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European Banks data book and questions for management
In this report we are publishing our half-yearly update on European banking sector
data. The report covers aggregated information by country for the quoted banks,
individual bank numbers on a standardised basis, and key questions for
management teams. The data are extracted from our Running the Numbers
database, which covers the European banking sector from 1989 to date.
Forecasts declining, reflecting GDP slowdown
The forecasts set out in this report include substantial downgrades made over
(and following) the Q2 earnings season. With GDP growth forecasts also being
revised down, sovereign fears, and bank funding set to be difficult over the next
year (possibly driving a new round of forced deleveraging), we think RoTEs will
struggle to rise above 11% to 12% this cycle. Given that tangible equity will
continue to rise even after 1 January 2013 as banks converge on CRD4
compliance, and returns fall (especially with interest rates lower for longer), we
see a protracted period of weaker earnings momentum.
Funding concerns, low growth, lack of capital: how will banks respond?
An industry going ex-growth, especially under the weight of regulation, is not
without precedent (e.g. telcos). We expect a renewed emphasis on cost efficiency
as a consequence. We also think that corporate activity could surprise to the
upside, from disposals (for focus) or bolt-on acquisitions of distressed assets (for
growth). But even if management actions can yield some additional earnings, we
expect ratings to be capped by the lack of sustainable growth in the sector.
Valuations: self-help stories will perform best
The European banks are trading on 0.7x P/TBV. Our peak RoTE forecast for this
cycle is now for just 12%; through-cycle would be lower. With little growth and
substantial risks, we have a through-cycle price objective for the sector of 0.9x
P/TBV. If funding and sovereign concerns are alleviated in H2, some upside is
possible, as we believe that current liquidity concerns are overdone. But
structurally, we see European banks as having the low growth characteristics of a
regulated telco, combined with deep cyclicality (leverage, bad debts) and a lack of
free cash flow (capital retentions to meet CRD4). This is a combination which
generates substantial adverse risks for the sector, especially if GDP forecasts
continue to be revised down. As a result, we have a negative structural view on
the sector. Upside sector risks would mainly come from a marked improvement in
the economic cycle, and perhaps further regulatory concessions for the banks to
promote credit provision.
The Question Bank
European Banks
Introduction
In this report we set out one-page summaries of data on our European Banks coverage
universe, together with a set of ten questions for each management team, plus a risk and
valuation statement. But there are also many general banking sector questions. We have set
out a number of these under six headings, these being: (1) regulation, (2) funding, (3) revenue
growth prospects, (4) asset led risks, (5) cost control, and (6) accounting changes.
Regulation
What do you expect your bank’s Basel III Tier 1 ratio to be on 1 January 2013? Do you
expect this to include only tangible equity, and to what extent will you be including
minority interest capital / grandfathered instruments?
What mitigation of additional capital requirements is your bank planning? How does this
break down between incremental model recognition, hedging, assets maturing, and
outright sales?
How much of a constraint would the Net Stable Funding Ratio be for your banking
business? What would your current pro-forma NSFR stand at? Do you think the delayed
implementation of NSFRs in CRD4 (and the scope for further changes) neutralises the
impact of the NSFR, or do you expect to aim for compliance anyway?
Have you discussed Solvency II with your insurance sector debt holders? Do you expect
to pay more for long-dated debt issuance once Solvency II is in place?
How much of a constraint will the Liquidity Coverage Ratio be? What is the interest
income drag from holding LCR liquid assets assuming the current yield curve
environment? As for the NSFR, do you see the delayed implantation under CRD4 as
meaningful, or are you expected by local regulators to apply the LCR or equivalent
standards in any case?
What are your plans for cash returns to investors versus retained earnings to bolster the
balance sheet (to meet new regulatory standards) versus retained earnings to fund
growth? How will the cumulative earnings of your bank be distributed between these
three categories over the next three years?
Funding
What level of asset growth does your bank expect this year in its core business, and to
what extent will this be offset by disposals / business exits? What is the net funding
requirement for this year?
What is your bank’s wholesale funding requirement for 2011? What proportion of this
has been completed YTD? Was the shutdown in the summer of 2011 at all problematic?
How do your debt issuance plans break down between refinancing, and net new
issuance?
What proportion of gross and net issuance this year has been from covered bonds?
What proportion of your balance sheet funding could come from covered bonds, taking
account of over-collateralisation requirements?
What is your bank’s target for retail deposit growth in 2011? How does this compare
with the wholesale funding target? How does it compare with the expected market rate
of deposit growth?
How is the cost of funding evolving this year? Overall, we see cash spreads and CDS
widening, and deposit pricing under pressure as well. How does your bank’s experience
fit with this?
Revenue growth prospects
Which business lines look most attractive at present in terms of revenue growth?
What growth opportunities exist for your bank outside of Europe? How meaningful can
these opportunities become over the next three years?
Within retail banking, to what extent will increasing cross-sell and improving pricing be
able to compensate for weak loan growth?
What are your bank’s expectations on the impact of the “lower for longer” interest rate
environment that we now find ourselves in? Can loans price upwards any further, and to
what extent will hedges be rolling off in 2012?
To what extent will the positive effects from rising rates discussed above be masked by
run-off of hedge positions put in place to minimize the impact of rates falling?
Within investment banking, what are your bank’s expectations for growth in the global
fee pool and sales and trading pool? What measures can you take to engineer betterthan-
market earnings growth?
How is your bank’s revenue growth strategy truly differentiated from the immediate
peers, at a time when we could argue that all banks will be pursuing the same
opportunities in higher return areas? Will we simply see a flattening of returns, as we
are already seeing in prime brokerage, for example?
Asset-led risks
Where is your bank in the current credit cycle? Versus previous cycles, has this credit
cycle (excluding US security and leveraged loan losses) been more or less bad in terms
of loan losses?
Has your estimate of through-cycle loan losses for each major loan asset class changed
over the last three years? Where do you think through-cycle loan losses are today?
What are your expectations for anti-cyclical provisioning requirements, either from CRD
IV (the European implementation of Basel III) or from your national regulator?
Will we see asset recoveries this cycle? If not, what makes this cycle different from
previous cycles, when asset recoveries were a constant source of profits in postrecession
years?
What has happened to your market risk appetite? In stress loss terms and VaR, how
much risk does your bank carry versus pre-crisis levels?
What scenarios has your bank used to assess the potential impact of sovereign debt
restructuring in the euro zone?
Cost control
So far in the crisis, we have seen a number of cost restraint programmes, but few major
cost cutting programmes designed to push absolute costs and headcount lower. Why is
this?
What is the scope for large-scale cost reduction at your bank? How far could the
absolute level of costs be reduced, given persistent revenue constraints (low rates, low
growth)?
In an ex-growth industry, M&A for cost cutting is one route to EPS growth and value
creation. We have seen this in the US already (the US cycle being somewhat advanced
versus Europe) with the BMO acquisition of Marshal & Isley, the MTB acquisition of
Wilmington, and others. Do you expect European banking sector M&A to pick up in
2012?
What scope is there for your bank to participate in cost-led M&A over the next cycle?
Do you expect bolt-on M&A to extract cost efficiencies, or large-scale in-market
mergers?
Accounting changes
IFRS 9 will change the way that banks value assets. Rather than the current multiplicity
of approaches (AFS, HTM, MTM), IFRS 9 will require all banks to mark-to-market all
assets, unless they pass a business model and cash flow test. We expect this to
substantially restrict banks’ ability to avoid marking assets to market, as was the case
with – for example – IAS 39 banking book transfers. What impact does your bank expect
from the implementation of IFRS 9?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
European Banks data book and questions for management
In this report we are publishing our half-yearly update on European banking sector
data. The report covers aggregated information by country for the quoted banks,
individual bank numbers on a standardised basis, and key questions for
management teams. The data are extracted from our Running the Numbers
database, which covers the European banking sector from 1989 to date.
Forecasts declining, reflecting GDP slowdown
The forecasts set out in this report include substantial downgrades made over
(and following) the Q2 earnings season. With GDP growth forecasts also being
revised down, sovereign fears, and bank funding set to be difficult over the next
year (possibly driving a new round of forced deleveraging), we think RoTEs will
struggle to rise above 11% to 12% this cycle. Given that tangible equity will
continue to rise even after 1 January 2013 as banks converge on CRD4
compliance, and returns fall (especially with interest rates lower for longer), we
see a protracted period of weaker earnings momentum.
Funding concerns, low growth, lack of capital: how will banks respond?
An industry going ex-growth, especially under the weight of regulation, is not
without precedent (e.g. telcos). We expect a renewed emphasis on cost efficiency
as a consequence. We also think that corporate activity could surprise to the
upside, from disposals (for focus) or bolt-on acquisitions of distressed assets (for
growth). But even if management actions can yield some additional earnings, we
expect ratings to be capped by the lack of sustainable growth in the sector.
Valuations: self-help stories will perform best
The European banks are trading on 0.7x P/TBV. Our peak RoTE forecast for this
cycle is now for just 12%; through-cycle would be lower. With little growth and
substantial risks, we have a through-cycle price objective for the sector of 0.9x
P/TBV. If funding and sovereign concerns are alleviated in H2, some upside is
possible, as we believe that current liquidity concerns are overdone. But
structurally, we see European banks as having the low growth characteristics of a
regulated telco, combined with deep cyclicality (leverage, bad debts) and a lack of
free cash flow (capital retentions to meet CRD4). This is a combination which
generates substantial adverse risks for the sector, especially if GDP forecasts
continue to be revised down. As a result, we have a negative structural view on
the sector. Upside sector risks would mainly come from a marked improvement in
the economic cycle, and perhaps further regulatory concessions for the banks to
promote credit provision.
The Question Bank
European Banks
Introduction
In this report we set out one-page summaries of data on our European Banks coverage
universe, together with a set of ten questions for each management team, plus a risk and
valuation statement. But there are also many general banking sector questions. We have set
out a number of these under six headings, these being: (1) regulation, (2) funding, (3) revenue
growth prospects, (4) asset led risks, (5) cost control, and (6) accounting changes.
Regulation
What do you expect your bank’s Basel III Tier 1 ratio to be on 1 January 2013? Do you
expect this to include only tangible equity, and to what extent will you be including
minority interest capital / grandfathered instruments?
What mitigation of additional capital requirements is your bank planning? How does this
break down between incremental model recognition, hedging, assets maturing, and
outright sales?
How much of a constraint would the Net Stable Funding Ratio be for your banking
business? What would your current pro-forma NSFR stand at? Do you think the delayed
implementation of NSFRs in CRD4 (and the scope for further changes) neutralises the
impact of the NSFR, or do you expect to aim for compliance anyway?
Have you discussed Solvency II with your insurance sector debt holders? Do you expect
to pay more for long-dated debt issuance once Solvency II is in place?
How much of a constraint will the Liquidity Coverage Ratio be? What is the interest
income drag from holding LCR liquid assets assuming the current yield curve
environment? As for the NSFR, do you see the delayed implantation under CRD4 as
meaningful, or are you expected by local regulators to apply the LCR or equivalent
standards in any case?
What are your plans for cash returns to investors versus retained earnings to bolster the
balance sheet (to meet new regulatory standards) versus retained earnings to fund
growth? How will the cumulative earnings of your bank be distributed between these
three categories over the next three years?
Funding
What level of asset growth does your bank expect this year in its core business, and to
what extent will this be offset by disposals / business exits? What is the net funding
requirement for this year?
What is your bank’s wholesale funding requirement for 2011? What proportion of this
has been completed YTD? Was the shutdown in the summer of 2011 at all problematic?
How do your debt issuance plans break down between refinancing, and net new
issuance?
What proportion of gross and net issuance this year has been from covered bonds?
What proportion of your balance sheet funding could come from covered bonds, taking
account of over-collateralisation requirements?
What is your bank’s target for retail deposit growth in 2011? How does this compare
with the wholesale funding target? How does it compare with the expected market rate
of deposit growth?
How is the cost of funding evolving this year? Overall, we see cash spreads and CDS
widening, and deposit pricing under pressure as well. How does your bank’s experience
fit with this?
Revenue growth prospects
Which business lines look most attractive at present in terms of revenue growth?
What growth opportunities exist for your bank outside of Europe? How meaningful can
these opportunities become over the next three years?
Within retail banking, to what extent will increasing cross-sell and improving pricing be
able to compensate for weak loan growth?
What are your bank’s expectations on the impact of the “lower for longer” interest rate
environment that we now find ourselves in? Can loans price upwards any further, and to
what extent will hedges be rolling off in 2012?
To what extent will the positive effects from rising rates discussed above be masked by
run-off of hedge positions put in place to minimize the impact of rates falling?
Within investment banking, what are your bank’s expectations for growth in the global
fee pool and sales and trading pool? What measures can you take to engineer betterthan-
market earnings growth?
How is your bank’s revenue growth strategy truly differentiated from the immediate
peers, at a time when we could argue that all banks will be pursuing the same
opportunities in higher return areas? Will we simply see a flattening of returns, as we
are already seeing in prime brokerage, for example?
Asset-led risks
Where is your bank in the current credit cycle? Versus previous cycles, has this credit
cycle (excluding US security and leveraged loan losses) been more or less bad in terms
of loan losses?
Has your estimate of through-cycle loan losses for each major loan asset class changed
over the last three years? Where do you think through-cycle loan losses are today?
What are your expectations for anti-cyclical provisioning requirements, either from CRD
IV (the European implementation of Basel III) or from your national regulator?
Will we see asset recoveries this cycle? If not, what makes this cycle different from
previous cycles, when asset recoveries were a constant source of profits in postrecession
years?
What has happened to your market risk appetite? In stress loss terms and VaR, how
much risk does your bank carry versus pre-crisis levels?
What scenarios has your bank used to assess the potential impact of sovereign debt
restructuring in the euro zone?
Cost control
So far in the crisis, we have seen a number of cost restraint programmes, but few major
cost cutting programmes designed to push absolute costs and headcount lower. Why is
this?
What is the scope for large-scale cost reduction at your bank? How far could the
absolute level of costs be reduced, given persistent revenue constraints (low rates, low
growth)?
In an ex-growth industry, M&A for cost cutting is one route to EPS growth and value
creation. We have seen this in the US already (the US cycle being somewhat advanced
versus Europe) with the BMO acquisition of Marshal & Isley, the MTB acquisition of
Wilmington, and others. Do you expect European banking sector M&A to pick up in
2012?
What scope is there for your bank to participate in cost-led M&A over the next cycle?
Do you expect bolt-on M&A to extract cost efficiencies, or large-scale in-market
mergers?
Accounting changes
IFRS 9 will change the way that banks value assets. Rather than the current multiplicity
of approaches (AFS, HTM, MTM), IFRS 9 will require all banks to mark-to-market all
assets, unless they pass a business model and cash flow test. We expect this to
substantially restrict banks’ ability to avoid marking assets to market, as was the case
with – for example – IAS 39 banking book transfers. What impact does your bank expect
from the implementation of IFRS 9?
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