Capital and credit remain major concerns for banks
Analysts at Evolution Securities today initiated coverage of 19 major European banks but their main concerns have not changed
Evolution’s proprietary Capital Deficit Screen suggests there is still a capital deficit of EUR 85 billion in its coverage universe and while some “friendly” governments have plugged the gap with “non-dilutive core Tier 1” bonds, the analysts don’t believe these are real equity. “More rights issues (or debt-for-equity swaps) are virtually inevitable,” the broker wrote in its sector research note published this morning. “The obvious capital shortages have been fixed, but remaining toxic assets, low capital generation, and pro-cyclicality will have major impacts on capital.”
Those banks identified as having the main capital deficits are ING Groep (EUR 19 billion), Credit Agricole (EUR 13 billion), KBC Group (EUR 12 billion), Unicredit (EUR 8 billion), Dexia Bank (EUR 8 billion) and Societe Generale (EUR 8 billion).
Regarding credit concerns, Evolution’s proprietary Credit Quality Screen shows defaults peaking at 7% and the cumulative 2009-2010 expected loss reaching 334 basis points or EUR 235 billion of loan losses, with Central & Eastern Europe being the worst hit region but the UK and Spain also suffering. Additional write-downs in the region of EUR 4 billion each are predicted for Barclays, Deutsche Bank and SocGen.
Furthermore, with “unthinkable” non-performing loans expected following “unthinkable” leverage, the broker forecasts the highest annualised loan loss ratios in 2009-2010 will be seen at HSBC, Banco Popular, Royal Bank of Scotland, Santander and Unicredit.
In the short term, the analysts see bumper markets revenues as banks enjoy an ideal environment given the very steep yield curve, but think the party could come to an end by December 2010, when banks will have to comply with tougher, i.e. fairer, capital rules. Evolution’s best picks to play this theme are Barclays, where bumper revenues might last longer due to its transformational Lehman deal, and Deutsche Bank.
In the longer term, the broker sees higher lending margins as the main theme and believes Santander and BBVA are the best placed to play this.
Though many banks will be selling assets, only a few will be buying and though sellers such as RBS, Credit Agricole and ING may generate nice short-term headlines, the buyers such as Santander, Credit Suisse, BNP-Paribas, Standard Chartered and perhaps HSBC are the one reinforcing their franchises, the analysts said.
Having reviews the sector, the broker’s top buy is Santander, while other core Buys are Standard Chartered, Barclays, BNP-Paribas and Deutsche Bank. On the Sell side, Unicredit is the Top Sell, with RBS, KBC, SocGen and Credit Agricole also ones to Sell.
With average upside to Evolution’s Core Buy portfolio of 33% and average downside to its Core Sell portfolio of 26%, the analysts see net upside for the sector of 7%.
