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Systematic capital risk eases
Capital is now being provided globally on
equitable terms to a broad range of banks and
non bank financials. Thus, while idiosyncratic
capital risks still exist, systematic capital strain
has been largely alleviated with Tier 1 ratios
rising to >10% across US, Europe and Asia.
Deploying capital = next leg of differentiation
Until now capital was a defensive differentiator.
Now, capital is a competitive weapon given low
premium M&A and high ROE lending opportunity.
Banks that can redeploy excess capital will be
able to redefine their P&Ls for years to come and
thus capital becomes an offensive differentiator.
Funding de-leveraging
The system will undergo “funding de-leveraging”
with simpler funding models and less duration
mismatching. Thus, long term, stable funding
becomes a core component of the business
model. That said government actions to date buy
the system time to do this in an orderly fashion.
Conclusion: Capital strength = P&L strength
Global financials that can redeploy capital
injections to profitable business will outperform:
1) US = Regional Champions: Banks with low
credit risk and high capital can do accretive deals
as well as high ROE lending. Conclusion: buy 20
regional champions (Bloomberg <GSRHCHMP>).
2) Europe = Home Grown Problems: Immediate
liquidity concerns abate, while home grown credit
problems come to the fore. Banks which front
loaded credit costs are best positioned, including
CL-Buy Societe Generale and Credit Suisse.
3) Asia = Policy Response: Core issues are not
capital (ex-Japan) but impacts to growth, credit,
and FX funding (Korea more exposed) if the world
continues to delever and expected government
responses do not come. Recent actions suggest
policy response will come as needs arise.
4) Debt = Potential Equity Returns: Guarantees
are in place, while long term stable funding will
be a core component of business models. As a
result, certain cash bonds across the capital
structure offer potential equity-like returns.
KEY TRADE RECOMMENDATIONS
Global Banks
1) US = BUY Bloomberg <GSRHCHMP>
2) Europe = BUY Societe Generale and Credit Suisse
3) Asia = BUY OCBC, ICBC, BBL
Non-Banks
1) P&C Insurance is a capital haven
US = BUY AHL, ACGL
Europe = BUY Swiss Re, SCOR
2) Avoid REITs and Specialty Finance
Credit
1) Buy large national bank champions, sell non-bank financials
2) Specific Trade ideas:
Buy COF sub debt at hold co level
(6.15% 2016 at around $55 or yield of 16.6%)
Buy HSBC Finance senior debt
(5.5% 2016 at around $82 or yield of 8.9%)
Buy ING Tier 1 debt
(5.775% Perp at around $63 or yield of 14.2%)
Source: Goldman Sachs Research.
Louise Pitt, our Global Banks and Finance
Credit Research Analyst, is responsible for the
credit recommendations within this report (last
bullet point on the cover page and some
content on pages 18 and 19)
Richard Ramsden
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