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UBS Global Banks Perspectives P rivate public investment fund (PPIF)-090324
Private public investment nt fund (PPIF)
Legacy assets
The PPIF, a two-prong approach to purchase legacy loans and securities, appears to
be well thought-out and coherent, offers scale (purchasing up to US$1tn of assets)
and if implemented effectively, should inject much needed liquidity into the
banking system, bringing about price discovery while stabilising asset prices.
Will it work?
The PPIF is voluntary and for it to work will require participation from both
investors and banks. There are incentives for both investors (access to leverage)
and banks (opportunities for asset disposal) but also obstacles - private participants
would be subject to rigorous oversight by the FDIC while banks would have to
realise losses that they have not already written down.
Dilution risk
Assuming the PPIF works, this should be an important step towards cleaning up
banks’ balance sheets. However, we believe the system still needs more capital -
we expect a number of stand alone banks to announce capital raising plans in this
rally. The US stress-testing results due at the end of April could also see more
preferred capital converted into common equity.
Investment strategy
Given additional capital raising requirements, we continue to recommend banks
that look better capitalised (i.e., less dilution risk) and with strong retail deposit
franchises. Our highest conviction buy ideas include HSBC, Intesa, SocGen, NBG,
Scotiabank, TD Bank, Bank of China, China Merchant Bank, Bradesco and DBS.
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