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Summary and investment conclusions
Last year was the year that changed the face of the banking landscape forever. Not
only did major international banks such as Lehman Brothers fail but so also did whole
country banking sectors – Iceland being a case in point. Few banks would have
survived without government/central bank help and in some cases (such as Royal
Bank of Scotland [RBS]), the government’s equity stake will ensure the state’s
influence endures for some time yet. What more then is in store for the sector in 2009?
The purpose of this document is to provide investors with our thoughts on where we
are, what we have learned over the past 12 months and how we are now thinking
about the risk/reward trade within the sector. We set out our short- and medium-term
views on the key strategic and financial issues facing our coverage universe and
attempt to identify catalysts and datapoints that investors can use to assess when the
sector might turn and momentum improve.
As the crisis evolves from a financial asset (CDOs, toxic assets, etc.) crisis into a
more traditional but, we expect, unique bad debt crisis, we also explore which asset
classes could cause most trouble and which banks look most vulnerable from an
earnings and capital perspective.
We conclude that there is considerably more change to come and we believe there is a
very real risk of further nationalisation within the sector should prior peak cycle loss
ratios be breached. While much is in the price, the severity of the impending bad debt
cycle means that premature enthusiasm and any early rally in the sector is likely to
prove to be a false dawn, in our opinion. We maintain our sector Marketweight ranking.
We detail our top ‘things to watch for’ and the stocks that we would play at current
relative valuations to weather the storm. Then we detail what we view as appropriate
risk and leverage for the sector turn and improvement in the sector’s fundamentals.
We think the key issues are as follows.
• Non-lending assets remain important… In 2008, it was little surprise that banks
with a high proportion of non customer-lending assets (collateralised debt
obligations, asset-backed securities) often underperformed the sector.
Deutsche Bank, UBS, Commerzbank and Natixis are examples. With these nonlending
assets associated with uncertain revenue streams (investment income,
dividends, fair value gains) and subject to some further write-downs, as a rule of
thumb we would continue to be cautious on such names, although we
acknowledge material upside once the corner is turned.
European Banks Marketweight
Analysts: David Williams/Jonathan Tyce david.williams@fpk.com +44 20 7663 6049
Outlook 2009: Ready…steady…wait
• We think it is still too early to take a positive stance on European Banks. We have little visibility on
earnings and low confidence that many sources of revenue (structured finance, fees/commissions) will
return anytime soon. In addition, there are numerous business lines where further downgrades are likely. As
such we expect sector valuation to continue to focus on price to tangible equity, set against franchise, track
record to date and capital position.
• As we move from the financial asset crisis (collateralised debt obligations, asset-backed securities,
leveraged lending inter alia) into a more traditional bad debt cycle, we believe that banks that have seen
performance, reputation and forecasts badly damaged by the former now offer better value for the coming
12-18 months.
• Early indicators of a turn in the sector’s performance in 2009 are likely to include stabilising asset prices,
a sustained reduction in Libor spreads and an easing of credit conditions as revealed by loan officers’
surveys. We detail within this document the non-company specific indicators that we intend to use to try to
identify a turn in the earnings downgrade cycle.
• Our top picks for the year include BNP Paribas, Société Générale, DnB NOR, Danske Bank and
Barclays. We think the risks associated with these names have been overly discounted, leaving relatively
inexpensive valuations versus quality franchises.
• We would, from here avoid ‘over-loved’ banks with tight consensus ranges that were the strong
performers of 2008 (BBVA, Santander, Handelsbanken, HSBC) and take relative profits by switching
into the names above. Over-reliance on wholesale funding and structurally weak economies are also still
key areas to avoid. We would be actively underweight domestic Spain, CEE and Raiffeisen
International.
Table of contents
Summary and investment conclusions..................................................................................................................... 4
From then to now...................................................................................................................................................... 9
All about write-downs and capital raising ........................................................................................................................9
Lessons learned and how to look at things differently...................................................................................................10
Capital for valuation – NAV a moving feast ...................................................................................................................11
RoE/CoE still best metric until capital issues resolved ..................................................................................................11
Capital for regulation – another ongoing issue..............................................................................................................12
How resilient are the P&Ls and capital positions?.........................................................................................................14
How should we think about earnings and valuation? ....................................................................................................15
What do we expect for the 4Q08 results and beyond?..................................................................................................25
What is now? .......................................................................................................................................................... 27
The global recession ....................................................................................................................................................27
Governments seek to soften recessionary blow............................................................................................................28
An inevitable recession, an inevitable bad debt cycle ...................................................................................................30
Property remains a key variable in provisioning game..................................................................................................33
Loan loss charges in the current cycle ..........................................................................................................................34
Country outlooks..................................................................................................................................................... 39
CEE and Russia ...........................................................................................................................................................40
France/Benelux ............................................................................................................................................................44
Germany.......................................................................................................................................................................50
Investment banks .........................................................................................................................................................53
Italy ...............................................................................................................................................................................56
Nordics .........................................................................................................................................................................59
Spain ............................................................................................................................................................................63
Switzerland ...................................................................................................................................................................67
United Kingdom............................................................................................................................................................70
Appendix: Summary valuation data......................................................................................................................... 75
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