This note follows up our 24 September
report. Fears of further negative capital
impacts are misplaced. Core T1 at 8% in
2011e even assuming loan loss
provision scenario in line with ’94 levels
􀀗 Lower estimated returns through the
cycle mainly driven by decline in both
ROA and leverage. TROE to reach 15%
in 2013e vs. 24% in 2006/2007
􀀗 Sector still undervalued using throughthe-
cycle earnings: most undervalued
stocks are Lloyds, KBC, Erste Bank,
Commerzbank, Barclays, Santander,
Banco Popolare; most overvalued
stocks are Bankinter, Natixis, BPM, UBI
In this note we look at two current market concerns: 1) the
possibility of further negative capital impacts and 2) reduced
through-the-cycle sector profitability.
Profit growth to offset possible negative
capital impacts in 2010/11
We estimate 2x and 4x loan loss provision (LLP) coverage
in 2010 and 2011, respectively, for our universe; more than
luation adequate, we believe, to cover further unexpected
negative capital impacts. A worst case scenario would
suggest a EUR40bn total capital impact (equal to 9% of
market value (MV)), leaving 2011e core T1 at c8%. Piraeus,
Alpha Bank, Banco Popolare, Bankinter, Sabadell, Credit
Agricole and Santander would be the most impacted with
Barclays, BBVA, Popular, Unicredit and Intesasanpaolo
being the least impacted.
EPS in 2013e in line with previous peak, but
lower returns expected
We estimate 2013 core EPS to be roughly in line with the
previous peak (-5% on average). However, despite higher
net profit, we estimate a significantly lower peak TROE
compared to the previous cycle as a result of a decline in
both ROA (0.72% vs. 0.84%) and leverage (25x vs. 35x).