JPM Banks

www.jpmorganmarkets.
com
Europe Equity Research
11 September 2013
European Banks
Shifting from core to total capital introducing Bank
Enterprise Valuation: Value in Southern Europe
European Banks
Kian Abouhossein
AC
(44-20) 7134-4575
[email protected]
Bloomberg JPMA ABOUHOSSEIN <GO>
J.P. Morgan Securities plc
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Bloomberg JPMA PETERZENS <GO>
Delphine Lee
(33-1) 40 15 49 28
[email protected]
Bloomberg JPMA DLEE <GO>
Garima Jaithliya
(91-22) 6157-3343
[email protected]
J.P. Morgan India Private Limited
Amit Ranjan
(44-20) 7134-4576
[email protected]
Vivek Gautam
(44-20) 7742 3244
[email protected]
Raul Sinha
(44-20) 7742-2190
[email protected]
Bloomberg JPMA SINHA <GO>
Marta Bastoni
(44-20) 7134-4720
[email protected]
Bloomberg JPMA BASTONI <GO>
Jaime Becerril
(44-20) 7742-6449
[email protected]
Bloomberg JPMA BECERRIL <GO>
Paul Formanko
(44-20) 7134-4718
[email protected]
See page 214 for analyst certification and important disclosures, including non-US analyst disclosures.
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the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
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In this 200+ page report, we look at the optimal capital structure for 25 banks accounting for c.80%
of European Bank market value, by comparing capital required for i) the EU bail-in requirement,
ii) Basel 3 revised leverage ratio consultation, and iii) Basel 3 Core Equity Tier I. We also implement
a new valuation methodology in order to use the new total capital structure of Eurobanks
adjusting for leverage as is the case in an industrial company (i.e. EV for banks). We conclude
based on our new valuation methodology:
We are moving up the risk curve on Euro-area banks. Hence our only default Euro bank is
not anymore just SocGen but we now add Deutsche Bank to the list as the cheapest large cap
Eurobank.
We also become more positive on Southern Euro-banks for the first time in two years expressing
our view through upgrading Unicredit to OW at normalized EV/cashflow of 5.1x and we also
upgrade Caixabank at 5.2x 2015E.
We remain cautious on Emerging Market (EM) exposure, we downgrade HSBC from OW to
N which is currently valued at 1.2x P/NAV and normalised EV/EBITDA ex growth 8.6x 2015E and
also remove it from our top picks portfolio. We do however upgrade Santander today from UW
to N despite its material EM exposure due to relative underperformance and better funding
evolution in Spain.
Within bank sub-business segments we remain OW private banking and Tier II FICC
restructuring: our top pick remains UBS.
Within Nordic banks, we reiterate our top pick Danske Bank and also see value in Nordea due to
potential dividend payout.
Within UK bank domestics, we retain Barclays as OW followed by Lloyds and RBS. We see
however limited value so in the UK.
So we add to our top picks in Euro-area banks: UCG, Caixabank, and Deutsche Bank. We
retain: UBS, Socit Gnrale, Danske Bank and Nordea. We remove HSBC.
Our new valuation methodology is based on moving from core Basel 3 capital to total Basel 3
capital, with increased focus on leverage and loss-absorbing capacity. In our view, traditional
valuations are not capturing these changes, and hence we reintroduce alternative measures of valuation
to complement traditional metrics. Valuing banks on a EV/EBITDA type metric, which takes into
account the full franchise value (so market cap and bail-in debt), we conclude that on this basis
the banking sector looks slightly expensive at 7.5x 2015E normalised EV/EBITDA (excluding
growth) vs. 5.9x for EU corporate (Telecoms at 5.0x and Utilities 6.4x), in contrast to its
attractiveness on a P/NAV and P/E basis. Hence, the focus should be on bottom up stock selection
to outperform.
Our new valuation model takes into account the optimal capital structure for a bank: i) Basel 3
Core Tier I above 10%, ii) at least 10% of bail-in funds to total liabilities, and iii) a Basel leverage ratio
above 3.5% by 2015e. Amongst all pieces of proposed capital requirements, we estimate that the
leverage ratio will account for 72bn of the 79bn additional capital need we see for the
European banks by 2015E. We expect all new capital requirements including bail-in, leverage
ratio and Basel 3 to reduce group EPS by -9% and RoNAV by -0.8% from 11.3% to 10.6% in
our analysis on 2015e estimates for a sample of 25 European banks.
2
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Equity Ratings and Price Targets
Mkt Cap Price Rating Price Target
Company Ticker ($ mn) CCY Price Cur Prev Cur Prev
BNP Paribas BNP FP 80,297.64 EUR 50.74 N n/c 49.00 n/c
BBVA BBVA SM 58,813.96 EUR 7.75 UW n/c 6.54 5.61
CaixaBank CABK SM 18,929.04 EUR 2.96 OW N 3.40 2.17
Credit Agricole ACA FP 26,791.73 EUR 8.19 N n/c 8.50 n/c
UniCredit UCG IM 34,900.28 EUR 4.55 OW N 5.51 4.00
UBS UBSN VX 77,152.93 CHF 19.19 OW n/c 21.00 n/c
Swedbank SWEDA SS 25,939.27 SEK 155.00 N n/c 165 n/c
Standard Chartered STAN LN 57,470.83 GBp 1,511 N n/c 1,800 n/c
Socit Gnrale GLE FP 37,005.69 EUR 36.75 OW n/c 39.00 n/c
Commerzbank CBK GR 13,701.62 EUR 9.08 N n/c 8.87 n/c
Credit Suisse Group CSGN VX 39,804.18 CHF 28.71 OW n/c 34.00 n/c
Danske Bank DANSKE DC 19,569.88 DKK 118.80 OW n/c 140 n/c
Deutsche Bank DBK GR 46,884.27 EUR 34.71 OW n/c 40.00 n/c
DnB ASA DNB NO 26,505.70 NOK 97.80 N n/c 100 n/c
Erste Bank EBS AV 14,277.29 EUR 25.06 OW n/c 35.00 n/c
Handelsbanken SHBA SS 28,613.77 SEK 289.80 UW n/c 270 n/c
KBC Group KBC BB 19,958.50 EUR 36.11 OW n/c 45.00 n/c
Lloyds Banking Group LLOY LN 87,316.67 GBp 78 N n/c 77 n/c
Santander SAN SM 83,337.04 EUR 5.67 N UW 5.86 4.36
SEB SEBA SS 23,758.17 SEK 71.10 N n/c 75 n/c
Royal Bank of Scotland RBS LN 62,691.09 GBp 356 N n/c 335 n/c
Nordea Bank AB NDA SS 49,668.82 SEK 80.45 OW n/c 97 n/c
IntesaSanpaolo ISP IM 34,748.53 EUR 1.60 N UW 1.65 1.19
HSBC Holdings plc HSBA LN 206,319.50 GBp 706 N OW 800 n/c
Banco Popular POP SM 9,074.09 EUR 4.00 UW n/c 2.41 2.05
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 10 Sep 13.
3
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table of Contents
Executive Summary Optimizing Eurobank Capital
Structure ...................................................................................6
Optimal Capital Structure Factor 1: Bail-in reducing PBT by 10% and RoNAV by
1%........................................................................................................................22
Optimal Capital Structure Factor 2: Basel 3 leverage ratio proposal resulting shortfall
of 72bn - reducing PBT by 5%............................................................................28
Optimal Capital Structure Factor 3: Basel 3 Core Tier I ratio resulting in a capital
shortfall of 3.6bn EPS dilution of 1% excluding harmonisation impact............32
Valuation .................................................................................35
Our unleveraged bank valuation EV/EBITDA methodology................................39
Cash flow analysis comparison of valuation........................................................40
Market dividend expectations too high ..................................................................48
Upgrading Italian banks on valuation.....................................................................50
Upgrading Spanish banks: Caixabank OW, Santander to N....................................52
UK Banks: Downgrading HSBC to Neutral ...........................................................54
Investment Banking: L-T preference for UBS reconfirmed, but Deutsche Bank OW
on valuation ..........................................................................................................55
French banks: Maintain preference for Socit Gnrale........................................56
Bail-in capital requirements ..................................................60
Implicit government guarantees removed under bail-in leading to higher funding
costs......................................................................................................................63
Bail-in challenging in practice...............................................................................65
Unintended consequences from moving from bail-out to bail-in.............................66
Key issues of uncertainty to assess bail-in proposal................................................68
The impact of bail-in: Methodology......................................69
The scope of the bail-in tool ..................................................................................69
The minimum bail-in requirement .........................................................................71
JPMe bail-in calculation methodology and health warning.....................................71
The Cost of Bail-in................................................................................................73
BASE CASE Impact on existing sub and senior debt if with no replacement .......85
Sensitivity to base case scenario - Lower bail-in premium for excess bail-inable
senior debt ............................................................................................................89
BEAR CASE - Banks fulfill 10% requirement through own funds to protect senior
creditors................................................................................................................93
Conclusions for 25 large cap EU banks in our analysis...........................................98
Leverage ratio.......................................................................102
Basel 3 Leverage ratio framework based on the revised consultation .................... 103
Timing and Disclosure requirement of Revised Basel 3 Leverage Consultation Ratio
........................................................................................................................... 104
Revised Basel 3 Leverage Consultation Ratio definition....................................... 104
JPMe Leverage ratio calculation methodology and Health Warning ..................... 107
Conclusions from our Basel 3 leverage ratio analysis based on revised consultation
........................................................................................................................... 111
Sensitivity to changes in net credit derivatives exposure....................................... 117
European Banks
Rohit Nigam
(44-20) 7134-4719
[email protected]
Anna V Marshall
(44- 20) 7742-2762
[email protected]
For Specialist Sales Advice
please contact;
Harry Harutunian
(44-20) 7779-2695
[email protected]
James Lloyd
(44-20) 7742-4267
[email protected]
4
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Sensitivity to changes in gross repo exposure....................................................... 122
UK regulatory leverage requirements................................................................... 128
US: Differences in leverage ratio levels and definitions compared to the revised
Basel leverage ratio consultation.......................................................................... 130
Balance sheet size in the US likely to be reduced by most European IBs but P&L
impact uncertain.................................................................................................. 134
Overview of the US regulatory agencies rules and
proposals ..............................................................................136
Generally applicable leverage ratio...................................................................... 136
Supplementary leverage ratio............................................................................... 136
Implication of a higher leverage ratio on the banking
industry .................................................................................138
Basel 3 Core Tier I capital against JPM required capital
requirement...........................................................................142
European banks; average Basel 3 Core Tier I to improve to 12.0% end 2015e from
10.5% end 2013e................................................................................................. 142
Most European Banks to close their capital shortfall vs. JPM minimum requirement
by 2015e ............................................................................................................. 142
Key differences in EU implementation vs. Basel 3............................................... 146
Risk weight harmonization Credit RWAs.......................................................... 146
Risk weight harmonization Market RWAs ........................................................ 148
Valuation and Earnings strips.............................................156
BNP Paribas........................................................................................................ 156
BBVA................................................................................................................. 156
CaixaBank .......................................................................................................... 156
Credit Agricole ................................................................................................... 157
UniCredit............................................................................................................ 157
UBS.................................................................................................................... 157
Swedbank ........................................................................................................... 158
Standard Chartered.............................................................................................. 158
Socit Gnrale ................................................................................................. 158
Commerzbank..................................................................................................... 159
Credit Suisse Group ............................................................................................ 159
Danske Bank....................................................................................................... 159
Deutsche Bank.................................................................................................... 160
DnB ASA........................................................................................................... 160
Erste Bank .......................................................................................................... 160
Handelsbanken.................................................................................................... 161
KBC Group......................................................................................................... 161
Lloyds Banking Group........................................................................................ 161
Santander............................................................................................................ 162
SEB.................................................................................................................... 162
Royal Bank of Scotland....................................................................................... 162
Nordea Bank AB................................................................................................. 163
IntesaSanpaolo.................................................................................................... 163
5
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
HSBC Holdings plc............................................................................................. 163
Banco Popular..................................................................................................... 164
Investment Thesis, Valuation and Risks ............................165
6
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Executive Summary Optimizing
Eurobank Capital Structure
In order to strengthen and prevent bank failures in a tail risk scenario as we
witnessed during the structured credit crisis, regulators are introducing tougher
total capital requirements such as i) Basel 3 capital rules, ii) revised Basel
leverage ratio proposal and iii) an EU bail-in regime. In this report we look at the
optimal capital structure using these three regulations for 25 banks accounting for
c.80% of European Bank market value, by comparing their Basel 3 Core Equity Tier
1, bail-in funds and the revised Basel leverage ratios proposed to minimum
requirements which we view as adequate. In our analysis we forecast 79bn of
additional total capital required predominantly due to the leverage ratio
proposal (72bn) by 2015E in the form of alternative Basel 3 Tier I bail-in
capital. We estimate the ROE impact from all three measures to equal below
1% of negative RoNAV to 10.6% by 2015E for the banks in our analysis. By
introducing different capital measures, we believe regulators aim to reduce
regulatory arbitrage and ensure banks are more resilient and better prepared for any
future crisis.
Post capital optimization, we also implement a new valuation methodology in
order to take into account the new capital structure of European banks and
adjusting for leverage. In short, we look at an unleveraged capital structure against
the banks cash flow. We take leverage into account in order to better compare banks
on a like-for-like basis, as well as against industrial sector valuations.
We believe focus on capital is moving from core capital to total capital, with
increased focus on leverage and loss-absorbing capacity. In our view, traditional
valuations are not capturing these changes, and hence we reintroduce
alternative measures of valuation to complement traditional metrics. As an
example, CSG, with a minimum core Tier I Basel 3 target of 10%, cannot be
compared to UBS with a target of 13%core equity tier 1 as CSG will be operating
more leveraged within the capital structure. In addition, the total capital ratio of
17.5% that both Swiss banks have to operate on is all bail-in able capital. In order to
compare banks we adjust for this leverage and make both banks comparable. We
adjust for the total bank capital structure including Tier I Basel 3 alternative capital
(ie capital that can lead to share count dilution for shareholders). In short, the days
when banks could issue cheap debt to finance acquisitions/grow businesses to
make ROIs work, is over and we put banks that are using more leverage vs. less
leverage banks on an equal footing.
Table 1: List of banks covered:
European banks:
BBVA
BNPP
Caixabank
CASA
CBK
CSG
Danske
DB
DnB
Erste
HSBC
ISP
KBC
Lloyds
NDA
Popular
RBS
SAN
SEB
SHB
Soc Gen
STAN
Swed
UCG
UBS
Source: J.P. Morgan.
7
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Comparing European bank EV to traditional valuation
metric
Cheap on traditional valuation metrics
Comparing banks to other industries on traditional metrics, banks look
attractive on both a P/E and a P/BV basis, as shown in Table 3, however, these
metrics do not take into account the banks leverage.
Based on P/E multiples, European banks appear inexpensive, trading at 9.5x
2015E earnings, a ~20% discount to the market excluding financials at 11.4x.
The discount is even more pronounced based on P/BV, with banks trading at
0.8x book value in 2015E, vs. 1.7x for the market ex financials, in our view
highlighting market concerns over the true BV of banks. Hence, the implied
CoE for banks is 11% compared to market 9%.
In the new regulatory environment, with regulators introducing clear, observable
measures of bail-in capital, we believe traditional valuation metrics are not able
to fully capture the intricacies of the regulatory world in which banks have to
operate, with constraints on capital structure, funding, and balance sheet size as well
as maturity profile. Hence we reintroduce our unleveraged valuation which takes
into account both core equity and other own funds (i.e. CoCos, additional
alternative tier 1 and tier 2) that potentially convert into shares and dilute the 'going
concern of a bank.
Bank EV/cashflow metrics: not so cheap against high yielding sectors
Valuing banks on a EV/EBITDA metric, which takes into account the full
franchise value (so market cap and bail-in debt), we conclude that on this basis
the banking sector looks slightly expensive at 7.5x 2015E normalised
EV/EBITDA (excluding growth) vs. 5.9x for EU corporates, in contrast to its
attractiveness on a P/NAV and P/E basis.
Comparing banks to telecoms/utilities sectors (viewing a bank either as a financial
service provider or a financial utility in mature sectors), banks again appear
expensive, trading at a 7.5x normalised EV/EBITDA multiple for an 8.8% ROE
compared to telecoms at 5.0x and utilities at 6.4x, with 2015E ROEs of 13.2% and
9.8% respectively. Hence, in conclusion, we believe banks on a sector basis are not
particularly cheap, however, we see material risk-reward opportunities as
valuation gaps between stocks are quite material and hence there is relative
value within the banking sector where cash flow generation and capital position
are solid and valuation is attractive on an EV basis. In our view, there is
outperformance potential by focusing on stock selection rather than sector call.
Table 2: European Banks Average
2015E:
European banks: 2015E
Basel III CET1 12.0%
Basel III Leverage Ratio 3.9%
Bail-in funds 13.0%
P/E 9.5
P/NAV 1.0
RoNAV 11.3%
RoNAV Normalized 11.8%
EV/EBITDA ex RWA growth 7.7
EV/EBITDA incl. RWA growth 8.4
EV/EBITDA ex RWA growth
(normalised) 7.5
EV/EBITDA incl RWA growth
(normalised) 8.1
Source: J.P. Morgan. Based on prices at cob 9
Sept 2013. Refers to banks in our report.
8
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 3: European Corporates valuation multiples and ratios based on IBES estimates
P/E Dividend Yield EV/EBITDA Price to Book ROE
13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E
Europe 13.6 12.1 10.9 3.5% 3.8% 4.2% - - - 1.6 1.5 1.4 11.6% 12.3% 12.8%
Europe ex Financials 13.9 12.5 11.4 3.5% 3.7% 4.0% 7.0 6.4 5.9 2.0 1.8 1.7 14.0% 14.5% 14.8%
Energy 10.0 9.0 8.6 4.7% 4.9% 5.1% 3.9 3.6 3.6 1.2 1.1 1.1 11.6% 12.2% 12.0%
Materials 15.1 12.6 10.8 3.0% 3.3% 3.6% 7.5 6.7 5.9 1.5 1.4 1.3 9.8% 11.0% 11.9%
Chemicals 15.2 13.7 12.4 3.1% 3.2% 3.5% 8.5 7.9 7.1 2.3 2.1 2.0 14.9% 15.4% 15.6%
Construction Materials 17.6 13.1 10.6 2.4% 2.9% 3.4% 8.2 7.1 6.2 1.0 1.0 0.9 5.9% 7.4% 8.7%
Metals & Mining 14.6 11.5 9.6 3.0% 3.3% 3.6% 6.8 6.2 5.3 1.2 1.2 1.1 8.3% 9.7% 10.9%
Industrials 16.2 13.8 12.2 3.0% 3.3% 3.6% 8.1 7.2 6.4 2.4 2.2 2.0 14.6% 15.6% 16.1%
Capital Goods 15.9 13.5 12.0 3.0% 3.3% 3.6% 8.3 7.2 6.5 2.4 2.2 2.0 14.6% 15.7% 16.1%
Transport 16.3 13.3 11.2 3.2% 3.2% 3.7% 6.7 6.1 5.4 1.9 1.8 1.6 12.5% 13.4% 14.4%
Business Svs 18.6 16.6 14.9 2.5% 2.8% 3.1% 11.2 10.1 9.0 4.4 4.0 3.6 19.7% 20.2% 20.2%
Discretionary 14.3 12.6 11.3 2.7% 3.0% 3.4% 6.5 5.8 5.2 2.1 1.9 1.7 14.7% 15.2% 15.5%
Automobile 9.6 8.4 7.5 3.0% 3.4% 3.8% 4.0 3.5 3.3 1.1 1.0 0.9 11.9% 12.5% 12.9%
Consumer Durables 17.8 15.3 13.7 2.1% 2.4% 2.7% 9.9 8.6 6.6 2.8 2.5 2.3 14.8% 15.5% 15.7%
Media 15.9 14.6 13.5 3.3% 3.5% 3.8% 9.2 8.6 7.8 3.4 3.2 2.9 20.1% 20.5% 20.2%
Retailing 20.4 18.2 16.4 2.7% 2.9% 3.3% 12.1 11.7 10.4 5.8 5.4 4.9 25.0% 25.2% 25.5%
Hotels, Rests & Leisure 18.6 16.5 14.9 2.6% 2.9% 3.3% 9.9 9.0 8.1 3.1 2.9 2.6 17.0% 17.6% 17.7%
Staples 17.1 15.6 14.3 2.9% 3.2% 3.5% 10.9 10.0 9.1 2.9 2.7 2.5 16.8% 17.2% 17.2%
Food & Drug Retailing 13.6 12.2 11.3 3.2% 3.7% 4.0% 6.9 6.4 6.0 1.7 1.6 1.5 11.1% 12.5% 12.6%
Food Beverage &
Tobacco 17.4 16.0 14.6 3.0% 3.3% 3.6% 11.7 10.7 9.8 3.2 3.0 2.7 18.7% 18.8% 18.9%
Household Products 19.3 17.8 16.4 2.2% 2.4% 2.6% 12.5 11.4 9.7 3.3 3.1 2.8 16.4% 16.2% 16.1%
Healthcare 14.9 13.7 12.5 3.2% 3.4% 3.7% 10.2 9.4 8.5 3.4 3.1 2.9 22.3% 22.5% 22.8%
Financials 11.6 10.1 8.9 3.8% 4.4% 5.2% - - - 0.9 0.9 0.8 7.6% 8.5% 9.2%
Banks 14.0 12.1 9.5 3.7% 4.4% 5.3% 8.8 8.4 7.5 0.9 0.8 0.8 6.7% 7.9% 8.8%
Diversified Financials 12.3 10.7 9.2 2.2% 3.2% 4.4% - - - 1.0 1.0 0.9 7.6% 8.6% 9.4%
Insurance 9.7 9.3 8.7 4.7% 5.0% 5.2% - - - 1.1 1.0 0.9 10.8% 10.6% 10.7%
Real Estate 17.0 16.0 15.1 5.1% 5.3% 5.6% - - - 0.9 0.9 0.9 5.5% 5.5% 5.7%
IT 22.6 17.5 14.7 1.7% 1.9% 2.1% 11.0 8.8 7.4 3.1 2.8 2.5 13.4% 15.8% 16.6%
Software and Services 16.6 14.9 13.3 1.8% 2.0% 2.2% 10.2 8.9 7.5 3.6 3.2 2.8 20.5% 20.4% 19.8%
Technology Hardware 26.7 18.9 15.6 1.9% 2.2% 2.6% 9.1 7.1 6.1 2.2 2.1 1.9 8.2% 10.9% 12.1%
Semicon & Semicon
Equip 37.8 21.7 16.4 1.3% 1.4% 1.6% 17.7 11.4 8.8 3.7 3.3 2.9 9.5% 15.6% 18.1%
Telecoms 12.0 11.4 10.8 5.4% 5.5% 5.6% 5.1 5.2 5.0 1.6 1.6 1.5 13.3% 13.3% 13.2%
Utilities 11.4 11.5 11.0 6.0% 6.0% 6.1% 6.6 6.6 6.4 1.1 1.0 1.0 10.4% 9.7% 9.8%
Source: I/B/E/S, Datastream. Based on prices COB 9Sept 2013. Note: We use the JPM Banks EV/EBITDA excluding RWA growth as it is closer to the industry sector EV/EBITDA which does not
account for capex. In this report, we focus on unlevered cash flow valuation as measured by JPM Banks EV/EBITDA. This measure replicates traditional non-financials' EV/EBITDA ratios and
excludes RWAs growth capital consumption. But this JPM methodology is not fully comparable to industrials' EV/EBITDA, for example we need to define business debt for banks and also include a
measure of maintenance capex. We use normalized EV/EBITDA 2015E
9
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Stock selection the key driver for Eurobank
outperformance in 2013/14E: JPM Top Picks
In our Eurobank top pick portfolio we are moving up the risk curve as in our
view the market is not yet pricing in the improved capital structure, funding
profile and real cash flow generation of some of the Eurobanks.
Our new portfolio of top picks is: UBS, DB, Soc Gen, UCG, Caixabank, Nordea
and Danske. Our portfolio of top pick stocks has outperformed the SX7P index of
banks by 4.7% in 2012 and 13.2% in 2013 YTD, as shown in Table 4 below. We use
the arithmetic sum of relative performance of our top picks portfolio in each period
to arrive at the total performance for the portfolio
Table 4: JPMorgan Top Picks Performance relative to banking sector
%
Jan-12 to
Feb-12
Feb-12 to
July-12
July-12 to
Jan-13
Jan-13 to
May-13
May-13 to
July-13
July-13 to
Sep-13
UBS UBS UBS UBS UBS UBS
Swedbank Swedbank Swedbank Swedbank Swedbank SG
DNB DNB DNB SG SG HSBC
DBK SG SG STAN HSBC CSG
STAN STAN STAN CSG CSG DANSKE
CSG DANSKE NORDEA
Top picks average performance over the period 12.8 -15.6 40.0 11.8 -6.6 10.2
SX7P performance 16.3 -14.8 31.0 2.2 -7.1 7.1
Top Picks' relative performance -3.5 -0.8 9.0 9.6 0.5 3.1
Top Picks' relative performance FY 2012 4.7
Top Picks' relative performance YTD 2013 13.2
Source: J.P. Morgan estimates, Bloomberg
1. More positive on Euro-area banks: Socit Gnrale to be joined by Deutsche
Bank, Unicredit and Caixabank due to valuation discounts
Hence our only default Euro bank is not anymore just Socit
Gnrale where we still see material upside on additional cost saves and
the turnaround in international retail, but we add Deutsche Bank as not
just the cheapest big cap stock in Europe on traditional valuation metrics but
still cheapest on an EV/cashflow basis (Deutsche Bank: Upgrading from N
to OW: 'Cheapest' Eurobank - 'Bear case' capital scenario more than
discounted). We also become more positive on Southern Europe for the
first time in two years, expressing our view through upgrading Unicredit
to OW (from n) with its strong capital base and balance sheet funding and
yet it is still cheap on valuation compared to the rest of Europe (see page
50). To express our more positive view on Southern Europe and especially
Italy we also upgrade Intesa from UW to N. We also upgrade Caixabank
to OW(from N) as one of the cheapest Eurobanks in our EV/cashflow
valuation on a 2015E basis. We note that both offer further upside on a
normalized provision basis.
2. Continue to avoid Emerging Market exposure
We remain cautious on Emerging Market (EM) exposure as discussed
in our report European Banks: Fed tapering: Who is afraid of EM sell-off?
We are! Running Eurobank exposure at risk published 6 June 2013, and
with limited concern on EM risk expressed by the market, we downgrade
HSBC from OW to N which is currently valued at 1.2x P/NAV and
10
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
normalised EV/EBITDA ex growth 8.6x 2015E and also remove from our
top picks portfolio. We do however upgrade Santander today from UW
to N despite its material EM exposure due to underperformance against
peers and Eurobanks in the past three months, some stabilization in Brazil
and a more stable and predictable Spanish domestic banking environment
accounting for 14% of profit by 2015E.
3. Within bank sub-business segments remain OW private banking and Tier II
FICC restructuring:
Our top pick remains UBS, being the largest private bank in the world
accounting for 51% of group profits in 2015E, with asset gathering
accounting for 60%. We also applaud UBS for the ongoing shrinkage of its
FICC franchise, accounting for only 5% of revenues and 13% capital by
2015E. We see UBS as a material dividend payout story and its strong
capital generation is reflected in our normalised EV/cashflow valuation of
8.2x which we consider cheap considering its excellent business mix. We
note DB is for us a valuation call as the 8th cheapest bank in our
European bank coverage and cheapest large cap bank even after
discounting a capital raise of 9bn in our bear case scenario based on its
current valuation, as discussed in our recent upgrade note (Deutsche Bank:
Upgrading from N to OW: 'Cheapest' Eurobank - 'Bear case' capital scenario
more than discounted). We note that CSG is now the third IB in our
pecking order considering its limited IB restructuring drive despite its
FICC Tier II franchise but it clearly offers WM gearing and long-term
restructuring potential to be discounted in the future. CSG however is not in
our top pick portfolio.
4. Value remains in some selective Nordics: Danske Bank and Nordea
Within the Nordics we recently switched our preference from
Swedbank into Nordea, which is in our top picks due to the potential DPS
payout at 65% (JPMe 2013-2015E) translating into a 7.0% dividend yield in
2015E. Trading at 1.4x 2015E P/NAV, Nordea is also cheaper than
Swedbank at 1.8x as well as less at risk from mortgage risk weighting
increases. We continue to reiterate our top pick Danske Bank due to i) its
ongoing asset quality improvement, ii) cheap valuation, trading at 0.9x
2015E P/NAV, and iii) strong capital position today, which offers future
dividend upside potential (JPMe 40% payout in 2015E translating into a
5.1% dividend yield).
5. UK banks: preference for domestics over UK-Asian leading to HSBC
downgrade, but overall limited value today
We believe that the relative attractions of the domestic UK banking
sector have improved compared to HSBC and StanChart, which face
potential headwinds within some EM economies. Further, with HSBC
having outperformed StanChart by 15% YTD and now at a 14% PE
premium to StanChart (10.2x 2015 P/E vs 8.9x 2015 P/E JPMe), we
downgrade HSBC from OW to N. However, the UK domestic banks
valuation is inline with Euro retail peers, both on traditional valuation
metrics as well as on our EV/cashflow valuation. We retain Barclays as
OW. Our preference is for Lloyds over RBS. So overall we find limited
value in UK banks.
11
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 5: European Banks JPMe stock selection EV/EBITDA valuation, RoNAV and other traditional metrics
%
2015e
EV/EBITDA
(ex RWA
growth)
2015e
EV/EBITDA
(including
RWA
growth)
2015e
normalised
EV/EBITDA
(ex RWA
growth)
2015e
normalised
EV/EBITDA
(inc RWA
growth)
2014e
EV/EBITDA
(ex RWA
growth)
2014e
EV/EBITDA
(incl RWA
growth)
2013e
EV/EBITDA
(ex RWA
growth)
2013e
EV/EBITDA
(incRWA
growth)
P/E
15E
P/NAV
2015E
RoNAV
2015E
RoNAV
(normalised)
2015E
Dividend
yield
2015E
B3 Core
Equity
Tier 1
2015E
Top Picks
UBS 8.2 7.7 8.2 7.7 10.7 9.1 12.3 7.8 9.9 1.6 15.8% 15.7% 5.0% 16.4%
Soc Gen 7.6 8.0 6.9 7.2 7.6 7.9 8.5 5.2 7.9 0.7 8.6% 9.9% 4.9% 11.4%
DB 6.0 7.5 5.9 7.4 6.6 7.3 7.7 6.4 5.8 0.7 12.4% 12.6% 2.2% 11.2%
UCG 5.4 6.0 5.1 5.6 6.3 6.9 7.4 4.9 8.5 0.5 6.4% 6.9% 2.0% 10.6%
Caixabank 5.4 5.1 5.2 4.9 5.3 5.0 3.1 3.8 11.4 0.6 6.7% 6.8% 7.9% 9.3%
NDA 7.9 8.0 8.1 8.2 8.6 8.3 9.3 6.2 9.3 1.4 14.8% 14.4% 7.0% 15.5%
Danske 7.7 7.9 7.8 7.9 8.7 8.6 11.0 17.4 7.8 0.9 10.9% 10.8% 5.1% 14.5%
Average 6.9 7.2 6.7 7.0 7.7 7.6 8.5 7.4 8.7 0.9 10.8% 11.0% 4.9% 12.7%
Swiss
CS 7.9 7.9 7.9 7.9 8.4 8.4 9.2 9.1 8.2 1.1 13.4% 13.4% 3.6% 12.2%
UK
Lloyds 7.2 7.0 7.3 7.0 7.7 6.9 8.5 6.1 10.0 1.2 12.2% 12.1% 5.9% 13.0%
RBS 8.3 7.5 8.2 7.3 8.7 5.4 9.6 6.0 11.8 0.7 6.2% 6.4% 1.8% 11.2%
STAN 6.8 11.1 7.3 12.4 7.9 13.2 9.5 19.0 8.9 1.2 13.8% 12.9% 4.7% 11.2%
HSBC 8.6 11.1 8.6 11.2 9.5 12.0 9.8 10.0 10.2 1.2 12.5% 12.4% 5.5% 10.7%
France
BNPP 7.3 7.9 6.7 7.1 7.4 7.8 7.7 8.0 9.4 0.9 9.6% 10.8% 4.0% 11.4%
CASA 10.5 9.4 9.6 8.6 10.7 8.7 11.6 8.5 6.3 0.7 11.0% 12.5% 0.0% 9.5%
Italy
ISP 4.8 4.6 4.5 4.4 5.1 4.9 5.9 5.4 10.0 0.7 7.3% 7.8% 3.8% 11.1%
Germany
CBK 12.2 10.6 12.2 10.6 14.2 12.1 - 14.3 11.6 0.4 3.7% 3.7% 0.0% 10.1%
Spain
SAN 7.8 9.3 5.9 6.7 6.3 7.0 6.9 7.4 11.8 1.0 10.5% 15.2% 10.8% 9.7%
BBVA 10.1 10.7 5.9 6.1 6.4 6.8 6.7 7.4 13.4 1.2 9.9% 18.0% 5.4% 10.1%
Popular 5.0 4.8 4.7 4.5 9.3 8.5 - 15.7 9.5 0.7 9.6% 10.2% 0.0% 8.9%
Nordics
Swed 9.2 9.5 9.5 9.9 10.1 10.5 10.8 14.1 10.0 1.8 17.6% 16.9% 7.5% 16.6%
SHB 9.3 11.1 9.5 11.2 10.0 11.7 10.2 17.4 12.2 1.6 13.7% 13.5% 4.2% 17.1%
SEB 9.1 10.5 9.7 11.4 10.2 13.1 10.7 13.9 10.4 1.4 13.5% 12.6% 4.8% 15.0%
DnB 7.1 9.5 6.9 9.3 7.6 25.1 8.6 10.5 8.4 1.0 12.5% 12.7% 3.0% 12.8%
CEEMA
Erste 6.5 8.4 7.1 9.3 7.9 9.1 9.2 7.5 6.5 1.1 16.2% 14.4% 6.2% 11.0%
KBC 7.4 8.2 8.1 9.1 8.9 9.1 8.3 6.7 8.9 1.3 14.9% 13.4% 3.7% 9.3%
Average 7.7 8.4 7.5 8.1 8.4 9.3 8.8 9.6 9.5 1.0 11.3% 11.8% 4.4% 12.0%
Source: Bloomberg and J.P. Morgan estimates. *Bloomberg closing prices used as of Sep 9, 2013.KBC capital position is calculated after deducting positive AFS reserves (c. 800mn by 15E) and including penalty payments on remaining government capital.. Note
CBK and Popular 2013E EV/EBITDA ex growth are not meaningful, because out of scale.
12
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Optimal capital structure analysis quantifying capital
required: 79bn
In our view, the optimal capital structure for a bank is to have a Basel 3 Core
Tier I above 10%, at least 10% of bail-in funds to total liabilities (vs. the
European Councils proposal that 8% of total liabilities must be bailed-in before
resolution funds can be used; to apply in 2018), and a Basel leverage ratio above
3.5% by 2015E (vs. the Basel Committee's proposal of a minimum of 3.0% with
final rules coming into force in 2018). We estimate that 11 banks out of the 25 banks
covered in this report will meet all the requirements by 2015E: UBS, Lloyds, RBS,
HSBC, STAN, UCG, ISP, SAN, Caixabank, SHB and Erste.
Based on our estimates of individual minimum regulatory requirement, we see
3.6bn capital shortfall arising due to Basel 3 Core Tier I requirement, 72bn
shortfall due to Basel 3 leverage EU requirement (i.e. additional alternative
Basel 3 Tier I) and 7bn shortfall 10% EU Bail-in funds requirement.
Overall for the optimal capital structure these three regulations combined
results in 3.6bn Basel 3 Core Tier I capital shortfall, 70bn additional
alternative Tier 1 Basel 3 shortfall and 6bn of additional sub debt shortfall.
The optimal capital structure takes into account the combined capital raised to meet
all the capital requirements, hence the overall additional alternative Tier 1 and Tier 2
issuance requirements are lower than the shortfall based on individual regulation. In
our view, banks like UCG, Intesa, Handelsbanken and UBS have an optimal capital
structure exceeding the Basel 3 capital, bail-in and leverage minimums by a healthy
margin and are seeing limited earnings impact, whilst we see a Basel 3 capital
shortfall of 1.8bn for CASA, Tier I Basel 3 alternative leverage shortfalls of 32bn
for CASA and 12bn for DBK, and bail-in funds shortfall of 4bn for BBVA. Note
that for CASA, we have run our analysis on the listed entity but note that regulators
and rating agencies focus on the Credit Agricole Group including the well capitalized
unlisted Regional Banks; in addition, we have not included the positive impact from
the extension of Switch expected by year end. For further discussion on CASA
please see our note Credit Agricole: high cost of equity on Basel leverage
uncertainties from 29 July 2013.
Basel 3 Core Tier I: 3.6bn capital shortfall only compared to JPMe
minimum requirements. Post optimizing the capital structure, we expect the
Basel 3 Core Tier I to improve from 10.5% on average end 2013e to 12.0% end
2015e, with shortfalls reduced to 3.6bn vs. our minimum requirements. The
capital shortfall is driven by CASA with 1.8bn shortfall, DNB with 1.0bn and
KBC with 0.7bn vs. the JPMe minimum Basel 3 Core Tier I ratio. Note that for
CASA, the 1.8bn shortfall does not include the extension of Switch expected by
year end; including the extension of Switch, we estimate Basel 3 Core Tier I ratio
would increase to 10.5% end 2015e, implying no shortfall to our minimum 10%.
Table 6: European Banks: Total
shortfall and optimum issuance
requirement 2015E
billion
Shortfall based on individual
regulation
Basel III CET1 capital 3.6
Basel III alternative bail-in B3T1 72
Bail-in funds 7
Optimum issuance requirement
Basel III CET1 3.6
Additional tier 1 ( Tier 1 Cocos) 70
Sub Debt (Tier 2 Cocos) 6
Total issuances 79
Source: J.P. Morgan estimates, Company data.
13
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Basel 3 leverage: 72bn additional alternative Tier 1 capital shortfall to
JPMe minimum 3.5% leverage ratio, which we expect banks to fulfill by
issuing Tier 1 cocos. We expect Basel 3 leverage ratio to improve to 3.9% end
2015e on average post the optimal capital structure, above the JPMe 3.5%
minimum. However, a few banks stand below and the total 72bn shortfall is
concentrated on CASA (32.1bn), DB (11.5bn), SG (6.6bn), CBK (7.3bn),
CS (5.5bn), BNP (4.3bn), Nordea (1.3bn) and Danske (1.3bn). Note that we
have run the sensitivity on CASA but regulators focus on Credit Agricole Group
which has a Basel 3 leverage ratio of 3.3%, implying a shortfall of only 3.3bn to
min 3.5%. To improve CASA Basel leverage earlier, by end 2015e, CASA could
consider several mitigation initiatives: i) issue additional Basel 3 Tier I
cocos/hybrids; ii) raise equity and issue additional Basel 3 Tier I cocos/hybrids;
or iii) sell the insurance business to the Regional Banks, unwind the intragroup
exposures and exit capital markets, as discussed in our note Credit Agricole:
high cost of equity on Basel leverage uncertainties on 29 July 2013.
EU Bail-in funds: 7bn subordinated debt shortfall to minimum JPMe 10%
minimum requirement, which we expect will be met by issuing additional
alternative tier 1 or tier 2 capital. Assuming that EU banks already comply
with our minimum Basel 3 capital and leverage ratio requirements, the shortfall
to 10% bail-in requirements would then be limited to 6bn, mainly driven by
BBVA with 4.1bn, SEB with 0.9bn and Swedbank with 0.9bn.
Retiring senior debt helps offset costs for an optimal capital structure
We estimate that European banks will have excess senior debt above the JPMe bail-
in requirement (10% of total liabilities). We further estimate 85bps bail-in premium
on senior debt in our analysis. Given that the banks will operate with excess senior
debt in 2015E, we believe that the banks will partly reduce the reliance on senior
debt through natural maturity (1.2trn of maturing senior unsecured bank debt
in EU by 2015E) to limit the increase in absolute funding costs. Additionally we
believe the leverage ratio rules will incentivize banks to shrink the balance sheets,
which potentially on the liability side will be done by reducing senior debt. For the
purpose of our analysis we assume that the banks will retire 25% of the excess senior
bail-inable debt by 2015E and in addition replace any new capital issuance with
excess senior unsecured debt, which, based on the current maturity profile, can be
achieved without buy-backs. For example, for CASA we assume that i) the 34bn
combined CET1 and coco capital issuances will replace existing senior, and ii) in
addition that CASA will redeem 25% of its excess senior unsecured bail-in funds
implying a total senior redemption of 43bn vs. 50bn of maturing debt in the next 3
years. The reason for the adjustment is not to double count for new and maturing
issuances.
14
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 7: European Banks: Summary of capital requirements vs. current estimated levels 2015E Table (1 of 2)
EUR mn
2015E CASA DB CBK Soc Gen CS BNPP BBVA NDA Danske DnB SEB Swed KBC
Requirements
Basel III CET1 10.0% 10.0% 9.0% 10.0% 10.0% 10.0% 9.0% 13.0% 13.0% 13.5% 13.0% 13.0% 10.0%
Basel III leverage ratio 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Bail-in requirement 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Current estimate
Basel III CET1 9.5% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 12.8% 15.0% 16.6% 9.3%
Available bail-in funds 11% 13% 14% 12% 10% 12% 9% 13% 10% 13% 10% 10% 12%
Deficit/Surplus
Basel III CET1 - + + + + + + + + - + + -
Basel III leverage ratio - - - - - - + - - + + + -
Bail-in requirement + + + + + + - + - + - - +
Issuance requirement based on individual regulations
Basel III CET1 1,805 - - - - - - - - 1,016 - - 711
Additional tier 1 issuance 33,890 11,524 7,303 6,605 5,539 4,297 - 1,332 1,298 - - - 92
Regulatory capital to meet bail-in - - - - - - 4,060 - 1,203 - 947 877 -
Optimum issuance requirement combining all three
Basel III CET1 1,805 - - - - - - - - 1,016 - - 711
Additional tier 1 issuance (Tier 1 Cocos) 32,085 11,524 7,303 6,605 5,539 4,297 - 1,332 1,298 - - - -
Additional sub debt (Tier 2 Cocos) - - - - - - 4,060 - - - 947 877 -
Total issuances 33,890 11,524 7,303 6,605 5,539 4,297 4,060 1,332 1,298 1,016 947 877 711
Source: J.P. Morgan estimates, Company data. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (CoCos) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into
BCNs
15
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 8: European Banks: Summary of capital requirements vs. current estimated levels 2015E Table (2 of 2)
EUR mn
2015E Popular UBS Lloyds RBS HSBC STAN UCG ISP SAN Caixabank SHB Erste Total/Average
Requirements
Basel III CET1 9.0% 13.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0% 9.0% 13.0% 10.0% 10.5%
Bail-in requirement 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Current estimate
Basel III CET1 8.9% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.0%
Available bail-in funds 12% 11% 11% 15% 10% 12% 20% 19% 10% 15% 29% 13% 13.0%
Deficit/Surplus
Basel III CET1 - + + + + + + + + + + +
Basel III leverage ratio + + + + + + + + + + + +
Bail-in requirement + + + + + + + + + + + +
Issuance requirement based on individual regulations
Basel III CET1 88 - - - - - - - - - - - 3,620
Additional tier 1 issuance - - - - - - - - - - - - 71,880
Regulatory capital to meet bail-in - - - - - - - - - - - - 7,088
Optimum issuance requirement combining all three
Basel III CET1 88 - - - - - - - - - - - 3,620
Additional tier 1 issuance (Tier 1 Cocos) - - - - - - - - - - - - 69,984
Additional sub debt (Tier 2 Cocos) - - - - - - - - - - - - 5,885
Total Issuances 88 - - - - - - - - - - - 79,489
Source: J.P. Morgan estimates, Company data
16
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 9: European Banks Optimising capital structure 2015e (1/2)
million
CASA DB CBK Soc Gen CS BNPP BBVA NDA Danske DnB SEB Swed KBC
OLD
Basel 3 Core Tier I capital 32,491 44,506 22,395 40,946 27,976 72,974 34,940 25,851 18,161 18,344 13,004 9,965 9,847
Tier 1 cocos 0 0 0 944 4,380 0 1,139 0 0 0 0 0 0
Tier I hybrids - current 8,850 13,098 2,259 4,978 4,372 10,307 1,860 1,976 3,760 403 1,652 692 2,104
Tier 2 cocos 0 0 0 0 3,968 0 0 0 0 0 0 0 769
Additional Tier 2 & other sub debt 18,850 6,427 9,878 6,211 3,420 10,643 7,386 3,601 2,045 1,760 392 878 2,328
Senior 87,169 88,320 54,450 69,590 25,061 78,406 12,169 40,500 16,360 20,509 13,961 9,991 14,800
Total 147,360 152,351 88,982 122,669 69,177 172,330 57,494 71,928 40,327 41,017 29,009 21,527 29,848
Total liabilities in reg capital adj for derivatives 1,366,539 1,162,286 626,267 1,037,982 679,564 1,456,740 615,543 558,793 415,298 307,051 299,564 224,042 254,757
Total exposure post asset reduction for leverage 1,896,593 1,600,868 848,495 1,385,582 1,082,710 2,207,734 723,491 776,660 555,995 406,129 297,891 241,594 283,966
Basel III RWA 342,956 395,648 221,869 358,487 229,406 638,150 345,743 166,708 125,618 143,412 86,649 60,110 105,574
Bail-in funds (%) 10.8% 13.1% 14.2% 11.8% 10.2% 11.8% 9.3% 12.9% 9.7% 13.4% 9.7% 9.6% 11.7%
Basel III Leverage Ratios (%) 1.7% 2.8% 2.6% 3.0% 3.0% 3.3% 4.8% 3.3% 3.3% 4.5% 4.4% 4.1% 3.5%
Basel III Capital Ratios (%) 9.5% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 12.8% 15.0% 16.6% 9.3%
NEW
Basel 3 Core Tier I capital 34,296 44,506 22,395 40,946 27,976 72,974 34,940 25,851 18,161 19,361 13,004 9,965 10,557
Tier 1 cocos 32,085 11,524 7,303 7,550 9,919 4,297 1,139 1,332 1,298 0 0 0 0
Tier I hybrids - current 8,850 13,098 2,259 4,978 4,372 10,307 1,860 1,976 3,760 403 1,652 692 2,104
Tier 2 cocos 0 0 0 0 3,968 0 4,060 0 0 0 947 877 769
Additional Tier 2 & other sub debt 18,850 6,427 9,878 6,211 3,420 10,643 7,386 3,601 2,045 1,760 392 878 2,328
Senior 43,935 64,884 38,733 56,616 18,301 66,371 12,169 34,823 16,265 17,677 13,961 9,991 13,529
Total 138,016 140,439 80,567 116,300 67,956 164,591 61,554 67,583 41,530 39,201 29,956 22,404 29,288
Bail-in funds (%) 10.1% 12.1% 12.9% 11.2% 10.0% 11.3% 10.0% 12.1% 10.0% 12.8% 10.0% 10.0% 11.5%
Basel III CET1 ratios (%) 10.0% 11.2% 10.1% 11.4% 12.2% 11.4% 10.1% 15.5% 14.5% 13.5% 15.0% 16.6% 10.0%
Common equity issuance 1,805 0 0 0 0 0 0 0 0 1,016 0 0 711
Tier 1 coco issuance 32,085 11,524 7,303 6,605 5,539 4,297 0 1,332 1,298 0 0 0 0
Tier 2 coco issuance 0 0 0 0 0 0 4,060 0 0 0 947 877 0
Total issuances (CET1+T1 cocos+T2cocos) 33,890 11,524 7,303 6,605 5,539 4,297 4,060 1,332 1,298 1,016 947 877 711
Senior redemption (Case I, excess senior debt redemption) -43,234 -23,436 -15,717 -12,974 -6,759 -12,035 0 -5,677 -95 -2,832 0 0 -1,271
Senior redemption (Case II senior debt redemption limited to
coco issuances) -32,085 -11,524 -7,303 -6,605 -5,539 -4,297 0 -1,332 -95 0 0 0 0
Source: J.P. Morgan estimates. Note: For CSG, current additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (CoCos) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into BCNs
17
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 10: European Banks Optimising capital structure 2015e (2/2)
million
Popular UBS Lloyds RBS HSBC STAN UCG ISP SAN Caixabank SHB Erste Total
OLD
Basel 3 Core Tier I capital 7,417 28,431 42,586 53,955 111,987 35,252 47,099 34,988 58,229 15,217 12,161 12,524
Tier 1 cocos 0 0 0 0 0 0 0 0 0 0 0 0
Tier I hybrids - current 134 2,587 1,647 11,000 7,013 3,961 2,554 2,544 3,195 90 1,227 377
Tier 2 cocos 0 4,371 10,774 0 0 0 0 0 0 0 0 0
Additional Tier 2 & other sub debt 777 4,092 10,289 12,989 25,247 9,589 14,343 8,141 9,391 4,020 382 4,423
Senior 9,109 20,689 35,316 64,913 55,477 16,400 101,240 70,741 43,421 34,738 71,911 11,750
Total 17,437 60,169 100,611 142,857 199,725 65,201 165,235 116,414 114,236 54,065 85,681 29,074
Total liabilities in reg capital adj for derivatives 147,028 540,056 916,589 971,544 1,996,716 534,314 828,203 617,668 1,128,298 350,540 293,395 216,193
Total exposure post asset reduction for
leverage 183,057 701,703 954,345 1,513,150 2,492,700 587,802 1,087,617 820,156 1,233,831 403,893 314,021 231,414
Basel III RWA 83,392 172,897 326,841 481,828 1,042,231 315,832 444,460 316,343 598,874 164,214 70,910 114,332
Bail-in funds (%) 11.9% 11.1% 11.0% 14.7% 10.0% 12.2% 20.0% 18.8% 10.1% 15.4% 29.2% 13.4% 13.0%
Basel III Capital Ratios (%) 8.9% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.0%
NEW
Basel 3 Core Tier I capital 7,505 28,431 42,586 53,955 111,987 35,252 47,099 34,988 58,229 15,217 12,161 12,524
Tier 1 cocos 0 0 0 0 0 0 0 0 0 0 0 0
Tier I hybrids - current 134 2,587 1,647 11,000 7,013 3,961 2,554 2,544 3,195 90 1,227 377
Tier 2 cocos 0 4,371 10,774 0 0 0 0 0 0 0 0 0
Additional Tier 2 & other sub debt 777 4,092 10,289 12,989 25,247 9,589 14,343 8,141 9,391 4,020 382 4,423
Senior 8,403 19,148 33,078 54,963 55,464 13,457 80,636 57,079 43,070 29,985 57,826 9,886
Total 16,819 58,628 98,373 132,907 199,711 62,259 144,631 102,752 113,884 49,312 71,596 27,210
Bail-in funds (%) 11.4% 10.9% 10.7% 13.7% 10.0% 11.7% 17.5% 16.6% 10.1% 14.1% 24.4% 12.6% 12.3%
Basel III CET1 Ratios (%) 9.0% 16.4% 13.0% 11.2% 10.7% 11.2% 10.6% 11.1% 9.7% 9.3% 17.1% 11.0% 12.1%
Common equity issuance 88 0 0 0 0 0 0 0 0 0 0 0 3,620
Tier 1 coco issuance 0 0 0 0 0 0 0 0 0 0 0 0 69,984
Tier 2 coco issuance 0 0 0 0 0 0 0 0 0 0 0 0 5,885
Total issuances (CET1+T1 cocos+T2cocos) 88 - - - - - - - - - - - 79,489
Senior redemption (Case I, excess senior debt
redemption) -706 -1,541 -2,238 -9,950 -13 -2,943 -20,604 -13,662 -351 -4,753 -14,085 -1,864 - 196,740
Senior redemption (Case II senior debt
redemption limited to coco issuances) 0 0 0 0 0 0 0 0 0 0 0 0 -68,781
Source: J.P. Morgan estimates.
18
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Optimal Capital Structure analysis- running the numbers:
RoNAV declines 1% to 10.6% 2015E
We conclude that the new regulations will increase capital requirements and
drive up capital as well as funding costs and thus increase pressure on banks
profitability. Additionally the tougher capital requirements could, in our view,
push banks to reduce their balance sheet sizes and focus more on the optimal
capital/funding structure, which potentially could lead to retiring of excess
senior unsecured funding. We expect the Basel 3 capital, bail-in and leverage
ratio requirements to reduce EPS by ~9% on average and RoNAV to ~10.6%
from 11.3% with the biggest earnings impact coming from bail-in. The most
impacted banks from Basel 3 capital, bail-in and leverage ratio rules are CBK,
CASA, and Caixabank with an estimated 35%, 34%, and 27% hit in EPS
respectively post regulation, while SHB, Nordea, UBS, RBS, Lloyds, HSBC,
STAN, ISP and UCG are relatively unaffected.
CBK is one of the most impacted with EPS dilution of 35% and RoNAV
declining from 3.7%in our current estimates to 2.4% in 2015e, with most of the
impact coming from a) the Basel 3 leverage ratio shortfall of 7.3bn to improve
leverage from 2.6% to our minimum 3.5%, and b) the additional cost of bail-in of
60bp for sub debt and 90bp for senior debt, only partly offset by senior debt
redemption of estimated 16bn.
CASA is also materially affected with EPS dilution of 34% and RoNAV
decreasing to 7.9% from 11.0% in 2015e. Note however that our sensitivity
scenario is based on CASA, which has a significant Basel 3 leverage shortfall of
34bn to improve leverage from 1.7% to 3.5% in our estimates. However,
regulators focus on Credit Agricole Group, which has a Basel leverage of 3.3%,
implying only 3.3bn shortfall to our 3.5% minimum. As discussed in our note
Credit Agricole: high cost of equity on Basel leverage uncertainties on 29 July
2013, to improve CASA Basel leverage by end 2015e, CASA could consider
several mitigation initiatives: a) issue additional Basel 3 Tier I cocos/hybrids; b)
raise equity and issue additional Basel 3 Tier I cocos/hybrids; or c) sell the
insurance business to the Regional Banks, unwind the intragroup exposures and
exit capital markets. The company has not commented on these options.
Caixabank is also significantly impacted with EPS dilution of 27% and RoNAV
declining to 4.9% from 6.7% in 2015e. The impact is mostly driven by the
incremental cost of bail-in debt of 170bp for senior and 120bp for sub debt.
SHB and Nordea are well positioned with no impact on EPS for SHB and only -
3% for Nordea. Basel 3 capital and leverage as well as bail-in funds are already
more than adequate at SHB. Nordeas 1.3bn leverage shortfall to improve Basel
leverage from 3.3% to 3.5% is largely offset by the positive impact from
redeeming 6bn of senior debt.
HSBC & STAN are also well positioned with EPS impact of up to -2% only in
our sensitivity scenario, driven entirely by the repricing of bail-inable debt for the
additional bail-in cost of 30bp for sub and 40bp for senior. RoNAV remains high
at 12.2% for HSBC and 13.8% for STAN.
Table 11: European Bank: 2015E
impact due to regulations on
average
%
% EPS
dilution
% Impact
on RoNAV
Bail-in funds -10% -1.0%
B3 leverage -5% -0.4%
Basel CET1 -1% 0.0%
Overall
impact * -9% -1%
Source: J.P. Morgan estimates. Note:- Overall
impact is calculated post optimum capital
structure including senior redemption
19
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UBS, RBS & Lloyds are also broadly unaffected with EPS impact of 0-2% in our
view, driven by the repricing of bail-inable debt. Note however that our estimates
are based on the banks delivering on their asset reduction targets of SF342bn,
65bn and 50bn respectively.
ISP & UCG are also well positioned with small EPS impact from our sensitivity
analysis. The negative impact from the repricing of wholesale funding - 60bp for
sub debt and 90bp for senior - is more than offset by the redemption of 21bn of
senior debt for UCG and 14bn for ISP.
Assuming banks would not retire any maturing excess bail-inable debt by 2015E to
offset the bail-in premium on senior funding, we estimate that the average EPS
impact for the European banks would be -17% with RoNAV falling on average by
1.5% from 11.3% to 9.9%. The most impacted bank would be CBK with a -73% EPS
hit, while UBS, HSBC and Standard Chartered would see limited earnings impact
(-2%EPS hit respectively).
Note that to get to the optimal capital structure, we have assumed: i) equity
capital raise to get to minimum Basel 3 Core Tier I ratio, ii) issuance of additional
alternative Tier 1 cocos at a average cost equal to 7%, iii) costs offset from the
redemption of senior to optimize the impact on liquidity (e.g. excess cash at central
banks), and iv) based on new capital structure, repricing of wholesale funding (senior
and sub) for the additional cost for bail-in feature.
For current cost of senior and sub debt we use 5 yr CDS data, as we believe the CDS
give fair and comparable costs for debt issuance. We note that some recent issuance
have been inside CDS spread levels. For additional alternative Tier 1 cocos we have
assumed a cost of 7%, equivalent to the average cost of the issuances by CSG, KBC,
BBVA and UBS.
Table 12: Funding cost assumptions for the optimal capital structure
%
Assumption
Financing cost on existing sub debt CDS spread + currency swap
Increase due to bail-in on existing sub debt 30bps/59bps/119bps depending on bail-in segmentation
Financing cost new debt CDS spread + currency swap + bail-in premium
Financing cost of cocos 7% - average of current CSG, KBC, BBVA and UBS coco issuance
20
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 13: European Banks Impact from reaching an optimal capital structure on 2015e EPS, NAV & RoNAV (1/2)
lcl ccy million
CBK CASA Caixabank KBC Soc Gen Popular BBVA Erste DB DnB BNPP Danske SAN
Net income 868 3,158 1,447 1,679 3,570 913 3,598 1,650 6,006 18,747 6,590 14,922 6,145
Interest income - capital raising 0 38 0 15 0 2 0 0 0 60 0 0 0
Cost of cocos/Add Tier I -385 -1,578 0 0 -320 0 0 0 -531 0 -205 -507 0
Cost of add sub debt 0 0 0 0 0 0 -234 0 0 0 0 0 0
Additional cost bail-in -402 -646 -559 -283 -548 -154 -158 -225 -668 -1,309 -689 -644 -441
Cost of redeeming senior (Case I) 484 1,300 164 38 388 42 0 56 585 486 315 19 14
Resulting net income 566 2,272 1,053 1,450 3,089 803 3,206 1,481 5,393 17,983 6,011 13,790 5,718
NOSH (m) 1,139 2,488 5,705 417 801 2,209 6,345 430 1,027 1,629 1,244 1,001 13,112
add shares (m) 0 231 0 21 0 24 0 0 0 84 0 0 0
Resulting NOSH (m) 1,139 2,720 5,705 438 801 2,232 6,345 430 1,027 1,713 1,244 1,001 13,112
EPS 0.76 1.27 0.25 4.03 4.45 0.41 0.57 3.84 5.85 11.51 5.30 14.91 0.47
Resulting EPS 0.50 0.84 0.18 3.31 3.86 0.36 0.51 3.44 5.25 10.50 4.83 13.78 0.44
EPS dilution -35% -34% -27% -18% -13% -13% -11% -10% -10% -9% -9% -8% -7%
NAV/share 20.9 12.2 4.0 28.5 53.5 4.6 5.8 24.9 49.5 96.7 56.9 141.5 4.6
Resulting NAV/share 20.6 11.8 3.9 28.0 52.9 4.6 5.7 24.5 48.9 96.2 56.5 140.3 4.6
RoNAV 3.7% 11.0% 6.7% 14.9% 8.6% 9.6% 9.9% 16.2% 12.4% 12.5% 9.6% 10.9% 10.5%
Resulting RoNAV 2.4% 7.9% 4.9% 12.9% 7.5% 8.5% 8.8% 14.5% 11.2% 12.0% 8.7% 10.1% 9.8%
Impact -1.3% -3.1% -1.8% -2.0% -1.2% -1.2% -1.1% -1.7% -1.3% -0.5% -0.8% -0.8% -0.7%
Case II- Sensitivity to senior debt redemption assumption assuming senior debt redemption limited to coco issuance
Cost of redeeming senior (Case II) 225 965 0 0 198 0 0 0 288 0 112 19 0
EPS 0.76 1.27 0.25 4.03 4.45 0.41 0.57 3.84 5.85 11.51 5.30 14.91 0.47
Resulting EPS 0.21 0.67 0.14 3.18 3.55 0.34 0.51 3.24 4.86 10.10 4.61 13.78 0.43
EPS dilution -73% -47% -44% -21% -20% -19% -11% -16% -17% -12% -13% -8% -7%
NAV/share 20.9 12.2 4.0 28.5 53.5 4.6 5.8 24.9 49.5 96.7 56.9 141.5 4.6
Resulting NAV/share 20.3 11.6 3.9 27.8 52.6 4.6 5.7 24.3 48.5 95.8 56.2 140.3 4.6
RoNAV 3.7% 11.0% 6.7% 14.9% 8.6% 9.6% 9.9% 16.2% 12.4% 12.5% 9.6% 10.9% 10.5%
Resulting RoNAV 1.0% 6.4% 3.7% 12.4% 6.9% 7.9% 8.8% 13.7% 10.3% 11.5% 8.3% 10.1% 9.7%
Impact -2.7% -4.7% -3.0% -2.6% -1.7% -1.7% -1.1% -2.5% -2.1% -1.0% -1.2% -0.8% -0.8%
21
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 14: European Banks Impact from reaching an optimal capital structure on 2015e EPS, NAV & RoNAV (2/2)
Lcl ccy million
SEB CS Swed NDA HSBC Lloyds UBS STAN RBS ISP SHB UCG Average
Net income 14,876 5,482 16,717 4,000 20,415 5,582 7,265 6,391 3,321 2,580 14,814 3,072
Interest income - capital raising 0 0 0 0 0 0 0 0 0 0 0 0
Cost of cocos/Add Tier I 0 -316 0 -70 0 0 0 0 0 0 0 0
Cost of add sub debt -285 0 -260 0 0 0 0 0 0 0 0 0
Additional cost bail-in -570 -125 -411 -165 -438 -150 -125 -129 -259 -549 -2,183 -786
Cost of redeeming senior (Case I) 0 200 0 118 0 53 44 110 259 576 2,520 940
Resulting net income 14,021 5,242 16,047 3,884 19,978 5,485 7,184 6,373 3,322 2,607 15,152 3,226
NOSH (m) 2,200 1,614 1,097 4,050 19,076 72,588 3,833 2,495 11,544 16,425 635 5,792
add shares (m) 0 0 0 0 0 0 0 0 0 0 0 0
Resulting NOSH (m) 2,200 1,614 1,097 4,050 19,076 72,588 3,833 2,495 11,544 16,425 635 5,792
EPS 6.76 3.40 15.23 0.99 1.07 7.69 1.90 2.56 28.77 0.16 23.31 0.53
Resulting EPS 6.37 3.25 14.62 0.96 1.05 7.56 1.87 2.55 28.77 0.16 23.85 0.56
EPS dilution -6% -4% -4% -3% -2% -2% -1% 0% 0% 1% 2% 5% -9%
NAV/share 51.8 26.5 88.5 6.9 8.8 65.0 12.3 19.5 476.2 2.2 176.4 8.5
Resulting NAV/share 51.4 26.4 87.8 6.8 8.8 64.9 12.3 19.5 476.2 2.2 176.9 8.5
RoNAV 13.5% 13.4% 17.6% 14.8% 12.5% 12.2% 15.9% 13.8% 6.2% 7.3% 13.7% 6.4% 11.3%
Resulting RoNAV 12.7% 12.8% 16.9% 14.3% 12.2% 12.0% 15.7% 13.8% 6.2% 7.3% 14.0% 6.7% 10.6%
Impact -0.8% -0.6% -0.7% -0.4% -0.3% -0.2% -0.2% 0.0% 0.0% 0.1% 0.3% 0.3% -0.8%
Case II- Sensitivity to senior debt redemption assumption assuming senior debt redemption limited to coco issuance
Cost of redeeming senior (Case II) 0 164 0 28 0 0 0 0 0 0 0 0
EPS 6.76 3.40 15.23 0.99 1.07 7.69 1.90 2.56 28.77 0.16 23.31 0.53
Resulting EPS 6.37 3.22 14.62 0.93 1.05 7.47 1.86 2.50 26.22 0.12 19.06 0.36
EPS dilution -6% -5% -4% -6% -2% -3% -2% -2% -9% -26% -18% -31% -17%
NAV/share 51.8 26.5 88.5 6.9 8.8 65.0 12.3 19.5 476.2 2.2 176.4 8.5
Resulting NAV/share 51.4 26.3 87.8 6.8 8.8 64.8 12.3 19.4 473.7 2.2 172.1 8.3
RoNAV 13.5% 13.4% 17.6% 14.8% 12.5% 12.2% 15.9% 13.8% 6.2% 7.3% 13.7% 6.4% 11.3%
Resulting RoNAV 12.7% 12.7% 16.9% 13.9% 12.2% 11.9% 15.6% 13.5% 5.7% 5.4% 11.2% 4.4% 9.9%
Impact -0.8% -0.7% -0.7% -0.8% -0.3% -0.3% -0.3% -0.3% -0.6% -1.9% -2.5% -2.0% -1.5%
22
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Optimal Capital Structure Factor 1: Bail-in reducing PBT by
10% and RoNAV by 1%
Whilst the European Council is proposing that 8% of total liabilities must be
bailed-in before resolution funds can be used, we think the actual bail-in
requirement could be higher. We run two scenarios for assessing a JPMe 10% bail-
in liability requirement namely a base case and a bear case.
In our base case we assume that the 10% JPMe bail-in requirement would be
fulfilled by total available loss-absorbing own funds and eligible liabilities i.e.
equity, sub-debt and senior unsecured with maturity greater than 1 year.
In our bear case we assume that banks would want to meet the JPMe 10%
minimum bail-in requirement with own funds only i.e. equity and sub-debt (T1
and T2
1
) excluding senior debt.
In our base case we do not see any sector deficit in terms of the absolute amount
of bail-in liabilities required, although we note that BBVA has a deficit of 1% of
liabilities with the bank needing to raise 4.1bn in eligible bail-in liabilities in order
to meet a JPMe 10% minimum bail-in requirement. Additionally, Danske, SEB and
Swedbank have small deficits of 0.3-0.4% vs. the JPMe 10% minimum, reflecting
their reliance on secured covered bond funding.
In our bear case we see a sector deficit of 3.6% of total liabilities with no
European bank meeting the minimum with own funds. Standard Chartered, RBS
and Erste with 9.1%, 8.0% and 8.0% respectively of own funds to total liabilities are
best placed, while CASA with 4.4% and Handelsbanken with 4.7% of own funds to
total liabilities are in the weakest position. Although the Nordic banks are on a B3
Core Equity Tier 1 measure some of the best capitalized banks in Europe, on a bail-in
measure they stack up slightly below average, with own funds to total liabilities
averaging 5.5% vs. sector average of 6.4%.

1
Please note that we have used the B3 definition for Core Equity Tier 1 and B2 definition for
Additional Tier 1 and Tier 2
The Council of the European
Union is proposing that a
minimum of 8% of total liabilities
including own funds must be
bailed-in before any resolution
funds can be used. However, we
think banks will operate above
the 8% threshold and hence
assume a 10% JPMe minimum
(losses prior to resolution action
do not count towards the 8% min
level). The bail-in tool will not
apply until 1 Jan 2018.
We note that FINMA has
developed a resolution strategy
for Switzerlands global
systemically important banks
and this may not fully replicate
the Council of the European
Union proposal. However, for the
purpose of like-for-like
comparison across the
European Banking sector, we
are running this exercise for
both UBS and CSG based on the
Council of the European Union
proposal.
23
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 15: European Banks minimum loss-absorbing bail-in requirement and availability of loss-absorbing liabilities
EUR bn
Total
liabs ex
der
Loss-absorbing
bail-in
requirement
(10% of total
liabs)
Total
capital
under
Basel III
Senior
debt >1
year
Total
available
loss-
absorbing
liabs
Total
available
loss-
absorbing
liabs incl
senior debt
BASE CASE
Additional
issuance
requirement
to meet 10%
total liabs
with own
funds and
senior debt
BASE CASE
Total
available
loss-
absorbing
own funds
BEAR CASE
Additional
issuance
requirement to
meet 10% total
liabs with own
funds only
BEAR CASE
BBVA 616 62 45 12 57 9% 4 7% 16
Danske 415 42 24 16 40 10% 1 6% 18
SEB 300 30 15 14 29 10% 1 5% 15
Swed 224 22 12 10 22 10% 1 5% 11
CASA 1,367 137 60 87 147 11% - 4% 76
HSBC 1,997 200 144 55 200 10% - 7% 55
DB 1,162 116 64 88 152 13% - 6% 52
BNPP 1,457 146 94 78 172 12% - 6% 52
Soc Gen 1,038 104 53 70 123 12% - 5% 51
SAN 1,128 113 71 43 114 10% - 6% 42
CBK 626 63 35 54 89 14% - 6% 28
Lloyds 917 92 65 35 101 11% - 7% 26
NDA 559 56 31 41 72 13% - 6% 24
CS 680 68 44 25 69 10% - 6% 24
RBS 972 97 78 65 143 15% - 8% 19
UCG 828 83 64 101 165 20% - 8% 19
ISP 618 62 46 71 116 19% - 7% 16
Caixabank 351 35 19 35 54 15% - 6% 16
SHB 293 29 14 72 86 29% - 5% 16
UBS 540 54 39 21 60 11% - 7% 15
KBC 255 25 15 15 30 12% - 6% 10
DnB 307 31 21 21 41 13% - 7% 10
Popular 147 15 8 9 17 12% - 6% 6
STAN 534 53 49 16 65 12% - 9% 5
Erste 216 22 17 12 29 13% - 8% 4
Total 17,545 1,754 1,128 1,067 2,195 13% 7 6% 627
Source: Company reports and J.P. Morgan estimates. Total capital includes Basel II.5 hybrids
We estimate an average 85bps bail-in premium for senior bail-in debt with the
cost of senior unsecured debt expected to increase on average to 244bps from
159bps for European banks. Given that subordinated debt provides loss-absorbing
resources, while senior unsecured debt generally doesnt in a non-bankruptcy
scenario, we believe that the bail-in premium for senior instruments should be higher
than subordinated debt. For the purpose of our analysis we assume that the sub
spread increase is 70% of the senior spread increase, in line with our Fixed Income
colleagues investor survey on the impact of bail-in on funding costs (European Bank
Bail-In Survey Results: Investor Views on Bail-in Senior Debt and Basel III
Subordinated Debt). Using this method we see an average 59bps bail-in premium
for subordinated debt, with the cost of sub debt issuances expected to rise to
318bps from 259bps.
24
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
We have derived the 85bps senior unsecured premium by using the average of
four different methods, which are discussed in more detail in The Cost of Bail-in
section on page 73:
1. The yield comparison between sub debt, senior unsecured debt and CoCo
yields, which assumes that senior debt is no longer bailed-out and hence should,
at least in theory, take more of the subordinated debt characteristics including
pricing. Using this method we see the senior unsecured bail-in premium ranging
from 90-170bps with an average of 125bps reflecting the average Z-spread
difference between existing coco-senior unsecured and coco-subordinated issues.
Moreover, we see an average 88bps increase for subordinated debt using this
method.
2. The case studies of Danish banks to see how the relative CDS spreads
developed with the two cases of Danish bail-in, which indicates an average senior
unsecured bail-in premium of 80bps (ranging from 40-160bps) and 56bps
premium (ranging from 28-112bps) for subordinated debt.
3. The investor bail-in debt survey assessment from our Fixed Income
colleagues, which suggests a bail-in premium of 59bps (85bps average increase
for an A-rated name of which 30% has already been incorporated in the market
level). Overall we see the senior unsecured bail-in premium increasing by 30-
122bps depending on the bail-in segmentation of the bank and 21-85bps for
subordinated debt (average increase of 43bps).
4. The yield pick-up from a higher loss given default (LGD) factor given that the
recovery rates should in theory be lower under bail-in than bail-out, suggesting
that the senior bail-in premium could rise by 74bps on average and sub debt
premium by 52bps.
Table 16: Bail-in cost estimates under different scenarios
Implied increase in spread Senior in bp Implied increase in spreads Sub in bp
Base figure Low Medium High Base figure Low Medium High
Bail-in cost under yield comparison method 125 63 125 250 88 44 88 175
Bail-in cost under scenario Denmark 80 40 80 160 56 28 56 112
Bail-in cost under scenario Fixed Income investor survey 59 30 59 122 43 21 43 85
Bail-in cost under higher LGD assumption 74 37 74 148 52 26 52 104
Average 85 42 85 170 59 30 59 119
Source: J.P. Morgan estimates, Bloomberg. Notes: The high, medium and low bail-in segment categories refer to the relative likelihood of bail-in, depending on the strength of the equity resources
and asset quality. The High factor is 200% of the estimated impact, medium is 100% of the estimated impact and low is 50% of the estimated impact. Sub debt factor is 70% of the senior debt
factor.
We believe bail-in could represent a material cost to bank debt issuers, with a
42bp to 170p increase in spreads on longer term unsecured senior debt depending on
the risk profile of the bank, and 30bp to 119bp on sub debt. We see an average 54%
or 85bps increase in senior debt funding cost and 23% or 59bps in sub debt
funding costs due to bail-in, across all eligible bail-in liabilities. Therefore in our
view, despite no deficits on average in terms of the absolute level of available
liabilities in the system, we see material cost to bank debt issuers. As shown in
Table 17 we estimate that the cost of senior unsecured issuances post bail-in will
rise on average to 244bps from 159bps and subordinated debt to 318bps from
259bps for European banks.
25
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 17: European Banks: Increase in sub and senior spreads due to bail-in
%
Bail-in
Segment*
Current
CDS on
senior debt
Increase due to
bail-in (senior
debt) %pt
CDS post
bail-in
(senior debt)
% uplift due
to bail-in
(senior debt)
Current
CDS on
sub debt
Increase due
to bail-in
(sub debt) %pt
CDS post
bail-in
(sub debt)
% uplift due
to bail-in
(sub debt)
DnB med 0.7% 0.9% 1.6% 115% 1.4% 0.6% 2.0% 43%
Erste high 1.6% 1.7% 3.3% 107% 2.7% 1.2% 3.8% 45%
KBC high 1.6% 1.7% 3.3% 106% 2.3% 1.2% 3.4% 53%
Caixabank high 2.1% 1.7% 3.8% 82% 4.5% 1.2% 5.6% 27%
DB med 1.1% 0.9% 1.9% 77% 1.8% 0.6% 2.4% 33%
BNPP med 1.2% 0.9% 2.1% 70% 1.9% 0.6% 2.5% 31%
SHB low 0.7% 0.4% 1.1% 65% 1.1% 0.3% 1.4% 27%
CASA high 1.6% 1.0% 2.6% 63% 2.5% 0.7% 3.3% 28%
NDA low 0.7% 0.4% 1.1% 62% 1.3% 0.3% 1.6% 23%
Soc Gen med 1.6% 0.9% 2.4% 53% 2.5% 0.6% 3.1% 24%
CBK med 1.7% 0.9% 2.5% 51% 3.9% 0.6% 4.5% 15%
UBS low 0.9% 0.4% 1.3% 47% 1.4% 0.3% 1.7% 22%
SEB low 0.9% 0.4% 1.4% 46% 1.8% 0.3% 2.1% 17%
CS low 1.0% 0.4% 1.4% 42% 1.4% 0.3% 1.7% 21%
HSBC med 1.0% 0.4% 1.5% 41% 1.6% 0.3% 1.9% 19%
Swed low 1.1% 0.4% 1.5% 40% 1.7% 0.3% 2.0% 17%
Popular high 4.6% 1.7% 6.3% 37% 6.4% 1.2% 7.6% 19%
Danske med 1.2% 0.4% 1.6% 35% 2.1% 0.3% 2.4% 14%
SAN med 2.5% 0.9% 3.4% 34% 3.6% 0.6% 4.2% 17%
BBVA med 2.7% 0.9% 3.5% 32% 3.8% 0.6% 4.4% 16%
Lloyds med 1.4% 0.4% 1.8% 31% 2.3% 0.3% 2.6% 13%
ISP med 2.8% 0.9% 3.7% 30% 4.0% 0.6% 4.6% 15%
STAN med 1.4% 0.4% 1.9% 30% 2.2% 0.3% 2.5% 13%
UCG med 3.2% 0.9% 4.0% 27% 4.5% 0.6% 5.1% 13%
RBS med 1.7% 0.4% 2.1% 25% 3.3% 0.3% 3.6% 9%
Average 1.6% 0.8% 2.4% 54% 2.6% 0.6% 3.2% 23%
Source: Bloomberg and J.P. Morgan estimates. * Bail-in segmentation is based on for the surplus or deficit above Basel 3 equity tier one requirements and asset quality (NPL ratio).
We see bail-in reducing JPMe 2015e RoNAVs by 1.0% to an average 10.4% for
the European banks (see Table 18). The most impacted banks vs. JPMe
earnings are CBK, Caixabank and CASA (41%, 37% and 24% PBT hits
respectively) whilst the Swiss and UK banks are relatively un-impacted given
their high levels of bail-inable own funds and optimal levels of senior unsecured
debt.
We see the lowest average impact on PBT post bail-in in 2015e for UBS,
HSBC and Standard Chartered with a 1.4%, 1.5% and 1.6% PBT hit
respectively. Post bail-in in 2015e we see the JPMe RoNAV for UBS, HSBC and
Standard Chartered at 15.6%, 12.3% and 13.6% respectively.
We estimate that only CBK, Caixabank and CASA are likely to see a severe
earnings impact from bail-in, knocking their 2015e PBT by 41%, 37% and
24% respectively. This equates to an estimated post bail-in RoNAV of 2.0%,
4.6% and 8.4% respectively in 2015e for the three banks. Note that we have run
the analysis on CASA although regulators focus on Credit Agricole Group,
including the well capitalized Regional Banks.
We recognize institutions that have large bail-in buffers, less secured
instruments relative to senior unsecured and/or large own fund buffers
could potentially enforce lower losses on senior unsecured creditors in a bail-
in scenario, given that there is more senior unsecured funding available to
cover the losses. We have taken further reduction in funding costs into account in
our base case sensitivity analysis on page 89.
26
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Whilst a combination of both eligible bail-in liabilities and own funds can be used to
meet the minimum bail-in requirement, we think banks may be pushed by the
funding markets to cover the minimum or at least a large part of the minimum
with own funds (i.e. T1 and T2) to minimize the increase in senior unsecured
funding costs. We believe the cost of senior unsecured instruments could be
lower if the banks regulatory capital base is relatively larger, which should
absorb the first losses once the bank reaches the point of non-viability. In our
bear case, where we assume that the JPMe bail-in minimum of 10% is met by own
funds (i.e. T1 and T2) and any new subordinated debt replaces existing senior debt,
we see a 11% average PBT earnings hit and 1.0% RoNAV hit in 2015e with the
sector JPMe RoNAV falling to 10.3% from 11.3%. Under this scenario the most
impacted banks vs. JPMe earnings are CASA, CBK and Caixabank (3.6%, 2.7% and
2.0% RoNAV hits respectively) while Standard Chartered, UBS and HSBC remain
relatively un-impacted (0.2%, 0.3%and 0.4% RoNAV hits respectively).
Table 18: European Banks: Impact on funding cost due to bail-in under different scenarios
% EUR mn
BASE CASE- impact on existing sub and senior debt
BEAR CASE - JPMe 10% min bail-in requirement met with own funds (i.e.
Tier 1 and Tier 2)
2015E
Clean
PBT
2015E PBT
post bail-in
Impact
on PBT
(%)
RoNAV
2015
RoNAV
2015E post
bail-in
Impact
on
RoNAV
2015E
Clean PBT
2015E PBT
post bail-
in
Impact on
PBT (%)
RoNAV
2015E
RoNAV
2015E post
bail-in
Impact
on
RoNAV
CBK 1,321 786 -41% 3.7% 2.0% -1.7% 1,321 464 -65% 3.7% 0.9% -2.7%
Caixabank 1,722 1,082 -37% 6.7% 4.6% -2.1% 1,722 1,110 -36% 6.7% 4.7% -2.0%
CASA 4,623 3,536 -24% 11.0% 8.4% -2.7% 4,623 3,159 -32% 11.0% 7.4% -3.6%
UCG 5,548 4,587 -17% 6.4% 5.1% -1.2% 5,548 5,081 -8% 6.4% 5.8% -0.6%
SHB 2,192 1,881 -14% 13.7% 11.7% -1.9% 2,192 2,073 -5% 13.7% 12.9% -0.7%
ISP 4,966 4,301 -13% 7.3% 6.3% -1.0% 4,966 4,611 -7% 7.3% 6.7% -0.5%
Popular 1,308 1,142 -13% 9.6% 8.4% -1.2% 1,308 1,106 -15% 9.6% 8.2% -1.5%
KBC 2,584 2,280 -12% 14.9% 13.0% -1.9% 2,584 2,340 -9% 14.9% 13.4% -1.6%
Erste 2,320 2,063 -11% 16.2% 14.2% -2.0% 2,320 2,166 -7% 16.2% 15.0% -1.2%
Soc Gen 5,959 5,300 -11% 8.6% 7.5% -1.1% 5,959 5,128 -14% 8.6% 7.2% -1.4%
DB 9,426 8,559 -9% 12.4% 11.3% -1.2% 9,426 8,633 -8% 12.4% 11.4% -1.1%
BBVA 5,306 4,913 -7% 9.9% 9.1% -0.8% 5,306 4,808 -9% 9.9% 8.9% -1.1%
BNPP 11,030 10,238 -7% 9.6% 8.8% -0.8% 11,030 10,223 -7% 9.6% 8.8% -0.8%
DnB 3,194 3,007 -6% 12.5% 11.7% -0.7% 3,194 3,055 -4% 12.5% 11.9% -0.5%
RBS 6,242 5,895 -6% 6.2% 5.8% -0.4% 6,242 5,802 -7% 6.2% 5.7% -0.5%
Danske 2,686 2,554 -5% 10.9% 10.4% -0.5% 2,686 2,430 -10% 10.9% 9.8% -1.0%
SEB 2,139 2,041 -5% 13.5% 12.9% -0.6% 2,139 1,944 -9% 13.5% 12.3% -1.2%
SAN 10,072 9,628 -4% 10.5% 9.9% -0.6% 10,072 9,298 -8% 10.5% 9.5% -1.0%
NDA 5,333 5,145 -4% 14.8% 14.2% -0.5% 5,333 5,093 -5% 14.8% 14.1% -0.7%
Swed 2,395 2,318 -3% 17.6% 17.0% -0.6% 2,395 2,267 -5% 17.6% 16.7% -0.9%
Lloyds 8,972 8,787 -2% 12.2% 12.0% -0.3% 8,972 8,619 -4% 12.2% 11.8% -0.5%
CS 6,625 6,495 -2% 13.4% 13.1% -0.3% 6,625 6,494 -2% 13.4% 13.1% -0.3%
STAN 6,938 6,828 -2% 13.8% 13.6% -0.2% 6,938 6,847 -1% 13.8% 13.6% -0.2%
HSBC 21,378 21,046 -2% 12.5% 12.3% -0.2% 21,378 20,815 -3% 12.5% 12.1% -0.4%
UBS 7,499 7,391 -1% 15.8% 15.6% -0.2% 7,499 7,367 -2% 15.8% 15.5% -0.3%
Average 5,671 5,272 -10% 11.3% 10.4% -1.0% 5,671 5,237 -11% 11.3% 10.3% -1.0%
We believe the markets have yet to discount for the European proposal on
resolution & recovery schemes including bail-in. In our view the structure of the
bond market is changing under bail-in, and we believe unsecured and uninsured
creditors will demand higher returns on funding to compensate for the removal
of implied government guarantees and burden-sharing in a resolution scenario
(i.e. higher loss given default). Whilst bail-in so far has been used only as a
resolution tool, we believe it will impact future access to funding and lead to
materially higher funding costs for a going concern bank. We note that post the
removal of the implicit government guarantee (i.e. bail-in) in the UK in February
27
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
2008, the UK banks CDS spreads have shown reduced correlation to UK sovereign
CDS.
Table 19: UK banks CDS coupled with sovereign pre 2008 financial crisis
start date 07 Apr 06 07 Apr 06 07 Apr 06
end date 21 Feb 08 21 Feb 08 21 Feb 08
Security 1 UK CDS UK CDS UK CDS
Security 2 HSBC CDS RBS CDS Lloyds CDS
R^2 0.91 0.94 0.93
Source: Bloomberg and J.P. Morgan estimates.
Table 20: UK banks CDS less correlated with sovereign post 2008 removal of government
guarantee
start date 22 Feb 08 22 Feb 08 22 Feb 08
end date 9 Sept 13 9 Sept 13 9 Sept 13
R^2 0.23 0.15 0.20
Similarly, comparing Danskes CDS pre and post resolution bail-in, we note that the
spread difference between Danske and its Nordic peers has widened by ~80bps post
bail-in.
Figure 1: Bail-in impact on funding costs, Danish example Danskes 5yr snr CDS vs. average 5yr snr CDS of Nordic peers and Danish bail-in
bps
Source: Bloomberg, Company Reports and J.P. Morgan.
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Difference (bps) Danske Bank 5yr Snr CDS Average Nordic Peers 5 yr Snr CDS
Bail-in introduced
1
st
bail-in case:
Amagerbanken
failed
2
nd
bail in case:
Fjordbank Mors
failed
Split of good/bad
bank introduced
Danske DKK7bn
capital increase
28
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Optimal Capital Structure Factor 2: Basel 3 leverage ratio
proposal resulting shortfall of 72bn - reducing PBT by 5%
We assess the potential capital impact by assuming that banks would need at
least a JPMe 3.5% leverage ratio by 2015e, including a 50bp buffer over the
proposed minimum 3.0% regulatory requirement. We recognize that the minimum
could be higher, with the Dutch Finance Minister calling for a 4% leverage ratio
minimum for SIFIs. We estimate that the Basel leverage consultation document
published on June 26, 2013 would in its current form lead to a 15% average increase
in balance sheet due to the treatment of derivatives, securities financing transactions
and off-balance sheet items.
Compared to a JPMe 3.5% leverage ratio minimumwe see a total capital
shortfall of 72bn in 2015e, or asset reduction need of 2.1 trillion. Most exposed
banks would be: DB with 11.5bn shortfall, CBK with 7bn, CASA with 34bn
(note however that regulators focus on Credit Agricole Group with more adequate
leverage ratio of 3.3% rather than CASA), whilst the best positioned banks are
STAN with 6% Basel leverage ratio, Erste Bank (5.4%), BBVA (4.8%) and SAN
(4.7%).
Based on our estimates, getting to a JPMe 3.5% leverage ratio on the proposed
Basel 3 leverage ratio requirements will reduce JPMe 2015e PBT by 5% on
average for the European banks. The most impacted banks by our estimates are
CASA and CBK (52%, and 39%PBT hits respectively) whilst UBS, UK,
Spanish and Italian banks are not likely to be impacted given their strong
leverage ratios.
In our sensitivity analysis, we have assumed that to improve Basel 3 leverage
ratio to our minimum 3.5% for European banks, banks would not issue
common equity nor reduce assets but issue alternative capital, i.e. additional
alternative Tier I cocos at a cost of 7%, equivalent to the average cost of the
issuances by CSG, KBC, BBVA and UBS.
29
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 21: Basel 3 leverage ratios end 2015e vs. minimum 3.5%
million
Basel 3
leverage ratio*
Total exposure reduction
required to get to 3.5%
% total leverage
exposure
Additional Tier I issuance
required to get to 3.5%
% Tier I
capital
Additional cost
of issuance
% impact
PBT 15e
CASA 1.7% 968,288 51% 33,890 104% -2,421 -52%
CBK 2.6% 208,647 25% 7,303 33% -522 -39%
DB 2.8% 329,266 21% 11,524 26% -823 -9%
Socgen 3.0% 188,726 14% 6,605 16% -472 -8%
CSG 3.0% 158,251 15% 5,539 17% -350 -5%
Danske 3.3% 37,096 7% 1,298 7% -93 -3%
BNPP 3.3% 122,772 6% 4,297 6% -307 -3%
Nordea 3.3% 38,053 5% 1,332 5% -95 -2%
KBC 3.5% 2,616 1% 92 1% -7 0%
UBS 4.1% - 0% - 0% 0 0%
Lloyds 4.5% - 0% - 0% 0 0%
RBS 3.6% - 0% - 0% 0 0%
HSBC 4.5% - 0% - 0% 0 0%
STAN 6.0% - 0% - 0% 0 0%
UCI 4.3% - 0% - 0% 0 0%
ISP 4.3% - 0% - 0% 0 0%
SAN 4.7% - 0% - 0% 0 0%
BBVA 4.8% - 0% - 0% 0 0%
Caixabank 3.8% - 0% - 0% 0 0%
Popular 4.1% - 0% - 0% 0 0%
SEB 4.4% - 0% - 0% 0 0%
SWED 4.1% - 0% - 0% 0 0%
SHB 3.9% - 0% - 0% 0 0%
DNB 4.5% - 0% - 0% 0 0%
Erste 5.4% - 0% - 0% 0 0%
Total/Av 3.9% 2,053,714 6% 71,880 9% -5,090 -5%
Source: J.P. Morgan estimates. *Based on our understanding of Basels latest proposals for leverage ratio from the 26 June 2013 consultation paper, Basel 3 leverage ratios calculated on Basel 3
Tier I capital fully loaded. Note: we have run the sensitivity on CASA although regulators focus on Credit Agricole Group, and hence, the actual shortfall is significantly lower. Note: For CSG, current
additional tier 1 outstanding includes issued high-trigger Buffer Capital Notes (CoCos) of CHF 1.6 bn, and also includes exchange in Oct 2013 of remaining CHF 3.8 bn hybrid tier1 notes into
BCNs.
We also highlight that the proposed B3 leverage ratio rules are far from final,
implementation long-dated, and we make material assumptions, in particular
on:
Netting of credit protection: In the Basel proposal sold credit protection
(written credit derivatives) is accounted for at full notional value and can be
reduced only by bought credit protection on the same reference name with the
same level of seniority. In our base case scenario we assume that 90% of the
credit protection bought can be used to offset against the credit protection sold.
We recognize that this assumption could vary from bank to bank and that the
number could be lower or higher in some cases, as some hedges might not qualify
under the proposed Basel III leverage ratio framework.
The table below shows sensitivity of 75% and 50% credit derivative netting
assumption to our leverage ratio estimates. Most sensitive banks to the
assumption around credit derivatives netting are UBS, MS, GS, DB, CSG and
BNP, with retail banks in general least impacted.
30
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 22: Sensitivity to netting of credit protection assumption on JPMe Leverage ratio calculation based on the revised Basel proposal
guidelines
2015E B3 leverage
ratio assuming 90% of
CDS bought can be
used to offset CDS
sold
2015E B3 leverage
CDS bought can be
used to offset CDS
sold
Sensitivity to 75%
CDS netting
assumption vs 90%
netting assumption
2015E B3 leverage
CDS bought can be
used to offset CDS
sold
Sensitivity to 50%
CDS netting
assumption vs 90%
netting assumption
UBS 4.1% 3.4% -0.6% 2.7% -1.4%
MS 3.2% 2.8% -0.5% 2.2% -1.0%
GS 3.5% 3.1% -0.4% 2.6% -0.9%
DB 2.8% 2.5% -0.3% 2.1% -0.7%
CSG 3.0% 2.7% -0.3% 2.4% -0.6%
BNPP 3.3% 3.1% -0.2% 2.8% -0.5%
RBS 3.6% 3.5% -0.1% 3.3% -0.2%
Socgen 3.0% 2.9% -0.1% 2.8% -0.2%
HSBC 4.5% 4.4% -0.1% 4.3% -0.2%
CASA 1.7% 1.6% -0.1% 1.5% -0.2%
KBC 3.5% 3.4% 0.0% 3.4% -0.1%
STAN 6.0% 6.0% 0.0% 5.9% -0.1%
BBVA 4.8% 4.8% 0.0% 4.8% -0.1%
Nordea 3.3% 3.3% 0.0% 3.3% 0.0%
CBK 2.6% 2.6% 0.0% 2.6% 0.0%
Lloyds 4.5% 4.5% 0.0% 4.5% 0.0%
Erste 5.4% 5.4% 0.0% 5.4% 0.0%
SWED 4.1% 4.1% 0.0% 4.1% 0.0%
SEB 4.4% 4.4% 0.0% 4.4% 0.0%
Danske 3.3% 3.3% 0.0% 3.3% 0.0%
SAN 4.7% 4.7% 0.0% 4.7% 0.0%
SHB 3.9% 3.9% 0.0% 3.9% 0.0%
DNB 4.5% 4.5% 0.0% 4.5% 0.0%
Caixabank 3.8% 3.8% 0.0% 3.8% 0.0%
Popular 4.1% 4.1% 0.0% 4.1% 0.0%
UCI 4.3% 4.4% 0.0% 4.4% 0.1%
ISP 4.3% 4.3% 0.1% 4.4% 0.2%
Basel leverage proposals punitive for repo transactions: In the Basel proposal
securities financing transactions (SFT) are reported gross of collateral with no
recognition of accounting netting, which is punitive for repo transactions as it
does not allow for netting of collateral or exposure (i.e. banks are not allowed to
offset repos against reverse repos). The rationale is to discourage banks from
rehypothecating assets. In our base case scenario, we assume that gross SFTs
match the reported on balance sheet number. We recognize that this assumption
could potentially underestimate the impact from valuing SFTs at gross value and
that the number could be higher in some cases, given that netting of repos and
reverse is currently allowed under IFRS and US GAAP reporting.
The table below shows sensitivity of 2x and 3x gross repos compared to the
reported number to our leverage ratio estimates. Most sensitive banks to the
assumption around higher gross repos are UBS and CBK. We have excluded GS,
MS, Danske, RBS and HSBC from this sensitivity analysis given that they all
report the gross repo exposures.
Table 23: Global IBs: Re-
hypothecation at FY12
$ billion
MS* 469.0
GS* 459.3
DBK 344.3
CSG 320.2
UBS 311.6
Note: *GS and MS are at Q113
31
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 24: Sensitivity to assumption around gross repos being a multiple of on balance sheet number on JPMe Leverage ratio calculation
based on the revised Basel proposal guidelines
2015E B3 leverage
ratio assuming gross
repos are 1x reported
number
2015E B3 leverage
number
Sensitivity to 2x
gross SFT
assumption vs 1x
2015E B3 leverage
number
Sensitivity to 3x
gross SFT
assumption vs 1x
UBS 4.1% 3.6% -0.4% 3.3% -0.8%
CBK 2.6% 2.3% -0.3% 2.0% -0.6%
CSG 3.0% 2.6% -0.3% 2.4% -0.6%
DB 2.8% 2.5% -0.3% 2.3% -0.5%
BNPP 3.3% 3.1% -0.2% 2.9% -0.4%
SEB 4.4% 4.2% -0.2% 4.0% -0.4%
Nordea 3.3% 3.1% -0.2% 3.0% -0.4%
UCG 4.3% 4.1% -0.2% 4.0% -0.4%
KBC 3.5% 3.3% -0.1% 3.2% -0.3%
Popular 4.1% 3.9% -0.1% 3.8% -0.3%
SAN 4.7% 4.6% -0.1% 4.5% -0.2%
SWED 4.1% 4.0% -0.1% 3.9% -0.2%
ISP 4.3% 4.1% -0.1% 4.0% -0.2%
Socgen 3.0% 2.8% -0.1% 2.7% -0.2%
SHB 3.9% 3.8% -0.1% 3.7% -0.2%
DNB 4.5% 4.4% -0.1% 4.4% -0.2%
STAN 6.0% 5.9% -0.1% 5.8% -0.1%
CASA 1.7% 1.6% -0.1% 1.6% -0.1%
BBVA 4.8% 4.8% -0.1% 4.7% -0.1%
Erste 5.4% 5.4% 0.0% 5.3% -0.1%
Lloyds 4.5% 4.4% 0.0% 4.4% 0.0%
Caixabank 3.8% 3.8% 0.0% 3.8% 0.0%
The UK PRAs (Prudential Regulation Authority) capital exercise introduced a
PRA adjusted leverage ratio requirement of 3% for UK banks. We believe that
this is a highly punitive measure in the context of global peers, with UK listed banks
having to comply with stricter UK requirements by 1H14 rather than 2018 or 2015.
Note that this leverage ratio requirement is not applicable to all the entities regulated
by the PRA. UK PRA Leverage ratio calculation methodology is more challenging
than the current CRD4 Leverage ratio rules the denominator of the PRA Leverage
ratio is same as CRD4, however, the numerator is adjusted for additional provisions
and future conduct costs and only high trigger (fully loaded) CoCos are included in
the numerator. We dont have enough disclosure to calculate the leverage ratio of UK
Banks on PRA-adjusted basis given the banks dont disclose the PRA adjustments at
H113 level. However, PRA said in its June release that HSBC, Lloyds, RBS and Stan
Chartered will likely exceed the 3% leverage ratio post adjustments by FY13E based
on their plans submitted to the PRA.
32
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Optimal Capital Structure Factor 3: Basel 3 Core Tier I ratio
resulting in a capital shortfall of 3.6bn EPS dilution of 1%
excluding harmonisation impact
We estimate that average fully loaded Basel 3 Core Tier I will improve from
10.5% on average end 2013e to 12.0% end 2015e, mainly driven by retained
earnings, as well as RWAs reduction for a few banks e.g. UBS, UK domestic
banks, CASA, domestic Spanish banks, and ISP.
By end 2015e year end, we expect the great majority of banks to reach our
JPMe minimum levels, with capital shortfall reducing to 4bn, mostly
concentrated with 1.8bn for CASA, 1.0bn for DNB and 0.7bn for KBC.
We see limited impact from Basel 3 CET1 requirements as most of the banks
are well above minimum requirements on our estimates. We estimate that only
DNB, KBC, CASA and Popular are likely to fall short of our JPMe minimum capital
requirements. Assuming that the banks reach required capital level by FY15E,
we see potential EPS dilution of 5% for DNB followed by KBC with 4% EPS
dilution. We note that DNBs capital position is calculated using 25% mortgage
risk weights vs. 11% currently, and KBCs capital position is calculated after
deducting positive AFS reserves (c. 800mn by 15E) and including penalty
payments on remaining government capital. Also note that for CASA, our
estimated 1.8bn shortfall does not include the positive impact from the extension of
Switch expected by year end, which would increase Basel 3 CT1 to 10.5% end
2015e.
33
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 25: European Banks 2015e Basel 3 Core Tier I shortfall vs. JPM minimum requirements
Lcl ccy
Basel 3
Common
Tier I 2015e
Min
2015e*
Shortfall/Exc
ess2015e
(EUR mn)
Shortfall
/Excess %
market cap
Net interest
income on
capital issues
Add
shares
issued
EPS
2015E
Resulting
EPS 2015E
EPS % dilution
due to CET1
issuance
CASA 9.5% 10.0% -1,805 -9% 38 231 1.27 1.18 -7%
DnB 12.8% 13.5% -1,016 -5% 60 84 11.51 10.98 -5%
KBC 9.3% 10.0% -711 -5% 15 21 4.03 3.87 -4%
Popular 8.9% 9.0% -88 -1% 2 24 0.41 0.41 -1%
CS 12.2% 10.0% 5,040 14% 0 0 3.40 3.40 0%
UBS 16.4% 13.0% 5,920 10% 0 0 1.90 1.90 0%
DB 11.2% 10.0% 4,941 14% 0 0 40.25 40.25 0%
Lloyds 13.0% 10.0% 9,902 16% 0 0 7.69 7.69 0%
RBS 11.2% 10.0% 5,772 13% 0 0 28.77 28.77 0%
HSBC 10.7% 10.0% 7,764 3% 0 0 1.07 1.07 0%
STAN 11.2% 10.0% 3,668 6% 0 0 2.56 2.56 0%
Soc Gen 11.4% 10.0% 5,097 19% 0 0 4.45 4.45 0%
BNPP 11.4% 10.0% 9,159 15% 0 0 5.30 5.30 0%
CBK 10.1% 9.0% 2,426 24% 0 0 0.76 0.76 0%
UCG 10.6% 9.0% 7,097 28% 0 0 0.53 0.53 0%
ISP 11.1% 9.0% 6,517 27% 0 0 0.16 0.16 0%
SAN 9.7% 9.0% 4,330 7% 0 0 0.47 0.47 0%
BBVA 10.1% 9.0% 3,823 9% 0 0 0.57 0.57 0%
Caixabank 9.3% 9.0% 438 3% 0 0 0.25 0.25 0%
NDA 15.5% 13.0% 4,179 11% 0 0 0.99 0.99 0%
SEB 15.0% 13.0% 1,740 10% 0 0 6.76 6.76 0%
Swed 16.6% 13.0% 2,151 11% 0 0 15.23 15.23 0%
SHB 17.1% 13.0% 2,942 14% 0 0 23.31 23.31 0%
Danske 14.5% 13.0% 1,831 12% 0 0 14.91 14.91 0%
Erste 11.0% 10.0% 1,091 10% 0 0 3.84 3.84 0%
Total shortfall 12.0% 10.6% -3,620 -5% 115 360 -1%
Source: J.P. Morgan estimates. *Min 2015E is highest of regulatory requirement, company target and our assumption of required minimum levels. KBC capital position is calculated after deducting
positive AFS reserves (c. 800mn by 15E) and including penalty payments on remaining government capital. DNBs capital position is calculated using 25% mortgage risk weights vs. 11%
currently.
Note however that capital risk we have not discounted in our analysis remains
with:
RWAs harmonization Risk weights have come under increased focus with
market participants and now also regulators questioning the consistency of the
banks risk-weighted assets and internal models across jurisdictions.
Credit RWAs: While the difference in risk weights can be partly explained by
the procyclicality and the riskiness of the portfolios, it still undermines the
comparability of capital ratios across geographies. We highlight that the average
mortgage risk weights across Europe vary from 8% in Finland to 51% in Latvia
and average corporate risk weights from 31% in Germany to 100% in Greece.
34
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 26: Banking book risk weights under Basel II
Mortgages* Corporate loans
Belgium 9% 45%
Denmark 14% 36%
Estonia 20% 90%
Finland 8% 37%
France 15% 50%
Germany 18% 31%
Greece 35% 100%
Hungary 41% na
Italy** 15% 52%
Italy (Standard Model) 20% 75%
Latvia 51% 97%
Lithuania 30% 93%
Netherlands 14% Na
Norway 12% 55%
Slovakia 50% na
Spain 35% 66%
Sweden 15% 42%
UK 20% 65%
Source: J.P. Morgan estimates, Company data. Swedish Central Bank's financial stability report, May 2012; Advanced Model Source
Pillar 3 June 2011 - TAB 7.4 - ISP, MPS, UCG, Corporate loans are calculated using company averages for that country.
Market RWAs: The extent of proportionate use of Internal models and
Standardised approaches to calculate market RWAs also varies considerably
across banks which in turn leads to additional uncertainty in market RWA
reported across banks in our view as we believe the Internal models are not
comparable across banks/jurisdictions. For European Banks in our analysis, 88%
of market RWAs are Internal Models based compared to 46% for U.S. IBs GS
and MS. With the Basel Committee carrying a Regulatory Consistency
Assessment Programme (RCAP) on trading book assets, and SNB talking about
calculation of RWAs under both Standardized and Internal models method, we
see momentum towards some form of convergence in RWAs.
Basel proposals for the revised framework for securitization: The Basel
Committee has performed a broader review of the securitization framework, and
in its consultation paper, is seeking to make capital requirements more prudent
and risk sensitive. The main change in our view is the closer alignment of the
Standardised Approach (SA) and Internal Ratings-Based (IRB) approaches, with
risk weights increased significantly for higher rated securitization exposures, and
the risk weight floor rising to 20% vs. 7% previously for senior tranches under
the current Ratings-Based Approach. The Basel proposals could result in much
higher capital requirements for securitizations, and in our worst-case scenario, we
estimate up to 160bp Basel 3 Core Tier I impact for DB which would be the most
affected.
Table 27: Global IBs: 2015E B3CET
sensitivity to market RWAs
$ billions
Pre Post (%)
UBS 16.4% 15.1% -1.4%
CSG 12.2% 11.0% -1.2%
DBK 11.2% 10.2% -1.0%
SG 11.4% 11.1% -0.3%
BNP 11.4% 11.1% -0.3%
MS 13.3% 13.3% 0.0%
GS 11.8% 11.8% 0.0%
Table 28: Global IBs: 2014E B3CET
sensitivity to Basel securitization
proposal- worst case
$ billion
B3CET
2014E
B3CET1
worst
case
(%)
DB 10.5% 8.9% -1.6%
UBS 14.7% 13.2% -1.5%
CASA 8.3% 7.3% -1.0%
SG 10.7% 10.0% -0.6%
BNPP 11.0% 10.4% -0.6%
CS 10.8% 10.6% -0.2%
Source: J.P. Morgan estimates
35
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Valuation
Going concern valuation- JPM Unlevered Valuation
methodology for European Banks
The case for banks attractiveness is compelling based on traditional valuation
multiples with banks looking cheap on both P/E and P/NAV basis vs. other
sectors as shown in Table 29.
Based on P/E multiples, European banks appear inexpensive, trading at 9.5x
2015E earnings, a ~20% discount to the market excluding financials at 11.4x.
The discount is even more pronounced based on P/BV, with banks trading at 0.8x
book value in 2015E, vs. 1.7x for the market ex financials, in our view
highlighting market concerns over the safety of NAV, and indeed, stated book
value in the banks sector.
However, we believe traditional valuation metrics are not able to fully capture the
intricacies of a new regulatory world in which banks have to operate with
constraints on capital structure, amount/seniority/duration of funding, and composition
of the balance sheet both in terms of maturity profile as well as absolute size.
Post the 2008 financial crisis we believe regulatory and investor focus has shifted
from core equity tier 1 capital ratios to total capital ratios (including cocos, AT1
and T2) to better reflect total loss-absorbing buffers available at a bank. Therefore we
believe that own funds (i.e. equity plus cocos and sub debt) rather than core equity is
becoming an increasingly important tool to value a bank. Hence we reintroduce our
unleveraged bank valuation EV/EBITDA valuation to take into account the full
franchise value, not just equity. In other words, we look at the valuation of a bank
from an optimal capital structure standpoint, i.e. taking into consideration the level of
own funds (equity, AT1 and T2).
Our core cash flow valuation is based on JPM Banks EV/EBITDA, excluding
RWA growth as well as normalised provision EV/EBITDA to analyse long-term
going concern valuations. In this valuation we look at the market value of equity,
adjusted for i) business debt and the cost of funding this debt, and ii) any excess or
capital deficit. We use the JPM Banks EV/EBITDA growth excluding RWA growth
as it is closer to the industry sector EV/EBITDA which does not account for capex.
We also run a version including growth, where we adjust the cash flow for cash
consumed for RWA growth.
We see an average value of 7.5x normalized for the banking sector (excluding
RWA growth) compared to 5.9x for broader European corporate ex financials
and conclude that on this basis the sector looks slightly expensive vs. EU
corporate in general.
Comparing banks to telecoms/utilities sectors (viewing a bank either as a financial
service provider or a financial utility in mature sectors), banks again appear
relatively expensive, trading at a 7.5x normalised EV/EBITDA multiple for an
8.8% ROE compared to telecoms at 5.0x and utilities at 6.4x with 2015E ROEs
of 13.2% and 9.8% respectively.
We detail our unleveraged bank
valuation" EV/EBITDA
methodology below. We adjust
EV for additional bail-in debt
requirements and use the
EBITDA as starting point.
36
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
In the new, tougher regulatory environment, we believe the cost of debt will be
higher, as bondholders no longer will be bailed-out. In addition, unless innovative
instruments are fully loss-absorbing, they will not be counted as Tier 1 capital
anymore, allowing banks to leverage their balance sheet with cheap debt. Hence,
investors will need to focus much more on balance sheet size, and more importantly,
the usage and optimization of the capital structure. Therefore, we believe a better
measure of real return analysis is the EV/EBITDA.
Table 29: European Corporates valuation multiples and ratios based on IBES estimates
P/E Dividend Yield EV/EBITDA Price to Book ROE
13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E 13E 14E 15E
Europe 13.6 12.1 10.9 3.5% 3.8% 4.2% - - - 1.6 1.5 1.4 11.6% 12.3% 12.8%
Europe ex Financials 13.9 12.5 11.4 3.5% 3.7% 4.0% 7.0 6.4 5.9 2.0 1.8 1.7 14.0% 14.5% 14.8%
Energy 10.0 9.0 8.6 4.7% 4.9% 5.1% 3.9 3.6 3.6 1.2 1.1 1.1 11.6% 12.2% 12.0%
Materials 15.1 12.6 10.8 3.0% 3.3% 3.6% 7.5 6.7 5.9 1.5 1.4 1.3 9.8% 11.0% 11.9%
Chemicals 15.2 13.7 12.4 3.1% 3.2% 3.5% 8.5 7.9 7.1 2.3 2.1 2.0 14.9% 15.4% 15.6%
Construction Materials 17.6 13.1 10.6 2.4% 2.9% 3.4% 8.2 7.1 6.2 1.0 1.0 0.9 5.9% 7.4% 8.7%
Metals & Mining 14.6 11.5 9.6 3.0% 3.3% 3.6% 6.8 6.2 5.3 1.2 1.2 1.1 8.3% 9.7% 10.9%
Industrials 16.2 13.8 12.2 3.0% 3.3% 3.6% 8.1 7.2 6.4 2.4 2.2 2.0 14.6% 15.6% 16.1%
Capital Goods 15.9 13.5 12.0 3.0% 3.3% 3.6% 8.3 7.2 6.5 2.4 2.2 2.0 14.6% 15.7% 16.1%
Transport 16.3 13.3 11.2 3.2% 3.2% 3.7% 6.7 6.1 5.4 1.9 1.8 1.6 12.5% 13.4% 14.4%
Business Svs 18.6 16.6 14.9 2.5% 2.8% 3.1% 11.2 10.1 9.0 4.4 4.0 3.6 19.7% 20.2% 20.2%
Discretionary 14.3 12.6 11.3 2.7% 3.0% 3.4% 6.5 5.8 5.2 2.1 1.9 1.7 14.7% 15.2% 15.5%
Automobile 9.6 8.4 7.5 3.0% 3.4% 3.8% 4.0 3.5 3.3 1.1 1.0 0.9 11.9% 12.5% 12.9%
Consumer Durables 17.8 15.3 13.7 2.1% 2.4% 2.7% 9.9 8.6 6.6 2.8 2.5 2.3 14.8% 15.5% 15.7%
Media 15.9 14.6 13.5 3.3% 3.5% 3.8% 9.2 8.6 7.8 3.4 3.2 2.9 20.1% 20.5% 20.2%
Retailing 20.4 18.2 16.4 2.7% 2.9% 3.3% 12.1 11.7 10.4 5.8 5.4 4.9 25.0% 25.2% 25.5%
Hotels, Rests & Leisure 18.6 16.5 14.9 2.6% 2.9% 3.3% 9.9 9.0 8.1 3.1 2.9 2.6 17.0% 17.6% 17.7%
Staples 17.1 15.6 14.3 2.9% 3.2% 3.5% 10.9 10.0 9.1 2.9 2.7 2.5 16.8% 17.2% 17.2%
Food & Drug Retailing 13.6 12.2 11.3 3.2% 3.7% 4.0% 6.9 6.4 6.0 1.7 1.6 1.5 11.1% 12.5% 12.6%
Food Beverage &
Tobacco 17.4 16.0 14.6 3.0% 3.3% 3.6% 11.7 10.7 9.8 3.2 3.0 2.7 18.7% 18.8% 18.9%
Household Products 19.3 17.8 16.4 2.2% 2.4% 2.6% 12.5 11.4 9.7 3.3 3.1 2.8 16.4% 16.2% 16.1%
Healthcare 14.9 13.7 12.5 3.2% 3.4% 3.7% 10.2 9.4 8.5 3.4 3.1 2.9 22.3% 22.5% 22.8%
Financials 11.6 10.1 8.9 3.8% 4.4% 5.2% - - - 0.9 0.9 0.8 7.6% 8.5% 9.2%
Banks 14.0 12.1 9.5 3.7% 4.4% 5.3% 8.8 8.4 7.5 0.9 0.8 0.8 6.7% 7.9% 8.8%
Diversified Financials 12.3 10.7 9.2 2.2% 3.2% 4.4% - - - 1.0 1.0 0.9 7.6% 8.6% 9.4%
Insurance 9.7 9.3 8.7 4.7% 5.0% 5.2% - - - 1.1 1.0 0.9 10.8% 10.6% 10.7%
Real Estate 17.0 16.0 15.1 5.1% 5.3% 5.6% - - - 0.9 0.9 0.9 5.5% 5.5% 5.7%
IT 22.6 17.5 14.7 1.7% 1.9% 2.1% 11.0 8.8 7.4 3.1 2.8 2.5 13.4% 15.8% 16.6%
Software and Services 16.6 14.9 13.3 1.8% 2.0% 2.2% 10.2 8.9 7.5 3.6 3.2 2.8 20.5% 20.4% 19.8%
Technology Hardware 26.7 18.9 15.6 1.9% 2.2% 2.6% 9.1 7.1 6.1 2.2 2.1 1.9 8.2% 10.9% 12.1%
Semicon & Semicon
Equip 37.8 21.7 16.4 1.3% 1.4% 1.6% 17.7 11.4 8.8 3.7 3.3 2.9 9.5% 15.6% 18.1%
Telecoms 12.0 11.4 10.8 5.4% 5.5% 5.6% 5.1 5.2 5.0 1.6 1.6 1.5 13.3% 13.3% 13.2%
Utilities 11.4 11.5 11.0 6.0% 6.0% 6.1% 6.6 6.6 6.4 1.1 1.0 1.0 10.4% 9.7% 9.8%
Source: I/B/E/S, Datastream. Based on prices COB 9Sept 2013. Note: We use the JPM Banks EV/EBITDA growth excluding RWA growth as it is closer to the industry sector EV/EBITDA which
does not account for capex. In this report, we focus on unlevered cash flow valuation as measured by JPM Banks EV/EBITDA. This measure replicates traditional non-financials' EV/EBITDA ratios
and excludes RWAs growth capital consumption. But this JPM methodology is not fully comparable to industrials' EV/EBITDA, for example we need to define business debt for banks and also
include a measure of maintenance capex. We use 2015E normalized EV/EBITDA 2015E
37
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
In terms of Eurobanks on unleveraged bank valuation EV/EBITDA,
Intesa, Popular, Caixabank and UCG appear amongst the cheapest names on this
metric with EV/EBITDAs (excl. RWA growth) of 4.8x, 5.0x, 5.4x and 5.4x
respectively, which in our view would suggest a buy signal. With the Italian banks
having stronger capital positions than the domestic Spanish banks and trading at
lower P/NAV multiples, we prefer the Italian banks over the domestic Spanish
banks. On the back of this we upgrade UCG to OW (from N), Intesa to Neutral
(from UW), Caixabank to OW (from N) and Santander to N (from UW).
The most expensive names on an EV/EBITDA metric are CBK, CASA and BBVA at
12.2x, 10.5x and 10.1x respectively for below Eurobank average RoNAVs. Whilst
especially CBK looks more investable on a traditional P/NAV basis, trading at 0.4x,
on an EV/EBITDA basis the bank look less attractive in our view.
Our new portfolio top picks are: UBS, DB, Soc Gen, UCG, Caixabank, Nordea
and Danske. Although banks on a sector basis are not particular cheap in our view,
we see opportunities as valuation gaps between stocks are quite significant,
especially within the banking sector where cash flow generation and capital position
are solid and valuation is attractive on an EV basis. Hence, we believe there is
outperformance potential by focusing on stock selection rather than sector call.
38
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 30: European Banks JPMe stock selection EV/EBITDA valuation, RoNAV and other traditional metrics
2015e
EV/EBITDA
(ex RWA
growth)
2015e
EV/EBITDA
(including
RWA
growth)
2015e
normalised
EV/EBITDA
(ex RWA
growth)
2015e
normalised
EV/EBITDA
(inc RWA
growth)
2014e
EV/EBITDA
(ex RWA
growth)
2014e
EV/EBITDA
(incl RWA
growth)
2013e
EV/EBITDA
(ex RWA
growth)
2013e
EV/EBITDA
(incRWA
growth)
P/E
15E
P/NAV
2015E
RoNAV
2015E
RoNAV
(normalised)
2015E
Dividend
yield
2015E
B3 Core
Equity
Tier 1
2015E
Top Picks
UBS 8.2 7.7 8.2 7.7 10.7 9.1 12.3 7.8 9.9 1.6 15.8% 15.7% 5.0% 16.4%
Soc Gen 7.6 8.0 6.9 7.2 7.6 7.9 8.5 5.2 7.9 0.7 8.6% 9.9% 4.9% 11.4%
DB 6.0 7.5 5.9 7.4 6.6 7.3 7.7 6.4 5.8 0.7 12.4% 12.6% 2.2% 11.2%
UCG 5.4 6.0 5.1 5.6 6.3 6.9 7.4 4.9 8.5 0.5 6.4% 6.9% 2.0% 10.6%
Caixabank 5.4 5.1 5.2 4.9 5.3 5.0 3.1 3.8 11.4 0.6 6.7% 6.8% 7.9% 9.3%
NDA 7.9 8.0 8.1 8.2 8.6 8.3 9.3 6.2 9.3 1.4 14.8% 14.4% 7.0% 15.5%
Danske 7.7 7.9 7.8 7.9 8.7 8.6 11.0 17.4 7.8 0.9 10.9% 10.8% 5.1% 14.5%
Average 6.9 7.2 6.7 7.0 7.7 7.6 8.5 7.4 8.7 0.9 10.8% 11.0% 4.9% 12.7%
Swiss
CS 7.9 7.9 7.9 7.9 8.4 8.4 9.2 9.1 8.2 1.1 13.4% 13.4% 3.6% 12.2%
UK
Lloyds 7.2 7.0 7.3 7.0 7.7 6.9 8.5 6.1 10.0 1.2 12.2% 12.1% 5.9% 13.0%
RBS 8.3 7.5 8.2 7.3 8.7 5.4 9.6 6.0 11.8 0.7 6.2% 6.4% 1.8% 11.2%
STAN 6.8 11.1 7.3 12.4 7.9 13.2 9.5 19.0 8.9 1.2 13.8% 12.9% 4.7% 11.2%
HSBC 8.6 11.1 8.6 11.2 9.5 12.0 9.8 10.0 10.2 1.2 12.5% 12.4% 5.5% 10.7%
France
BNPP 7.3 7.9 6.7 7.1 7.4 7.8 7.7 8.0 9.4 0.9 9.6% 10.8% 4.0% 11.4%
CASA 10.5 9.4 9.6 8.6 10.7 8.7 11.6 8.5 6.3 0.7 11.0% 12.5% 0.0% 9.5%
Italy
ISP 4.8 4.6 4.5 4.4 5.1 4.9 5.9 5.4 10.0 0.7 7.3% 7.8% 3.8% 11.1%
Germany
CBK 12.2 10.6 12.2 10.6 14.2 12.1 - 14.3 11.6 0.4 3.7% 3.7% 0.0% 10.1%
Spain
SAN 7.8 9.3 5.9 6.7 6.3 7.0 6.9 7.4 11.8 1.0 10.5% 15.2% 10.8% 9.7%
BBVA 10.1 10.7 5.9 6.1 6.4 6.8 6.7 7.4 13.4 1.2 9.9% 18.0% 5.4% 10.1%
Popular 5.0 4.8 4.7 4.5 9.3 8.5 - 15.7 9.5 0.7 9.6% 10.2% 0.0% 8.9%
Nordics
Swed 9.2 9.5 9.5 9.9 10.1 10.5 10.8 14.1 10.0 1.8 17.6% 16.9% 7.5% 16.6%
SHB 9.3 11.1 9.5 11.2 10.0 11.7 10.2 17.4 12.2 1.6 13.7% 13.5% 4.2% 17.1%
SEB 9.1 10.5 9.7 11.4 10.2 13.1 10.7 13.9 10.4 1.4 13.5% 12.6% 4.8% 15.0%
DnB 7.1 9.5 6.9 9.3 7.6 25.1 8.6 10.5 8.4 1.0 12.5% 12.7% 3.0% 12.8%
CEEMA
Erste 6.5 8.4 7.1 9.3 7.9 9.1 9.2 7.5 6.5 1.1 16.2% 14.4% 6.2% 11.0%
KBC 7.4 8.2 8.1 9.1 8.9 9.1 8.3 6.7 8.9 1.3 14.9% 13.4% 3.7% 9.3%
Average 7.7 8.4 7.5 8.1 8.4 9.3 8.8 9.6 9.5 1.0 11.3% 11.8% 4.4% 12.0%
Source: Bloomberg and J.P. Morgan estimates. *Bloomberg closing prices used as of Sep 9, 2013.KBC capital position is calculated after deducting positive AFS reserves (c. 800mn by 15E) and including penalty payments on remaining
government capital. Note CBK and popular 2013E EV/EBITDA ex growth are not meaningful.
39
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Our unleveraged bank valuation EV/EBITDA methodology
Enterprise Value (EV) is the cost of buying the right to the whole of an enterprise's
core cash flow. It is the sum of the market value of equity and debt less cash and
equals the estimated value of the operations of an enterprise as represented by the
value of the various claims on cash flow and profit.
Cash flow valuation method
In our cash flow valuation for the banks we look at the ratio of Enterprise Value (EV)
to free cash flow on an unlevered basis. The aim is to mimic the traditional
EV/EBITDA valuation of other industries. We make a number of adjustments to the
text-book model, to make it useful from a banks perspective, though a number of
important caveats remain. These adjustments also mean that comparisons to other
sectors need to be treated with some caution.
Enterprise Value
Enterprise Value (EV) this represents the value to financial stakeholders in
the company i.e. the value of the companys operation from the perspective of
equity as well as debt investors. The value for equity holders is straightforward, and
will simply equal the market value of the shares based on the current share price or
the market cap in other words.
The value for debt investors is more discretionary as a banks business model is
based on deploying liabilities in terms of deposits, wholesale funding (including
senior funding) and repos, or as part of its financial markets operations. Hence we
only want to consider the subordinated debt that in our view represents an investment
into the bank itself, i.e. long-term ongoing operational business debt.
For the purpose of this analysis we consider the market value of debt which is not
captured in equity valuation. We assume that funding such as deposit, wholesale and
repo funding is part of the banks going concern business and hence exclude it. We
instead assume that the market value of debt consists only of subordinated debt and
minority interests. In addition, we adjust for the optimal capital structure by
assuming the bank needs to take on capital/sub debt to meet its B3
ET1/leverage/bail-in targets, alternatively would return capital to bring capital in line
with the targets. We assume that the capital increase/reduction is the same in years
2013-2015e. So in short, we add to the market cap of the bank sub debt/bail-in
debt as required under the optimal capital structure for each bank in our
analysis.
Lastly, we adjust our EV for equity-accounted stakes, which we do not consider as
cash earnings generating and hence deduct from our EV.
We do not deduct cash, as cash holding are generally volatile and part of the banks
normal course of business (e.g. cash collateral received, short-term interbank
placements, payment services and cash management, liquidity required due to
regulations).
40
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Cash flow
We base our cash flow analysis on adjusted pretax earnings which we adjust for non-
cash items which we define as: i) depreciation, ii) maintenance capex (assumed as
105% of depreciation), and iii) equity-accounted profits.
In addition, we add back the cost of external debt. We assume the cost of funding for
minorities is 6% and the current 5 year sub CDS for subordinated debt. We also
include the additional net interest cost due to bail-in debt.
Table 31: Funding cost assumptions for the cash flow model
%
Assumption
Financing cost on existing sub debt CDS spread + currency swap
Increase due to bail-in on existing sub debt 30bps/59bps/119bps depending on bail-in segmentation
Financing cost new debt CDS spread + currency swap + bail-in premium
Financing cost of cocos 7% - average of current CSG, KBC, BBVA and UBS coco issuance
Financing cost minorities 6%
We maintain our estimated 2013-2015e levels of loan losses, bearing in mind that the
level of current losses for most banks remains above the normalized level.
Additionally, for 2015e we run the EV/EBITDA calculations on normalized loss
assumptions.
Some important caveats to our unleveraged bank valuation EV/EBITDA
methodology:
Whilst we have adjusted for the interest cost of issued subordinated debt, and we
are comfortable to treat interest income earned on loans and other balance sheet
assets as unleveraged earnings, leveraged interest earnings such as Fixed
Income trading income also contribute to the EBITDA for a bank, making
this an imperfect measure of unleveraged cash flows
Whilst all outstanding senior debt at current market value is in the text-book
formula included in the EV, we have excluded it given the nature of banks
business where lending and borrowing is part of the normal course of business.
Hence we have only included subordinated debt in our EV calculations, i.e. long-
term ongoing operational business debt. We believe this adjustment better reflects
the franchise value in the tougher regulatory environment.
Whilst cash is generally deducted from EV valuations (as no multiple or discount
is generally placed on the value of cash), the cash balances of banks are part of
the normal course of business (e.g. cash collateral received, short-term interbank
placements, payment services and cash management) and tend to be volatile
depending on the refinancing cycles, and therefore we have not deducted from
our EV.
We also highlight that the EBITDA is based on pre-tax profits and as such the
cash flow does not take into account the different tax regimes across Europe.
Cash flow analysis comparison of valuation
With investor focus moving from core capital to total capital ratios, we shift away
from P/E valuations to focus instead on JPM Banks EV/EBITDA valuations for a
measure of the value of the banks as a going concern.
41
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
We summarize the result of this exercise in Table 32 below, where we run several
different valuations on the cash flow data (including/excluding RWA growth and
published/normalized losses).
Looking at the JPMe Banks EV/EBITDA valuation excluding RWA growth, which
is comparable to corporate EV/EBITDA valuations as these do not take into account
Capex.
The cheapest banks on an EV/EBITDA metric are: i) Intesa at 4.8x 2015e, ii)
Popular at 5.0x, iii) Caixabank at 5.4x, and iv) UCG at 5.4x, which in our view
suggests upside potential in these names. With the Italian banks being slightly
cheaper on a traditional P/NAV basis and having stronger capital bases than
the domestic Spanish banks, we prefer the Italian banks over the Spanish
and upgrade UCG to OW (from N) and Intesa to Neutral from (UW). While
the Italian banks look very cheap on this metrics, it is important to keep in mind
that the tax rate for the two banks is very high (we consider normalized rates of
45%for Intesa, more concentrated in Italy, and 35% for Unicredit group,
benefitting from lower blended rate from lower Italian concentration).
Banks that are expensive on a cash flow basis but cheap on traditional
metrics include CBK at 0.4x P/NAV and 12.2x on JPMe Banks EV/EBITDA
equivalent excl. RWA growth, and CASA at 0.7x P/NAV but 10.5x on JPMe
Banks EV/EBITDA excl. RWA growth.
Assuming normalized losses in 2015e, the cheapest banks on a EV/EBITDA
metric are Intesa at 4.5x, Popular at 4.7x and UCG at 5.1x for a 7.8%, 10.2%and
6.9% normalized RoNAV respectively, while CBK at 12.2x for a 3.7%
normalized RoNAV, SEB at 9.7x for a 12.6% normalized RoNAV and CASA at
9.6x for a 12.5% normalized RoNAV are the most expensive banks in a
normalized loss environment.
Banks such as BBVA and Handelsbanken are expensive on both cash flow
and traditional basis, trading at an EV/EBITDA multiple of 10.1x and 9.3x
respectively and a P/NAV multiple of 1.2x and 1.6x respectively.
42
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 32: European Banks: 2015E Unlevered valuation analysis (Table 1 of 2)
EUR million
CS UBS DB Lloyds RBS HSBC STAN Soc Gen BNPP CASA CBK UCG ISP
Market Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295
+Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282
+Subordinated Debt (incl Cocos) 16,108 11,028 19,525 22,850 24,138 32,099 13,482 12,133 20,950 27,700 12,137 16,897 10,685
+Minority Interests 5,671 1,619 256 383 563 6,253 445 9,929 7,552 5,728 885 3,560 586
-Equity accounted stakes -1,754 -687 -3,673 0 0 -12,105 -1,253 -2,060 -7,251 -18,900 -744 -3,493 -2,706
Total EV 61,223 66,578 62,438 79,178 69,073 181,039 50,773 54,884 87,168 68,355 29,648 36,023 26,578
Free EBITDA
Clean PBT 6,612 7,484 9,426 9,028 6,281 21,271 6,904 5,959 11,030 4,623 1,321 5,548 4,966
Less equity accounted earnings 65 -71 150 0 0 2,279 200 155 508 1,222 46 175 65
Add depreciation -995 -546 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -932 -622
Add amortisation -29 -86 0 -823 -855 -731 -192 0 0 0 0 0 0
Less maintenance capex( 105% depreciation cost) -1,045 -573 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -979 -653
Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,333 680
Financing cost new debt 159 0 436 0 0 0 0 297 169 1,496 421 0 0
Financing cost on existing sub debt 200 185 624 436 1,092 951 488 437 699 1,095 628 1,019 582
Increase due to bailin on existing subdebt 23 20 116 36 71 95 40 66 124 197 72 100 63
Financing cost of cocos 522 251 0 773 0 0 0 67 0 0 0 0 0
Financing cost minorities 340 97 15 23 34 375 27 596 453 344 53 214 35
Free cash flow ex RWA growth 7,771 8,167 10,467 11,034 8,278 21,087 7,434 7,221 11,890 6,497 2,432 6,659 5,550
Less cash consumed for growth capital 0 -526 2,154 -344 -943 4,711 2,879 360 865 -790 -362 657 -180
FY13 RWAs 228,954 176,603 374,112 332,310 494,242 989,894 285,457 354,883 629,499 350,856 225,887 437,158 318,343
FY14 RWAs 228,954 172,556 395,648 328,868 484,816 1,037,006 314,249 358,487 638,150 342,956 221,869 444,460 316,343
Target B3 core equity ratio 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%
Free cash flow inc RWA growth 7,771 8,693 8,313 11,378 9,221 16,376 4,555 6,860 11,025 7,287 2,794 6,002 5,730
I) 2015E Unlevered valuation ex RWA growth 7.9 8.2 6.0 7.2 8.3 8.6 6.8 7.6 7.3 10.5 12.2 5.4 4.8
II) 2015E Unlevered valuation in RWA growth 7.9 7.7 7.5 7.0 7.5 11.1 11.1 8.0 7.9 9.4 10.6 6.0 4.6
Add normalised loan losses 10 -76 137 -119 191 -154 -444 746 1,209 621 0 428 358
2015e normalized EV/EBITDA (ex RWA growth) 7.9 8.2 5.9 7.3 8.2 8.6 7.3 6.9 6.7 9.6 12.2 5.1 4.5
2015e normalized EV/EBITDA (incl RWA growth) 7.9 7.7 7.4 7.0 7.3 11.2 12.4 7.2 7.1 8.6 10.6 5.6 4.4
43
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
EUR million
SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Average
Market Cap 61,461 43,614 14,000 6,762 36,983 17,480 19,864 20,484 15,676 19,654 10,698 14,886
+ Implied total capital financing -1,406 4,060 -438 88 1,332 947 877 -1,170 1,298 1,016 -1,091 711
+Subordinated Debt (incl Cocos) 12,586 10,385 4,110 911 5,577 2,047 1,572 1,612 5,805 2,176 4,800 5,201
+Minority Interests 18,658 2,362 0 46 4 0 18 0 0 0 3,929 382
-Equity accounted stakes -4,453 -6,921 -10,064 -941 -585 -144 -418 -23 -150 -361 -220 0
Total EV 86,846 53,500 7,608 6,866 43,311 20,330 21,913 20,902 22,630 22,485 18,116 21,179
Free EBITDA
Clean PBT 10,072 5,306 1,722 1,308 5,333 2,143 2,399 2,195 2,686 3,212 2,320 2,584
Less equity accounted earnings 694 971 582 17 87 2 92 1 22 99 0 0
Add depreciation -2,468 -1,183 -416 -122 0 0 -78 -53 0 -209 -367 -310
Add amortisation 0 0 0 0 0 0 0 0 0 0 0 0
Less maintenance capex( 105% depreciation cost) -2,592 -1,242 -437 -128 0 0 -82 -56 0 -219 -385 -326
Add interest 1,827 1,023 291 85 211 105 86 45 273 75 489 300
Financing cost new debt 0 235 0 0 41 33 30 0 50 0 0 0
Financing cost on existing sub debt 633 480 242 71 153 66 50 40 206 62 197 162
Increase due to bailin on existing subdebt 74 55 49 11 17 6 5 5 17 13 57 52
Financing cost of cocos 0 112 0 0 0 0 0 0 0 0 0 63
Financing cost minorities 1,119 142 0 3 0 0 1 0 0 0 236 23
Free cash flow ex RWA growth 11,082 5,298 1,410 1,369 5,457 2,245 2,389 2,237 2,937 3,178 2,791 2,869
Less cash consumed for growth capital 1,739 288 -79 -62 43 314 76 348 60 820 624 293
FY13 RWAs 579,554 342,540 165,086 84,077 166,374 84,367 59,617 68,343 125,155 138,147 108,096 102,644
FY14 RWAs 598,874 345,743 164,214 83,392 166,708 86,785 60,204 71,021 125,618 144,218 114,332 105,574
Target B3 core equity ratio 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0%
Free cash flow inc RWA growth 9,343 5,010 1,489 1,431 5,414 1,931 2,313 1,888 2,877 2,358 2,167 2,576
Add normalised loan losses 3,648 3,821 52 79 -127 -145 -93 -26 -26 61 -230 -239
2015e normalized EV/EBITDA (ex RWA growth) 5.9 5.9 5.2 4.7 8.1 9.7 9.5 9.5 7.8 6.9 7.1 8.1 7.5
2015e normalized EV/EBITDA (incl RWA growth) 6.7 6.1 4.9 4.5 8.2 11.4 9.9 11.2 7.9 9.3 9.3 9.1 8.1
44
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
EUR million
Market Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295
+ Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282
Total EV 61,223 66,578 62,438 79,178 69,073 181,039 50,773 54,884 87,523 68,355 29,648 36,059 26,578
Free EBITDA
Clean PBT 6,103 5,639 8,254 8,012 5,103 19,183 6,313 5,106 9,800 3,832 970 3,496 3,704
Add depreciation -995 -548 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -961 -628
Less maintenance capex( 105% depreciation cost) -1,045 -576 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -1,009 -660
Add normalised loan losses 10 -79 190 294 876 -218 -405 820 1,180 651 175 1,132 903
Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,335 680
Less cash consumed for growth capital 0 -1,052 980 -1,172 -4,817 3,917 2,605 231 626 -1,404 -362 486 -270
FY13 RWAs 228,954 184,698 364,311 344,028 542,411 950,721 259,409 352,573 623,235 364,896 225,887 431,763 321,343
FY14 RWAs 228,954 176,603 374,112 332,310 494,242 989,894 285,457 354,883 629,499 350,856 221,869 437,158 318,343
45
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
EUR million
SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Ave
Market Cap 61,461 43,614 14,000 6,762 36,983 17,480 19,864 20,484 15,676 19,654 10,698 14,886
Total EV 85,341 53,500 7,608 6,952 43,311 20,330 21,913 20,902 22,630 22,485 17,963 21,172
Free EBITDA
Clean PBT 8,537 4,125 897 470 4,991 2,030 2,274 2,105 2,298 2,887 1,718 2,073
Less equity accounted earnings 686 840 544 17 80 2 92 1 22 99 0 0
Add normalised loan losses 4,033 4,129 815 219 -85 -139 -92 -53 61 96 100 33
Add interest 1,737 1,023 291 85 211 105 86 45 273 75 480 299
Financing cost minorities 1,029 142 0 3 0 0 1 0 0 0 227 23
Free cash flow ex RWA growth 13,504 8,379 1,439 751 5,036 1,993 2,173 2,093 2,610 2,948 2,279 2,390
Less cash consumed for growth capital 1,280 455 -80 -64 -157 443 94 309 -18 2,052 303 55
FY13 RWAs 565,331 337,489 165,972 84,793 167,581 80,957 58,890 65,962 125,297 122,949 105,069 102,094
FY14 RWAs 579,554 342,540 165,086 84,077 166,374 84,367 59,617 68,343 125,155 138,147 108,096 102,644
Free cash flow inc RWA growth 12,224 7,924 1,519 815 5,193 1,550 2,078 1,783 2,629 897 1,976 2,335
46
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
EUR million
Market Cap 35,660 58,489 34,806 64,906 45,367 154,846 41,768 28,276 61,620 19,937 10,068 26,157 24,295
+ Implied total capital financing 5,539 -3,871 11,524 -8,961 -995 -53 -3,668 6,605 4,297 33,890 7,303 -7,097 -6,282
Total EV 61,223 66,578 62,401 79,178 69,073 181,039 50,773 54,884 87,867 68,355 29,648 36,095 26,578
Free EBITDA
Clean PBT 5,456 4,850 6,894 6,045 2,957 19,007 5,295 3,614 8,751 3,107 -55 2,394 2,776
Add depreciation -995 -577 -8 -1,695 -1,090 -1,119 -306 -925 -1,543 -712 -316 -1,001 -641
Less maintenance capex( 105% depreciation cost) -1,045 -606 -8 -1,780 -1,145 -1,175 -322 -971 -1,620 -748 -332 -1,051 -673
Add normalised loan losses 17 -127 260 1,301 2,222 -760 -517 1,549 1,620 779 414 1,410 1,112
Add interest 1,245 553 1,191 1,268 1,197 1,421 554 1,463 1,445 3,131 1,173 1,337 680
Less cash consumed for growth capital -94 -3,140 -1,569 -3,578 -4,344 339 2,675 -4,139 341 -2,105 -1,014 -2,409 -348
FY13 RWAs 229,898 208,851 380,000 379,812 585,854 947,329 232,664 393,962 619,825 385,941 233,135 458,527 325,215
Normalised Growth
FY14 RWAs 228,954 184,698 364,311 344,028 542,411 950,721 259,409 352,573 623,235 364,896 221,869 431,763 321,343
I) 2013E Unlevered valuation ex RWA growth 9.2 12.3 7.7 8.5 9.6 9.8 9.5 8.5 7.7 11.6 - 7.4 5.9
47
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
EUR million
SAN BBVA Caixabank Popular NDA SEB Swed SHB Danske DnB Erste KBC Average
Market Cap 61,461 43,614 14,000 6,762 36,983 17,480 19,864 20,484 15,676 19,654 10,698 14,886
Total EV 83,902 53,500 7,608 6,952 43,311 20,330 21,913 20,902 22,630 22,485 17,821 21,165
Free EBITDA
Clean PBT 7,262 3,446 -674 -409 4,476 1,950 2,184 2,057 1,619 2,519 801 1,949
Less equity accounted earnings 1,043 617 643 16 73 2 92 1 22 99 0 0
Add normalised loan losses 4,340 4,226 3,487 408 25 -160 -141 -53 179 128 677 312
Add interest 1,651 1,023 291 85 211 105 86 45 273 75 472 299
Financing cost minorities 943 142 0 3 0 0 1 0 0 0 218 22
Free cash flow ex RWA growth 12,097 8,021 2,441 61 4,639 1,893 2,034 2,045 2,049 2,613 1,931 2,544
Less cash consumed for growth capital 747 761 429 -357 -2,391 434 481 842 751 478 -442 -615
FY13 RWAs 557,030 329,033 161,200 88,757 185,976 77,622 55,192 59,485 119,518 119,412 109,493 108,248
Normalised Growth
FY14 RWAs 565,331 337,489 165,972 84,793 167,581 80,957 58,890 65,962 125,297 122,949 105,069 102,094
Free cash flow inc RWA growth 11,349 7,260 2,011 418 7,030 1,459 1,553 1,203 1,298 2,136 2,373 3,159
48
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Market dividend expectations too high
Whilst our dividend yields rising over the next 3 years we are concerned by market
expectations. We recognize that European banks dividends could remain at risk
due to incremental headwinds to capital resulting fromi) new bail-in requirements
that encourage banks to hold more own funds, ii) tougher capital requirements including
Basel 3 Core Equity Tier 1 minimums and RWAs harmonization, iii) introduction of
leverage ratios, iv) revised framework for securitization, and v) local regulations
imposing more demanding requirements.
Consensus Dividend at risk: Market expectation of DPS coming down but still
higher than our estimates
We highlight that market-implied DPS expectations for DB, CS and CASA are
higher than our DPS estimates in some years and believe that market dividend
expectations could be at risk. We highlight that market-implied DPS expectations for
DBK are higher than our DPS estimates in 2014E (paid out in 2015) and believe that
market dividend expectations are at risk considering ongoing capital at risk concerns.
For DB, we estimate DPS at 0.75p.a. until 2015.
DB: We estimate i) FY13E declared DPS (paid out in 14E) of 75c, in line with last
year vs. market implied expectations of 74c, ii) FY14E declared DPS (paid out in
15E) of 75c vs. market-implied expectations of 0.93 and iii) FY15E declared DPS
(paid out in 16E) of 75c.
CSG: We estimate i) FY13E declared DPS (paid out in 14E) of SF0.75 vs. market-
implied expectations of SF0.88, ii) FY14E declared DPS (paid out in 15E) of
SF0.75 vs. market-implied expectations of SF1.07 and iii) FY15E declared DPS
(paid out in 16E) of SF1.00.
CASA: We conservatively estimate no dividend payment in the years 2013 to 2015
(paid out in 2014 to 2016) vs. market expectation of i) 0.25 paid in 2014E ii) 0.30
paid in 2015E and iii) 0.30 paid in 2016E.
SG: We estimate i) FY13E declared DPS (paid out in 14E) of 0.95, equivalent to
~25% payout on earnings adjusted for own debt, vs. market-implied expectations of
0.85, ii) FY14E declared DPS (paid out in 15E) of 1.50, equivalent to ~40%
payout, vs. market-implied expectations of 1.20 and iii) FY15E declared DPS (paid
out in 16E) of 1.75, equivalent to ~40% payout vs. market-implied expectations of
1.28. Note that the company guides to 25% payout for FY13, and 35% to 50% from
2014. In our view, 50% payout is unlikely given the ongoing regulatory uncertainties
(EU Banking Union, new Basel Securitization framework, trading book review for
market RWAs).
In Table 38 below we show our estimates of announced dividends in a financial year
(paid out in next year) and compare these with market-implied dividend expectations.
49
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 38: JPMe DPS estimates and market-implied DPS expectations
Local Currency
UBS CS DBK BNP SG HSBC BBVA SAN CASA ISP UCG
DPS announced in FY12 0.15 0.75 0.75 1.50 0.45 0.45 0.41 0.62 0.00 0.05 0.09
JPMe DPS accrued in FY13E 0.30 0.75 0.75 1.50 0.95 0.50 0.41 0.60 0.00 0.05 0.06
Market implied DPS paid in FY14E 0.26 0.88 0.74 1.67 0.85 0.59 0.35 0.40 0.25 0.05 0.09
JPMe/ Market implied difference(%) 15% -15% 1% -10% 12% -15% 17% 50% -100% 0% -33%
Market implied DPS paid in FY15E 0.55 1.07 0.93 1.80 1.20 0.52 0.27 0.30 0.05 0.09
JPMe/ Market implied difference(%) 9% -30% -19% -6% 25% 6% 122% -100% 20% 0%
Market implied DPS paid in FY16E - - - 1.84 1.28 0.52 0.24 0.30 0.09
JPMe/ Market implied difference(%) 9% 37% 15% 150% -100% 0%
In Table 39 below we show our dividend estimates for 2013-2015E and how
these will be paid.
Table 39: European Banks: JPMe Dividend per share and Dividend yield forecasts, 2013-2015E
million
13E
DPS
14E
DPS
15E
DPS
2015E div.
yield
Excess/Shortfall to Basel 3
CET1 min. requirement (EUR) Notes
CASA 0.00 0.00 0.00 0.0% -1,805 -
DnB 2.26 2.59 2.88 3.0% -1,016 Cash
KBC 0.00 1.06 1.33 3.9% -711 Cash
Popular 0.00 0.00 0.00 0.0% -88 No dividend payment at the moment.
Caixabank 0.23 0.23 0.23 8.0% 438 20c DPS target, 5c per quarter, all scrip - avg take-up 90%
Erste 0.33 1.13 1.54 6.2% 1,091 Cash
SEB 2.80 3.20 3.38 4.9% 1,740 Cash
Danske 1.75 5.10 5.97 5.2% 1,831 Cash
Swed 10.11 10.82 11.43 7.5% 2,151 Cash
CBK 0.00 0.00 0.00 0.0% 2,426 No dividend
SHB 11.00 11.50 12.00 4.2% 2,942 Cash
STAN 0.90 0.98 1.06 4.6% 3,668 60% cash 40% scrip
BBVA 0.41 0.41 0.41 5.6% 3,823 BBVA 2 dividends cash, 2 scrip 0.10c each. Usual acceptance 85%
NDA 0.53 0.59 0.64 7.1% 4,179 Cash
SAN 0.60 0.60 0.60 11.0% 4,330 SAN 4 dividends 0.15c each, full scrip. Usual acceptance 85%
DB 0.75 0.75 0.75 2.2% 4,941 Cash
CS 0.75 0.75 1.00 3.7% 5,040 Scrip and cash in 2011-2012, cash from 2013E onwards
Soc Gen 0.95 1.50 1.75 5.1% 5,097 SG dividends 60% scrip, 40% cash
RBS 0.00 0.00 6.00 1.8% 5,772 Cash
UBS 0.30 0.60 0.95 5.1% 5,920 Cash
ISP 0.05 0.06 0.06 3.9% 6,517 Cash
UCG 0.06 0.09 0.09 2.0% 7,097 Cash
HSBC 0.50 0.55 0.60 5.6% 7,764 all cash
BNPP 1.50 1.70 2.00 4.1% 9,159 BNP dividends all cash
Lloyds 1.10 3.40 4.50 6.1% 9,902 Lloyds
50
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Upgrading Italian banks on valuation
We upgrade Italian banks on valuation: We raise our recommendation on
Unicredit from Neutral to Overweight and raise Intesa from Underweight to
Neutral. We prefer Unicredit because: 1) cheaper valuation on traditional metrics, 2)
more attractive geographical differentiation, and 3) better positioned for low for
long interest rate environment (See Julys note)
Italian banks (UCG and ISP) appear particularly attractive when looking at the
metrics discussed in this note:
Capital position is solid, with Basel 3 Core Equity Tier 1 ratio expected to be
well above 10% in 2015E (10.6% for UCG, 11.1% for ISP).
Leverage ratio is estimated above the 3.9% average for European banks, at
4.3% for both Unicredit and Intesa.
Both banks see limited earnings impact even in our bear case bail-in scenario of
10% of bail-inable liabilities to be covered by own fund only. Moreover, the
banks have a high proportion of bail-inable liabilities to total liabilities (equity +
additional Tier 1 + senior debt): 20% for UCG and 19% for Intesa, vs. 13%
average for European banks.
Most importantly, our unleveraged bank valuation EV/EBITDA shows that Italian
banks are particularly cheap in a European context because of the capital exceeding
the level of the optimal capital structure requirement. On a cash-flow metric the
valuation for UCG is 5.1x and for Intesa 4.5x vs. the 7.5x European bank average.
We note however that this ratio is slightly distorted by the high tax rate of both UCG
and ISP (resp. 38% and 47%), given that the EV/EBITDA metric looks at the pre-tax
earnings. We estimate that after normalizing the tax rate to the European average
EV/EBITDA 2015E would rise to 5.6x for Unicredit and 5.4x for Intesa, still well
below the European average.
Table 40: Summary valuation comparison
UCG ISP European average
P/NAV 2015E 0.5 0.7 1.0
P/E 2015E 8.5 10.0 9.5
RoNAV 2015E 6.4% 7.3% 11.3%
EV/EBITDA 2015E 5.1 4.5 7.5
B3 Core equity tier 1 2015E 10.6% 11.1% 12.1%
Leverage ratio 4.30% 4.30% 3.9%
Loss-absorbing funds 20% 19% 13%
We note that the excess capital reflects the ongoing uncertainty due to the upcoming
Asset Quality review and stress test, which is pushing the two banks to maintain a
safety buffer. This is, in our view, one reason why the Italians look so good on an
EV/EBITDA comparative valuation.
In terms of earning estimates, we are changing our number marginally: for UCG,
EPS 2015E increased from 0.43 to 0.46 and for ISP from 0.13 to 0.14. We
expect the AQR to take place mid-2014e. Our forecast for both banks includes
coverage going up from c. 44% to c. 47% by 2015e, with provisions now slightly
more concentrated in 2013e and 2014e.
51
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
The increase in price target for both banks comes from the removal of the provision
shortfall to reach 50% coverage by 2015e. As the macro situation appears less
worrying, we assume that there is less risk that Italian banks will be asked to reach
such a high level of coverage and assume that the increase to 47% already in our
forecast will be enough. We look at Bear and Bull case to set risks around our
earning forecast:
Table 42: Bull-Bear scenarios impact on RoNAV and PT
Base case 2015 forecast Bull scenario Bear scenario

UCG
Cost of risk (bps) 107 84 129
Loan growth (%y/y) 1.8% 3.8% -0.2%
Costs (%y/y) -3.4% -4.4% -2.4%
RoNAV (%) 6.4% 9.5% 5.3%
PT () 5.51 7.25 3.82
PT/NAV 0.5 0.8 0.3
ISP
Cost of risk (bps) 109 74 144
Loan growth (%y/y) 1.0% 3.0% -1.0%
Costs (%y/y) -1.0% -2.0% 0.0%
RoNAV (%) 7.3% 9.5% 5.4%
PT () 1.65 2.14 1.19
PT/NAV 0.7 1.0 0.6
Table 41: Bull-Bear scenarios
-
Bull scenario Bear
scenario
Cost of
risk
(bps)
COR
consistent
with coverage
unchanged
COR
consistent
with
coverage at
50%
Loan
growth
(%y/y)
2%> base
case
2% < base
case
Costs
(%y/y)
1%pts <
2014-2015
1%pts > in
2014-2015
than base
case
52
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Upgrading Spanish banks: Caixabank OW, Santander to N
We upgrade our recommendation on Santander from UW to Neutral and
Caixabank from Neutral to OW. The main reason behind the upgrade is our more
constructive view on Spain, taking into account a more favorable domestic
environment, lower cost of equity and better valuations as we move our estimates to
2015 from a previous 2014. The positive impact or the EV valuation method
described in this document is also supportive of these changes.
Our more constructive approach to Spain is based on some macro stabilization as
highlighted by our economists, also reflected in our latest Spain in Pictures. There
are some signs of economic stabilization in Spain and rationalization on pricing for
the first time in the funding markets that should benefit larger banks operating in
Spain. We remain generally cautious on the economy and are still waiting for a final
cleanup of the banks, where hopefully the ECB will give banks a necessary push to
go ahead and just do it.
Santander: upgrade to Neutral from UW
We upgrade Santander to Neutral from UW, increasing our TP to 5.86 from
previous 4.36, as we adjust our estimates to a better funding evolution in Spain and
a more than likely favorable resolution on Spanish deferred tax assets that will help
improve its capital position (RWAs also dropped as much as 7% in 2Q13). Santander
screens positively vs its domestic peers in the EV/EBITDA estimates, as we see
value in the share, making 11% RoTBV in 2015.
What has changed since our UW call in June: Early June we downgraded our
view on Santander due to a mix of low capital, relative expensive valuation, high
consensus figures and Latam turmoil. Its fair to say there have been changes since
then. In the past three months the stock has underperformed BBVA and European
banks by 7% and 5% respectively. Consensus expectations for 2013-15 have fallen
by 15% on average in the period and we are now just 10% below Bloomberg
Consensus, from 25% in June.
Why are we not going OW? While we acknowledge the improvement in
Santanders domestic market and progress in capital are being made, the stocks
valuation (1.0x P/TBV 2015E), upcoming Asset Quality Review and increasing
turmoil in Emerging Markets are still large challenges, given SAN generates most of
its revenues in Latin America. A stabilization in Latam and a less dilutive dividend
policy would help us become more positive in the stock, which we currently view as
fairly valued.
Caixabank: upgrade to OW from Neutral
We upgrade Caixabank to Neutral from UW, increasing our TP from 2.10 to 3.40
as we rollover to 2015 estimates and look beyond the 2014 recovery in Spain.
Caixabank becomes our only OW amongst Spanish domestic names, set to benefit in
Spain from a relatively lower cost of funding than its pure domestic peers and a
favourable resolution on Spanish deferred tax assets. The main challenges we see are
the potential impacts of the ECB Asset Quality Review, further losses in the
integration of its acquired businesses (Banco Valencia, B. Civica), as well as further
deterioration in Spain. We see value in the share, making 8% RoTBV in 2015,
attractive relative to its valuation.
53
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Caixabank has been dragged over the past few years by its complicated structure, a
dilutive dividend policy and most importantly a very low profitability result of a
mortgage-focused business over the past decade. The integrations of Banca Civica
and Banco de Valencia will take time but we believe there is still much upside in the
banks cost base, still one of the most inefficient in Spain.
Why do we turn OW now? Caixabank has one of the lowest valuations amongst
European banks at 0.6x P/TBV (2015E) and considering its capital position looks
solid in the near term, the main challenge is profitability, where we consider it has
significant levers to achieve it. Having a final share count, selling non strategic
stakes and showing progress on provisions and costs should lead in our view to a re-
rating of the stock upwards. Considering its the largest bank in Spain by assets, we
would expect it to benefit from a potential recovery in Spain.
54
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UK Banks: Downgrading HSBC to Neutral
Prefer Domestic UK banks to HSBC and Standard Chartered
With an improving economic outlook for the UK (JPMe 3.1% UK GDP growth in
2014) and substantial progress on capital made by domestic UK banks in 2013, we
believe that the relative attractions of the domestic UK banks sector have improved
compared to HSBC and StanChart, which face headwinds within some EM
economies. Further, with HSBC having outperformed StanChart by 15% YTD and
now at a 14% PE premium to StanChart (10.2x 2015 P/E vs 8.9x 2015 P/E JPMe) we
believe that HSBCs positives are now discounted from the perspective of European
bank investors who can invest in recovery/value stocks and StanChart at a cheaper
valuation. We remain cautious on EM (Asian and Latin America) trends with EM
provisions for both HSBC and StanChart expected to remain below normalised levels
within consensus. In our view, an increase in EM provisions remains the key risk for
both banks over the next 12 months given their premium valuation (1.3x P/TNAV
2014E) relative to other UK/European banks (sector at 1.1x P/TNAV 2014). With
HSBC trading at 1.3x 2014 P/TNAV for 12.5% RoNAV 2015E we move to Neutral
from OW with StanChart already at Neutral.
We now prefer StanChart to HSBC in Europe. With slower economic growth,
weakness in local FX and tighter monetary policy across some EM economies, we
believe the outlook for impairments could get challenging over the next 12 months.
Our EPS forecasts on HSBC are below consensus, 5% for 2014 and 6% for 2015. We
still see HSBCs strong balance sheet (10.1% B3 CT1) and dividend as a support
(5% yield 2014E) and expect the shares to outperform local EM/Asia peers, however,
we believe that they are less attractive in a UK/European context.
Barclays: We note our OW recommendation on Barclays and continue to prefer
Lloyds to RBS within the domestic UK banks. Barclays has taken action to address
the issue of leverage via a 5.8bn rights issue (taking B3 CT1 to 9.3%) and moved
on from the ongoing drag of redress costs by taking 2bn in provisions, thereby
materially addressing balance sheet concerns.
Lloyds: We prefer Lloyds over RBS. Following strong Q2 results at Lloyds, we
upgraded our EPS estimates by 19% for 2015E. We continue to see Lloyds as well
placed to resume dividend payments given its now strong capital ratios (9.6% B3
CT1) and estimate that the shares are yielding 4.5% and 6% based on our 14 & 15
DPS forecasts, respectively. We note that Lloyds is likely to end up as the best
capitalized UK bank on our estimates with 15E B3 CET1 of 13.0%, which may
create an option for capital return through buybacks in addition to a normalizing
dividend policy. Lloyds trades at 1.2x P/TNAV 14E and 10.0x 15 PE.
RBS: We believe that a bad bank split is unlikely to fundamentally change
valuation attractions, given the market already values the shares at 9.6x Core 2015
EPS. Our analysis shows that transferring 63bn of Non core, UK CRE and Irish
assets to a bad bank on a capital-neutral basis would improve Core EPS by only
3% to 36p in 2015. The shares are 10% undervalued in this scenario but uncertainties
from an EC state aid review would arise. In our view, a strategy refresh is required at
RBS and potential catalysts would include: further restructuring or rebasing of
expectations for Markets, a reassessment of the shape of Core RBS and a more
aggressive strategy towards the disposal or IPO of Citizens.
55
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Investment Banking: L-T preference for UBS reconfirmed,
but Deutsche Bank OW on valuation
Within Global IBs, our preference remains for WM gearing, which we see as the
only area of structural growth in banking, as discussed in our note, Global Banking:
Wealth Management - only area of structural growth in banking: OW UBS, CSG,
Julius Baer and MS published 23 Jan 2013. We stick with our preference for Tier II
FICC IBs due to restructuring leading to capital release with IB divisions currently
valued below tangible BV for UBS, CSG and MS in our SOP implied valuation. We
believe Tier I IBs will continue to remain more exposed to the IB regulatory changes
as they try to defend their turf in the highly scalable IB business while Tier II IBs
have the option to step back more aggressively to move to an agency-type low
capital and cost IB model. We continue to prefer Equity gearing over FICC as we see
3% CAGR growth in Equities revenues over the next 2 years compared to -2%
decline in the FICC revenue wallet with increased regulation weighing on the FICC
revenue wallet.
UBS: We see Wealth management/Asset gathering as the only area of structural
growth in banking as discussed in our note, Global Banking: Wealth Management -
only area of structural growth in banking: OW UBS, CSG, Julius Baer and MS. We
play this theme through UBS which is our Top Global IB pick considering its
business mix of asset gathering gearing (60% of 2015E Net Income) through the
largest private bank in the world and also material capital release potential (5.1%
dividend yield in 2015E). UBS is trading at 9.9x P/E, 1.6x P/NAV and RoNAV ex
own debt of 15.9% in 2015E with Basel 3 CET1 ratio of 16.4% on a fully loaded
basis, assuming the exercise of the SNB StabFund option in 2013. UBS also remains
relatively less impacted from ongoing concerns around EM/Securitization as well as
increased IB regulation due to its FICC restructuring with FICC revenues only
contributing 5% to Group revenues in our 2015E.
DBK: DBK is the cheapest Eurobank in our coverage universe on a P/E basis,
trading at 5.8x P/E vs. IB peers at 9.1x and Eurobanks at 9.5x in 2015E. The current
valuation of DBK is discounting our bear case 9bn capital raise scenario with exit
PE 8.7x 2015E below Eurobanks at 9.5x, and we believe new management, now
almost one year post Investor Day is under pressure to create S/H value. In our view
DB management has inherited material unresolved legacy problems from the old DB
management team, ranging from asset marks, litigation, to capital positioning. New
management needs to move forward more aggressively in our view: i) deliver in 3Q
13 with 50bn-100bn of assets reduction to improve leverage, ii) focus on generating
B3TI capital through asset reductions, iii) accelerate cost saving program at YE2013,
and iv) start settling litigation issues. Investor confidence is low in DB delivering and
hence risk-reward is attractive, even after factoring in impact from regulations
outstanding as well as 2bn in post-tax litigation charges above 3bn litigation
reserves at Q2. We believe DBK should put our bear case capital concerns to rest
by moving away from its muddle through strategy and i) raise an additional 3bn
capital in ABB, and ii) reduce RWAs by 15% (60bn).
56
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
French banks: Maintain preference for Socit Gnrale
Within French banks, SG remains our preferred pick we view the risk/reward
as attractive with shares trading at 7.9x PE, 0.7x NAV 2015e vs. 9.4x PE and
0.9x NAV for BNPP. We believe 10% RoNAV is achievable in the long term,
driven by cost savings and turnaround in international retail, which would provide
additional ~15% upside and imply 7x PE. We remain Neutral on BNPP on relative
valuation - whilst the group benefits from stronger capital, this is reflected in relative
valuation with BNPP trading at 10.1x PE adjusted for optimal capital structure vs.
8.9x for SG in 2015e in our sensitivity analysis. On EV/EBITDA ~7.8x, BNPP
would trade at similar level as SG, however, we would prefer SG for the
turnaround/recovery story at this point given the still limited visibility on capital
consumption/return for BNPP until the Investor Day next year. We also reiterate our
Neutral rating on CASA although we expect earnings visibility to improve for
French retail and Italian consumer finance, valuation is not as cheap adjusted for
optimal capital structure relative to peers with CASA trading at 9.3x PE and 9.6x
EV/EBITDA, and in our view, cost of equity will remain high due to question marks
on the Danish compromise for the treatment of insurance as well as uncertainties on
Basel 3 leverage ratio for CASA.
Socit Gnrale: SG offers double-digit earnings progression with cashflow
generation of c.70bp p.a. by our estimates. We estimate 3.6bn of net profits in
2015e, vs. 3.3bn underlying in 2012; long term, we see potential upside to our
estimates with additional 0.5bn profits to 4bn and EPS of close to 5.00 implying
PE of 7x, 10% RoNAV vs. 8.6% in our 2015e base case, driven by cost savings and
turnaround in international retail. At 0.7x NAV, valuation appears attractive vs. 1.0x
for the sector. The capital debate appears to be over with the end of the deleveraging
plan; Basel 3 Core Tier I was strengthened by c.250bp to 10% end 2013e, increasing
to 11.4% end 2015e and SG offers a dividend yield of 5% assuming only 40%
payout. Further improvement is required to get Basel 3 leverage ratio up from our
estimated 3% end 2015e to our minimum 3.5%. However, even adjusted for our
optimal capital structure, SG would be trading at 9.0x PE 2015e vs. 10.4x PE for the
sector. Looking at EV/EBITDA valuation adjusted for our optimal capital structure
(incl. growth), SG would trade at 6.9x in 2015e vs. 7.5x for the sector.
Nordic Banks: Prefer Danske and Nordea
Within the Nordic banks we prefer Danish geared banks, in particular Danske
and Nordea offering upside potential from improving Danish macro and softer
capital requirements, to more expensive names such as Handelsbanken. With
Sweden and Norway expected to implement some of toughest capital rules in Europe
(up to ~2.5% countercyclical buffer as well as 2x/3x higher mortgage risk weights),
we prefer Nordic banks less exposed to these two markets, hence less regulatory risk
on capital and more upside potential on the payout. Whilst we recognize solid top
line revenue progression for DNB (~6% core revenue growth in 2014/2015e), we
believe capital is tight with a B3 ET1 of 12.8% in 2015e (adjusted for 25% mortgage
risk weights) vs. an up to 14.5% B3 ET1 JPMe minimum (12% minimum CET1 + up
to 2.5% countercyclical buffer). Although Handelsbankens, Swedbanks and SEBs
RoNAVs at 13.7%, 17.6% and 13.5% respectively are above the European average at
11.3%, we see few catalysts and in our view the banks are trading at fair value for
now (1.6x, 1.8x and 1.4x respectively 2015 P/NAV).
57
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Danske: Trading at 0.9x P/NAV for a 10.9% RoNAV and 5.1% dividend yield in
2015E, Danske is our top Nordic pick. We like the asset recovery story in Danske
and believe the worst is behind us in Denmark and Ireland (gross NPLs fell -1%
qoq/-8% yoy in 2Q13 and coverage including collateral is at 90%). We see group
losses falling from 65bps in 2012e to 23bps in 2014e and 19bps in 2015e. With
management focusing on improving earnings (by +DKK5-6bn by 2015e) and cost
efficiency (2015e cost income target of 46%), we believe Danske will reach at least a
10.9% RoNAV in 2015e. Whilst Danske has disappointed in the past, expectations
are low and we see limited risk for consensus earnings downgrades. With a JPMe B3
ET1 of 12.0% at 2Q13 (adjusted for DKK100bn higher RWAs), we believe Danske
could pay a 20%/40%/40% dividend in 13/14/15e.
Nordea: Trading at 1.4x P/NAV for a 14.6% RoNAV and 7.0% dividend yield in
2015E, Nordea looks attractive in our view. We see upside potential from i)
improved profitability stemming from better pricing and product mix, ii) enhanced
efficiency as Nordea is cutting underlying costs by 450mm by 2015, iii) improving
asset quality with Denmark showing signs of recovery (27bps of losses in 12 falling
to 16bps in 15e), iv) a dividend payout rising to 65% already in 2013E on the back
of 35bn of scheduled RWA reductions, and v) strong capital position with the B3
ET1 fully loaded reaching 15.5% in 2015E.
58
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
59
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
B
A
I
L
-
I
N
60
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Bail-in capital requirements
Since the financial crisis in 2008 a number of banks (RBS, Lloyds, Fortis etc) have
been bailed out with public money as they were considered too big to fail. We have
also seen a number of banks that havent been bailed out and failed (e.g. Icelandic
banks, Lehman), but instead severely threatened the financial stability. The EC
estimates a 121bn cost of the 2008-2010 crisis in terms of state aid (asset relief and
recapitalization) and estimates that if banks had also been recapitalized to meet B3
10.5% total capital minimum requirements, the total cost would have exceeded
400bn, or 17% of total EU bank liabilities.
Senior unsecured creditors have on average recovered ~52% in the 21 bank failures
since Sept 2008 listed below. While this is above the often-quoted 40% assumption,
dispersion among names is high, with the average recovery rate averaging only
3.625% for the Icelandic bankruptcies (Glitnir, Landsbanki & Kaupthing), while it is
84% for the restructured or failure to pay events for European banks.
Table 43: Historical Recovery Rates Global CDS Auction
-
Reference Entity Date of Credit Event Final Recovery Rate Type of event Region Sector
Fannie Mae 08-Sep-08 91.510 Bankruptcy North America Financial
Freddie Mac 08-Sep-08 94.000 Bankruptcy North America Financial
Lehman 15-Sep-08 8.625 Bankruptcy North America Financial
Washington Mutual 29-Sep-08 57.000 Bankruptcy North America Financial
Glitnir 07-Oct-08 3.000 Bankruptcy Europe Financial
Landsbanki 07-Oct-08 1.250 Bankruptcy Europe Financial
Kaupthing 09-Oct-08 6.625 Bankruptcy Europe Financial
JSC BTA 28-Apr-09 10.250 Failure to pay EM Financial
JSC Alliance Bank 15-May-09 16.750 Failure to pay EM Financial
Bradford & Bingley 07-Sep-09 94.625 Failure to pay Europe Financial
CIT Group Inc. 03-Nov-09 68.125 Bankruptcy North America Financial
Financl Guaranty Ins
Co(FGIC)
03-Dec-09 26.000 Failure to pay North America Financial
AMBAC Assurance Corp 26-Mar-10 20.000 Bankruptcy North America Financial
Ambac Financial Group 09-Nov-10 9.500 Bankruptcy North America Financial
Anglo 24-Nov-10 76.000 Restructuring Europe Financial
Allied Irish 19-Jun-11 70.125 Failure to Pay Europe Financial
Irish Life 01-Jul-11 71.000 Restructuring Europe Financial
BKIR 07-Jul-11 76.625 Restructuring Europe Financial
Northern Rock 15-Dec-11 99.125 Restructuring Europe Financial
SNS 01-Feb-13 95.500 Restructuring Europe Financial
Bankia 18-Apr-13 88.500 Restructuring Europe Financial
Average 51.625
Source: J.P. Morgan, Credit Fixings, ISDA. Senior unsecured 2.5-5y bucket only.
The recent financial crisis has proved that authorities had limited resolution tools.
European leaders are now looking back at the shortcomings of the 2008 crisis and
proposing to continue to install tougher measures to make banks less vulnerable to a
potential financial crisis. The lessons learned from the recent financial crisis are
many, but BIS highlights group structure, liquidity and information sharing among
supervisors as examples of where improvements are needed.
In response to the recent financial crisis, the European Commission has laid down a
framework for the Resolution and Recovery of banks and investment firms. The
European Parliament and Council have finalized their proposed revisions to the
Commissions proposal and are currently working with the Commission to agree a
61
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
final framework, which is expected to come into force in 2015 (with the bail-in
provisions proposed to come into effect either in 2016 or 2018). The framework
consists of 3 stages:
Preparation and prevention: aims to improve supervision and resolvability in
the European banking sector. In other words, the preparation and prevention tool
aims to reduce the probability of a bank failure and ex ante identify ways to
effectively address a failing bank.
Early intervention: early remedial actions by supervisors in an effort to avoid
bank resolution and return the bank to normal course of business.
Resolution: tools for restructuring a failing bank, to ensure continuity of critical
services, maintain financial stability and restore a bank to viability. The
resolution process is managed by a resolution authority (central bank, regulator,
deposit guarantee scheme, ministry of finance, etc)
Table 44: Stages of the bank recovery and resolution process
-
Normal course of business /
Preparation and prevention => Early intervention => Bank Resolution
Ongoing supervision + Preparatory measures
to avoid problems Early intervention measures by supervisors Non-judicial tools
Capital requirements Raise own funds by shareholders Sale of business
Liquidity Replace managers Bridge bank
Large exposure limits Implement recovery plan Asset separation
Reporting Divestment of activities Bail-in/debt write-down
On/off site supervision, etc. More frequent reporting
Supervisory programs Special management
Enhanced supervision Etc.
Stress testing
Recovery plans
Preventative measures to ensure resolvability Bank Insolvency
Resolution plans Winding up / liquidation
Change of legal and business structure
Limit exposures
Divestment
Reduction of complexity
Source: European Commission.
The resolution authority can deploy four resolution tools (or a combination of them)
for a bank if it reaches the point of non-viability (PNV):
Sale of business: selling all or parts of shares or assets and liabilities to one or
more buyers without the consent of shareholders.
Bridge bank: a bridge bank is a temporary institution, owned wholly or in part
by the government, that takes over the viable business (good bank) of the
failing bank with the objective to later return the bank to private ownership. In
other words, the good bank is spun off to a new entity generally under
government ownership, while the original entity is wound-down.
Asset separation: asset separation is basically the opposite from a bridge bank,
where the bad assets are transferred to an asset management vehicle, owned
wholly or in part by the government and placed into run-off.
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Sofie Peterzens
(44-20) 7134-4716
[email protected]
Bail-in / debt write-down: resolution authorities can force creditors to take
losses by writing-off or converting to equity (bailing in) certain liabilities owed
by a defaulted bank. Write down and bail-in are designed to protect
taxpayers money and instead let creditors share the burden to absorb
losses/recapitalize the bank to be viable in the long run. The burden sharing
is expected to rest on subordinated and senior creditors primarily, as
secured creditors and insured depositors are excluded.
Figure 2: Stages of the bank resolution / insolvency
Source: European Commission.
In the most recent proposal, the Council of the European Union is proposing that a
minimum of 8% of total liabilities including own funds must be bailed-in
(subject to specified derogations) before any resolution funds can be used.
Above this level, the use of resolution funds is proposed to be capped at 5% of total
liabilities. Additionally, all unsecured bondholders must be fully bailed-in before
a bank is eligible to receive capital directly from the European Stability
Mechanism(ESM).
For the purpose of calculating the 8% minimum of total liabilities (including own
funds), losses which have been absorbed prior to the resolution action will not be
taken into account. Based on European Parliament procedure file, the RRD
proposal will not be considered until the Parliaments plenary session scheduled for
19 November 2013. The European Commission could recommend a harmonized
minimum requirement for eligible debt and own funds for banks in 2016 at the
earliest, given that it will be based on recommendations by the European Banking
Authority (EBA), which are due by 31 Oct 2016. The bail-in tool will not apply
until 1 Jan 2018 (2016 under the EP proposal).
Decision about non-viability
Winding-up / liquidation
Judicial
insolvency
procedure
Bail-in / debt write down
Asset
separation
Bridge bank Sale of
business
Administrative
resolution
procedure
Bank resolution
Bank insolvency
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
To ensure that institutions always have sufficient loss-absorbing capacity, a
minimum requirement for own funds and eligible liabilities will be introduced. In the
council proposal the minimum requirement is defined as a sufficient aggregate
amount of own funds and eligible liabilities (MREL) as a percentage of total
liabilities and own funds (excluding derivatives liabilities). Eligible liabilities, sub
debt and sub loans that do not qualify as Additional Tier 1 or Tier 2 capital are
included in own funds and eligible liabilities if, among other restrictions, the
remaining maturity is = or >1 year. The MREL may be partially met through
contractual bail-in instruments.
Implicit government guarantees removed under bail-in
leading to higher funding costs
One of the intended consequences with the recovery and resolution directive is to
remove the implicit state guarantee from the banking sector and transfer the burden
sharing to creditors. This could potentially lead to credit rating downgrades of the
banks given that most banks in Europe benefit from implied government support.
This could also increase the expected funding costs for banks, which in turn might
be passed on the customers and shareholders.
Under bail-in the structure of the bond market is changing and we believe unsecured
and uninsured creditors will demand higher returns on funding to compensate for the
removal of implied government guarantees and burden sharing in a resolution
scenario (i.e. higher loss given default).
Figure 3: Changes in uplift of large international banks in selected
European countries
Notches; numerical equivalents of average rating uplifts and changes in
rating uplifts
Source: Bloomberg, Moody's and OECD Secretariat estimates. Notes: Average uplift,
calculated as the difference in notches between all-in credit rating (AICR) and the adjusted
stand-alone credit rating (SACR*), which already factors in parental and co-operative support;
hence the difference reflects regional government and systemic support only. Sample consists
of 118 large European banks. Number of banks headquartered in countries shown in
parentheses.
Figure 4: Estimated yearly reduction in funding costs due to implicit
guarantee.
Per country where banks are headquartered, in USD billion, as of March
2012
Sources: OECD Secretariat estimates, Bloomberg, Moody's, Bankscope, bank specific annual
reports. Notes: Number of banks in parentheses. Estimated implied yearly reduction in cost of
outstanding debt in billion USD, per country in which banks are headquartered (with the
exception of Dexia, in which case Dexia Credit Local is allocated to France and Dexia BIL to
Luxembourg, even though the Dexia group is headquartered in Belgium). Note that these
estimates do not necessarily imply equivalent local taxpayer burden. Using adjusted stand-
alone credit rating. Total number of banks is 123.
-4
-3
-2
-1
0
1
2
3
4
5
Average Uplift* July 2012 Average change in Uplift* December 2010 - July 2012
0
5
10
15
20
25
30
35
40
45
Lower bound, USD bn (debt of rated bank entityonly) Upper bound, USD bn(subsidiaries included)
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Sofie Peterzens
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[email protected]
The OECD estimates the benefits that implied government guarantees have given to
banks in some cases up to a 4-notch rating upgrade (e.g. Luxembourg). Using their
conclusions, we show in the table below the impact of a 2-notch downgrade for the
ST senior debt for each bank under consideration. In our view rating support is
important to maintain senior bail-in debt as sufficiently large and liquid asset class,
and we highlight that senior debt of 11 banks in our coverage would be rated junk if
the rating uplift was to be removed.
In our view bank debt rated BBB or below would be at risk due to higher CVA risk
and hence less counterparties wanting to trade with them.
Table 46: Selected banks S&P issuer rating and implied issuer rating after a 2-notch downgrade.
Name SP Issr ST LC Rtg Implied new rating with loss of 2-notch Sov support
NDA AA- A
SHB AA- A
HSBC A+ A-
STAN A+ A-
BNPP A+ A-
SWED A+ A-
SEB A+ A-
SG A BBB+
CA A BBB+
NAT A BBB+
ERSTE A BBB+
KOM A BBB+
RAIF A BBB+
RBS A- BBB
LLOY A- BBB
DANSKE A- BBB
CMZ A- BBB
JYSKE A- BBB
PKO A- BBB
PEK BBB+ BBB-
KBC BBB+ BBB-
SAN BBB BB+
ISP BBB BB+
UCG BBB BB+
BBVA BBB- BB
CAIXABANK BBB- BB
OTP BB B+
SAB BB B+
POP BB- B
BES BB- B
BANKIA BB- B
Source: Bloomberg, J.P. Morgan, S&P. Light grey represents the lowest investment grade BBB-; dark grey represents speculative
grade
Despite efforts to remove implied government guarantees, the OECD estimates that
the implied guarantees still remain substantial. According to OECD, as of March
2012 the annual reduction in funding costs due to implicit guarantees was 27bn in
Germany, 6bn in the UK, 4bn in France, 4bn in Italy and 1bn in Spain. The
differences reflect credit rating differences, debt outstanding and the number of
banks headquartered in the country. Based on the OECD data we estimate the
implied pricing benefit from each country's implicit government guarantees,
comparing banking sector debt in each country to the OECDs estimate of the implicit
guarantee provided to banks headquartered in each country.
Table 45: BIS standardized CVA
risk weighting by credit agency
rating
Risk
weight
Multiple vs. AAA
Risk weight
AAA 8.8% 1.0
AA 8.8% 1.0
A 10.0% 1.1
BBB 12.5% 1.4
BB 25.0% 2.9
B 37.5% 4.3
CCC 125.0% 14.3
Source: June 2011 BIS Basel 3 disclosure
http://www.bis.org/publ/bcbs189.pdf
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Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 47: OECD estimates of the implicit guarantees for banks headquartered in EC countries.
EUR bn Germany UK France Italy Spain
Total banking assets, 2012 7,257 7,551 6,583 2,603 3,595
Total banking deposits, 2012 2,760 3,402 2,507 1,033 1,795
Total banking sector debt, 2012 996 1,373 1,068 537 501
Implicit guarantee in EUR bn, OECD estimate 27 6 4 4 1
JPMe Implied avoided debt yield 2.73% 0.47% 0.38% 0.75% 0.28%
Source: OECD http://www.oecd.org/dataoecd/16/25/50586138.pdf, ECB., J.P. Morgan
Bail-in challenging in practice
Involving bondholders in loss absorbing could prove more challenging in practice
than theory in our view. Whilst subordinated debt holders were part of the burden
sharing in Anglo Irish in late 2010 and in SNS Reeal in 2013, senior bond holders
have been protected in both deals, which raises the question: why it is so difficult for
the governments to impose losses on senior unsecured instruments? Some
explanations in our view could be:
Contagion reflects the concern that a default in one bank could spread to another
bank, which could have significant adverse effects on financial stability. Whilst it
might be easier to impose bail-in on small, non-systemic banks (e.g. Danish
examples), we believe it could prove challenging in practice to effectively and
rapidly enforce bail-in on large, systemically important banks without severely
disrupting the functioning of the financial markets given the interconnectedness.
Removing implied government guarantees by imposing bail-in at a time when
unsecured funding is under stress could have negative ramifications and
exacerbate the stresses for the entire banking sector in a country (e.g. if the
wholesale markets are closed, it could result in liquidity stresses for other banks).
Preference for certain creditors (retail deposits, SMEs, deposit guarantee funds
etc.) could become legally challenging if such legal priority does not already exist
in law, as it essentially creates different tiering among similarly ranking senior
unsecured creditors.
Threat to the no creditor worse off in liquidation. The more that is excluded
from the eligible bail-inable liabilities (for various reasons), the less loss-
absorbing funds will be available in a bail-in scenario, which takes us to the point
of no creditor worse off principle. If the scope of eligible bail-in liabilities is
narrowed, it could at least in theory mean that the liabilities that are subject to
bail-in could have a higher loss absorption rate in a bail-in scenario than in a
default scenario.
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Sofie Peterzens
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[email protected]
Unintended consequences from moving from bail-out to
bail-in
Whilst the purpose of the resolution regime is to move away from bail-out to bail-
in, we believe there could be unintended consequences that force losses back on the
government/taxpayers.
In terms of the ECB, we note that almost 18% of the 14.5tr eligible collateral held
is unsecured bank debt (additionally ~11% is secured), leaving the ECB with
exposure to potential write-downs in this collateral. Whilst the EC Directive
Proposals allow for instruments of the same seniority to be treated differently, it
would be a more complex issue to treat the same instrument differently depending on
the owner.
Figure 5: Eligible collateral by asset type held at the ECB, 1Q12-1Q13
billion
Source: ECB. http://www.ecb.int/paym/pdf/collateral/collateral_data.pdf?13ba33db0a2ca20c3ca364b6e79af8ef
In terms of insurers, looking at the J.P. Morgan coverage of the large insurance
entities, we see that on average >80% of the insurers shareholder equity is covered
by exposure to bank debt, with almost 227bn exposure (compared to sovereign net
exposure of 533bn). The bank debt exposure is marked to market.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Q112 2Q12 3Q12 4Q12 1Q13
Other marketable assets
Asset -backed securities
Corporate bonds
Covered bank bonds
Uncovered bank bonds
Regional government securities
Central government securities
We note that in the case of the
Greek debt restructuring, all the
private creditors were subjected to
53.5% principal write-down,
whereas there was no haircut for
ECB/central banks.
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Kian Abouhossein
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 48: Summary table of Insurers exposure to European bank debt, FY 2012
million
Total bank debt
exposure
Total bank debt/
Sh equity
Tier I/
Sh equity
Tier II and other
sub/Sh equity
Total sub debt/
Sh equity
Senior & Covered
debt/Sh equity
Aegon 9,712 41% 2% 4% 6% 36%
Ageas 5,700 58% na na 5% 53%
Allianz* 37,500 72% 3% 10% 13% 60%
Aviva 7,519 79% 4% 24% 28% 51%
AXA 50,800 111% 2% 14% 16% 94%
Baloise 9,926 205% na na 7% 199%
Hannover Re 2,860 45% na na na na
ING 24,100 44% na na 0% 44%
Groupama 7,775 148% 6% 34% 40% 108%
LGEN 3,750 60% 4% 14% 18% 41%
Munich* 5,901 21% 1% 2% 3% 17%
Phoenix 2,956 154% 19% 28% 47% 107%
Prudential 6,182 52% 4% 17% 21% 30%
Resolution 5,565 89% na na 13% 76%
RSA 2,429 53% 1% 5% 6% 47%
SCOR* 600 12% na na 3% 9%
Standard Life 2,362 47% na na 3% 44%
Swiss Life 17,302 208% 6% 31% 37% 170%
Swiss Re* 3,363 13% na na na na
Zurich* 20,333 78% na na 7% 71%
Average 226,636** 80% 5% 17% 15% 70%
Source: Company reports and J.P. Morgan estimates. * as of 1Q13. **Total.
Overall insurers are significantly exposed to the value of bank debt. This could
create a potential moral hazard issue which may reduce the likelihood of regulators
ever initiating bail-in for a large institution once broader systemic risks are taken into
account.
In terms of Retail holders of prefs and structured deposits, we are already seeing
the risk to Retail debt holders of bail-in, as around 2/3
rd
of the sub debt in Spain is
held by Retail investors. Bankia announced in May 2013 a 15.5bn capital increase
at 1.35 per share, leading to partial nationalization and severe dilution for the banks
former shareholders. Bankia was the first Spanish bank to apply a bail-in of its
preferred shares (38%), perpetual sub debt (36%) and sub debt with maturity (13%),
where the latter could be exchanged for zero coupon debt or equity while the first 2
converted into equity and there was no cash option.
We note the significant exposure of Spanish retail deposit holders to bail-in debt. The
problem is less acute elsewhere in our view - whilst other potential bail-in
instruments, such as structured notes, are popular in France for example, they are
mainly sold to institutional and corporate clients, so there is less risk of placing the
cost on the individual taxpayers
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Key issues of uncertainty to assess bail-in proposal
We highlight our technical questions and concerns for bail-in or burden sharing
Firstly, we question the definition of non-viability rather than default,
without a clear known set of conditions which will definitely trigger bail-in; there
is still a moral hazard that governments will bail-out rather than enforcing bail-in,
especially when considering the potential consequences of writing down bank
debt held by insurance and pension companies, or deposits or sub debt held by
voters/taxpayers. Whilst we note that uncovered depositors were written down
equally with senior debt holders in the Danish bail-in, we note that in the Irish
situation only sub debt holders were written off, despite loss levels which could
have justified additional writedowns of senior debt holdings, in our view.
One of the key principles for bail-in is that no creditor is worse off than they
would be in a liquidation of a financial institution. We question how we can
estimate no creditor worse off compared to liquidation? We believe it could
be hard to prove that the compensation from a bail-in is more favorable than in a
liquidation scenario given difficulty of assessing the recovery value in
liquidation.
Whilst the resolution authority has the power to suspend termination rights, we
question if the bail-in could trigger non-payment instead (i.e. counterparties
may refuse to make payments and deliveries to a failing entity in a bail-in
scenario), which could add further pressure on the ailing bank.
The definition of bail-inable liabilities is not fully clear and subject to
interpretation, hence we believe uncertainty could arise in determining which
liabilities are bail-inable.
Related to the above, we believe it could be hard within a short timeframe to
quantify the unsecured excess part of a secured liability, especially if the
underlying collateral is illiquid.
We also question whether we could potentially end up with different classes of
senior debt, bail-in and non-bail-in, and if that could potentially threaten the
ongoing liquidity of the bail-in market.
In addition, we are concerned about the conflict of interest, with the ECB
potentially holding bank debt as collateral offering liquidity to the banking
system.
Finally we reiterate our questions on jurisdiction in terms of EU entities operating
subsidiaries outside the EU, and non-EU entities operating branches or
subsidiaries inside the EU.
and our remaining fundamental questions on likely effectiveness of bail-in
We consider the issue of SIFI status from the perspective of crisis management and
bail-in, where the priority is to prevent deposit holders/taxpayers from suffering
losses, which would imply it is a less relevant measure for IBs. However, the rules
are not explicitly limited to deposit institutions and we wonder what makes a
bail-in SIFI - the share of covered retail deposits, net interbank exposure? We
note that in the Danish example, bail-in was used on two very small, non systemic
banks, but with the impact on funding costs the Danish government subsequently
introduced two further Bank package resolution tools, to clearly signal the very low
likelihood of using bail-in in future scenarios.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
The impact of bail-in: Methodology
In the most recent proposal, the Council of the European Union is proposing that a
minimum of 8% of total liabilities including own funds must be bailed-in before
any resolution funds can be used. Above this level, the use of resolution funds is
proposed to be capped at 5% of total liabilities and will require EU approval.
Additionally, all unsecured bondholders must be fully bailed-in before a bank is
eligible to receive capital directly from the European Stability Mechanism
(ESM).
For the purpose of calculating the 8% minimum of total liabilities (including own
funds), losses which have been absorbed prior to the resolution action will not be
taken into account. Based on the European Parliament procedure file, the RRD
proposal will not be considered until the Parliaments plenary session, scheduled for
19 November 2013. The European Commission could recommend a harmonized
minimum requirement for eligible debt and own funds for banks in 2016 at the
earliest, given that it will be based on recommendations by the European Banking
Authority (EBA), which are due by 31 Oct 2016. The bail-in tool will not apply
until 1 Jan 2018 (2016 under the EP proposal).
The scope of the bail-in tool
The purpose of the bail-in tool is to enable resolution authorities to write-down,
or convert into equity, claims of shareholders and creditors of a failing bank.
The Council is proposing that eligible retail and SME deposits, as well as liabilities
to the European Investment Bank (EIB), have preference over the claims of ordinary
unsecured, non-preferred creditors, including large corporate depositors. The deposit
guarantee scheme, which would step in for covered deposits (i.e. deposits below
100,000) would have a higher ranking than eligible deposits.
The bail-in tool can be applied to the liabilities of any EU financial institution,
financial holding company and parent financial holding company.
The bail-in tool would be subject to all liabilities apart from certain liabilities
that are permanently excluded from bail-in:
covered deposits (i.e. up to 100,000, any amount exceeding it can be subject to
bail-in)
secured liabilities including covered bonds, however, any unsecured part of a
secured liability is not exempt from bail-in (although covered bonds and cover
pool hedges may be exempted from this provision)
liabilities arising from holding client assets or client money, or a fiduciary
relationship
inter-bank liabilities with an original maturity of less than 7 days
liabilities arising from a participation in payment systems which have a
remaining maturity of less than 7 days
liabilities to employees of failing institutions, such as fixed salary and pension
benefits
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Sofie Peterzens
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[email protected]
commercial claims relating to goods and services critical for the daily functioning
of the institution
tax or social security claim
National resolution authorities would also have the power to exclude, or
partially exclude, liabilities on a discretionary basis for the following reasons:
if they cannot be bailed in within a reasonable time
to ensure continuity of critical functions
to avoid contagion
to avoid value destruction that would raise losses borne by other creditors
Resolution authorities would be able to compensate for the discretionary exclusion of
some liabilities by i) passing these losses on to other creditors, as long as no creditor
is worse off than under normal insolvency proceedings, or ii) through a contribution
by the resolution fund. The resolution fund may only make a contribution
provided that:
a minimum of 8% of total liabilities including own funds has been bailed-in
the contribution of the resolution financing arrangement does not exceed
5%. In special circumstances the resolution may seek further funding from
alternative funding sources if i) the 5% limit has been reached, or ii) if all bail-
inable debt (excluding eligible deposits) has been written down or converted in
full.
In addition to the above, the resolution fund can in a special circumstance make a
contribution if all of the below is met:
the loss absorption and recapitalization is >20% of RWAs, and
the ex-ante resolution fund has already reached at least 3% of covered deposits of
all credit institutions authorized in the country, and
the institution has <900bn of assets on a consolidated basis
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Sofie Peterzens
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[email protected]
The minimum bail-in requirement
To ensure that institutions always have sufficient loss-absorbing capacity, a
minimum requirement for own funds and eligible liabilities will be introduced. In the
Council proposal the minimum requirement is defined as a sufficient aggregate
amount of own funds and eligible liabilities (MREL) as a percentage of total
liabilities and own funds (excluding derivatives liabilities). Eligible liabilities, sub
debt and sub loans that do not qualify as Additional Tier 1 or Tier 2 capital are
included in own funds and eligible liabilities if, among other restrictions, the
remaining maturity is 1 year. The MREL may be partially met through
contractual bail-in instruments.
The minimum requirement is proposed to be determined by the appropriate
resolution authority on the basis of specific criteria, including:
loss-absorbing capacity
the size and business model
risk profile, including own funds
the extent to which a deposit guarantee scheme could contribute to resolution
potential impact on financial stability and contagion risk should the institution be
subject to failure
- The resolution authority may also decide to apply a minimum requirement for
subsidiaries. The Commission could recommend a harmonized MREL applicable to
all banks in 2016 at the earliest, if recommended by which is based on
recommendations by the European Banking Authority (EBA) in a proposed report on
MREL proposed to be completed by 31 Oct 2016.
JPMe bail-in calculation methodology and health warning
Whilst the Council has provided more detail around the scope of the bail-in tool (i.e.
a minimum of 8% of total liabilities must be bailed-in before resolution funds can be
used), no minimum requirement has been set and is unlikely to be proposed before
2016 at the earliest (post the EBA recommendations due 31 Oct 2016).
For the purpose of our bail-in calculation methodology, we assume on the basis
of the Council proposal:
Own funds and eligible liabilities: include Core Tier 1, Additional Tier 1 (AT1),
Tier 2 (T2)
2
, contractual bail-in instruments, subordinated debt >1 year (not
included in the T1 and T2 capital), and senior debt >1 year. We recognize that the
scope of bail-inable instruments could be wider in reality given that the unsecured
part of secured liabilities, corporate deposits, interbank debt >1 year etc are
included.
We assume depositor preference in our analysis - both for non-guaranteed deposit
and for Deposit Guarantee Funds. The assumed depositor preference is implicitly
defined in Article 98a (insolvency hierarchy) in the proposal from the EU
Council.

2
Please note that we have used the B3 definition for Core Equity Tier 1 and B2 definition for
Additional Tier 1 and Tier 2
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Total liabilities and own funds: include total liabilities and own funds, but
exclude all derivatives liabilities, in line with the proposed language for the
minimum requirement (Article 39). We note however that in the scope of the
bail-in tool (Article 38), there is no reference to exclusion of derivatives
liabilities.
Minimum requirement: with the EU Council proposing that a minimum of 8%
of total liabilities must be bailed-in before resolution funds can be used, we think
the minimum requirement could be set above 8%, given that the 8% of losses that
must be absorbed are measured prospectively from the point of resolution (i.e.
losses that have been absorbed prior to the resolution action do not count towards
the 8% min level of bail-in). Therefore, for the purpose of our calculations, we
assume that banks would need at least a 2% add-on to cover any future
losses that could occur prior to the point of resolution and hence set the min
bail-in requirement at 10%.
We note that FINMA has developed a resolution strategy for Switzerlands
global systemically important banks and this may not fully replicate the Council
proposal. However, for the purpose of like-for-like comparison across the
European Banking sector, we are running this exercise for both UBS and CSG
based on the Council of the European Union proposal.
Likelihood of bail-in: Capital and compliance with the preparation and
prevention tools should in theory reduce the probability of default, therefore we
use regulatory capital ratios as a first step to estimate the bail-in segment (high,
medium or low) as these take into account the riskiness of assets. In order to
estimate the probability of resolution leading to bail-in losses, i.e. the probability
that write-down powers are exercised on sub debt and senior debt because
resources lower down in the capital structure hierarchy have been fully written
off, we adjust the relative risk of bail-in for the surplus or deficit above Basel 3
equity tier one requirements, as shown below. Additionally, we take into
consideration asset quality (NPL ratio), as we believe this might be another factor
that debt investors take into consideration when assessing the likelihood of bail-in
of the issuer. We recognize however that NPL definitions vary across Europe,
which make NPLs in some cases not fully comparable, but we believe it gives a
general indication of the asset quality of the bank.
We consider any surplus in excess of 10% as low bail-in segmentation, any
surplus between 0%-10% as medium bail-in segmentation and any capital
shortfall as high bail-in segmentation. We also use asset quality as our second
criterion for determining the bail-in segmentation, as shown in Table 49.
Table 49: Assumption of likelihood of bail-in based on equity tier 1 and asset quality
Bail-in segment Based on B3ET1 Based on asset quality
High B3CET1 <minimum requirement NPL ratio>5%
Medium excess B3CET1 0-10% NPL ratio 2-5%
Low excess B3CET1 >10% NPL ratio< 2%
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 50: European Banks: Bail-in segment based on equity tier 1 and asset quality (Table 1 of 2)
CS UBS DB Lloyds RBS HSBC STAN SG BNPP CASA CBK UCG ISP
2015E Basel III CET1 ratio * 12.2% 16.4% 11.2% 13.0% 11.2% 10.7% 11.2% 11.4% 11.4% 9.5% 10.1% 10.6% 11.1%
Min requirement 10.0% 13.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 9.0% 9.0% 9.0%
% excess /deficit 22% 26% 12% 30% 12% 7% 12% 14% 14% -5% 12% 18% 23%
Bail-in segmentation on B3ET1 low low low low low med low low low high low low low
NPL ratios 2015E 0.7% 1.2% 2.4% 5.1% 9.1% 3.1% 2.0% 5.5% 5.9% 3.5% 6.1% 15.7% 14.1%
Bail-in segmentation low low med med med med med med med high med med med
Source: J.P. Morgan estimates. * Fully loaded
Table 51: European Banks: Bail-in segment based on equity tier 1 and asset quality (Table 2 of 2)
SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBC Ave
2015E Basel III CET1 ratio * 9.7% 10.1% 9.3% 8.9% 15.5% 15.0% 16.6% 17.1% 14.5% 12.8% 11.0% 9.3% 12.0%
Min requirement 9.0% 9.0% 9.0% 9.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.5% 10.0% 10.0% 10.6%
% excess /deficit 8% 12% 3% -1% 19% 15% 28% 32% 11% -5% 10% -7% 13%
Bail-in segmentation onB3ET1 med low med high low low low low low high med high
NPL ratios 2015E 4.6% 4.1% 10.1% 5.7% 2.0% 0.0% 0.0% 0.0% 5.5% 2.5% 8.8% 5.2% 4.9%
Bail-in segmentation med med high high low low low low med med high high
Source: J.P. Morgan estimates. * Fully loaded
Based on our required B3 ET1 and asset quality estimates, we see the deficits and
the highest debt writedown risks in KBC. Please note that KBC capital position is
calculated after deducting positive AFS reserves (c. 800mn by 15E) and including
penalty payments on remaining government capital
As we assume senior debt ranks below both guaranteed and non-guaranteed
deposits, it would be written-off first regardless of the size of the deposit cushion,
therefore the factors determining the additional risk pricing requirements
for senior bail-in debt are the liabilities held lower down in the hierarchy i.e.
equity then subordinated debt and then CoCos.
With bail-in introducing an expected loss given default/resolution, we would
expect this increased risk to be reflected in increased yield requirements for
both senior and subordinated outstanding debt (excluding CoCos and already
existing perpetuals).
The Cost of Bail-in
We assume that the cost of bail-in for banks is dependent on i) the absolute quantity
of own funds needed, ii) the incremental cost for increasing the level of own funds,
and iii) the additional funding cost premium of eligible bail-in liabilities.
i) We increase the costs for all remaining long-term senior unsecured debt
and sub debt (ex perpetuals and CoCos) with respect to bail-in. Only non-
equity tier one and tier two sub debt, which counts as regulatory capital and
where Basel has said there must be discretionary write-down permission
available to authorities (if a trigger event occurs effective from 2013), is
explicitly bail-in. We believe the risk of writedown is reflected to a greater
extent in sub debt than in senior debt. Therefore we expect the cost of sub
debt to increase, but to a lesser extent than the cost of senior debt i.e. we
would expect the sub vs. senior spread to narrow, with senior taking on more
sub characteristics.
74
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
ii) We assess the potential increase in costs for bail-in debt using four
methods, and apply the increase according to whether each bank has a higher,
medium or lower bail-in write-down risk.
a. the yield comparison between sub debt, senior unsecured debt
and CoCo yields
b. the case studies of Danish banks to see how the relative CDS
spreads developed with the two cases of Danish bail-in
c. the investor bail-in debt survey assessment from our Fixed
Income colleagues
d. estimating the yield pick-up from a higher loss given default
(LGD) factor (the recovery rates should in theory be lower
under bail-in than bail-out)
We have used the average of all four methodologies as our base case input figure, as
shown in the table below, and have assigned high, medium and low writedown risk
according to capital deficits/surplus over required B3 and asset quality levels (as
discussed earlier in this report). In addition, we assume 50% lower impact from bail-
in for banks operating in the UK and Denmark, where bail-in has already been
implemented as a resolution tool and banks have as a consequence already seen a
spread pick-up.
Given that subordinated debt provides loss-absorbing resources, while senior
unsecured debt generally doesnt in a non-bankruptcy scenario, we believe that the
bail-in premium for senior instruments should be higher than subordinated debt. For
the purpose of our analysis we assume that the sub spread increase is 70% of the
senior spread increase in line with our Fixed Income colleagues investor survey on
the impact of bail-in on funding costs (European Bank Bail-In Survey Results:
Investor Views on Bail-in Senior Debt and Basel III Subordinated Debt).
The outputs are summarized in the tables below, where we estimate a 170bp uplift
for high risk banks, 85bp for medium and 42bp for low risk banks for senior debt,
and a 119bp increase on sub debt for high risk banks, 59bp for medium and 30bp for
low risk names.
Table 52: Bail-in cost estimates under different scenarios
Implied increase in spread Senior in bp Implied increase in spreads Sub in bp
Base figure Low Medium High Base figure Low Medium High
Bail-in cost under yield comparison method 125 63 125 250 88 44 88 175
Bail-in cost under scenario Denmark 80 40 80 160 56 28 56 112
Bail-in cost under scenario Fixed Income investor survey 59 30 59 122 43 21 43 85
Bail-in cost under higher LGD assumption 74 37 74 148 52 26 52 104
Average 85 42 85 170 59 30 59 119
Source: J.P. Morgan estimates, Bloomberg. Notes: The high, medium and low bail-in segment categories refer to the relative likelihood of bail-in, depending on the strength of the equity resources
and asset quality. The High factor is 200% of the estimated impact, medium is 100% of the estimated impact and low is 50% of the estimated impact. Sub debt factor is 70% of the senior debt
factor.
For current cost of senior and sub
debt we use 5 yr CDS data, as we
believe the CDS give fair and
comparable costs for debt
issuance. We note that some
recent issuance have been inside
CDS spread levels, however in our
view these have mainly been more
reflective of smaller ticket or
private placement type activity
rather than real market pricing.
75
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
a) The yield comparison method
In our methodology we use the fact that CoCos already provide loss-absorbing
resources, while senior debt generally doesnt in a non-bankruptcy scenario.
Therefore the uplift in spreads to account for bail-in costs for senior
instruments should be lower than the uplift in spreads to account for conversion
options in CoCos, as CoCos should have greater conversion risk than bail-in
debt. However, with senior/sub debt being subject to increased writedown risk in
future, the sub/senior spreads should rise, as the spreads factor in higher LGDs.
Here we take our reference CoCo yields from existing CoCo issuances and look at
the issuances by CS, KBC, Lloyds, Rabobank and UBS as examples of instruments
in the market, although we note differences in terms of i) triggers for conversion,
ii) consequences for conversion (equity conversion, 100% write-off, partial write-
offs, conversion into shares), and iii) call options and step-up clauses. We note that
due to liquidity premiums, the yield at issue of currently issued CoCos is likely to be
technically inflated, suggesting that spreads would be lower if CoCos become a
larger and more liquid assets class.
The table below shows coupons at issuance and current yield for CoCos in
issues.
76
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 53: Selected CoCo issuances by European banks
Issuer
Year of
Issue Features Year of Maturity Value issued Yield on issue Trigger for conversion Consequence of conversion
Current
yield*
BBVA 2013 Tier 1 Notes Perpetual $1.5bn 9.00% to May 2018 thereafter
US SW5 +826.2bps
CET1 < 5.125%, CT1 < 7.0%, T1
< 6% and/or non-viability event
Mandatory conversion into new
shares
9.6%
CS 2011 Tier 2 Buffer Capital Notes 2041, redeemable
after 2016
$2.0bn 7.875%, reset every 5 years at
5yr $US MS + 522bps
Core Tier 1 < 7% Mandatory conversion into
ordinary shares
6.7%
CS 2012 Tier 1 Buffer Capital Notes 2022 CHF0.75bn 7.125% to Mar 2017 thereafter
US SW5 +668.5bps
Core Tier 1 < 7% Mandatory conversion into
ordinary shares
6.2%
CS 2013 Tier 2 Buffer Capital Notes 2023 $2.5bn 6.50% Core Tier 1 < 5% Write-down 6.4%
CS 2013 Tier 1 Perpetual CHF0.29bn 6.00% Core Tier 1 < 5.125% Mandatory conversion into
ordinary shares
5.9%
KBC 2013 Subordinated Contingent 2023 $1.0bn 8.00% Core Tier 1 < 7% Permanent write down to zero of
principal and accrued interest
8.0%
Lloyds 2009 Lloyds Enhanced Capital Notes 10, 12, 15 yr 7.5bn 8%-11% Core Tier 1 < 5% Conversion into new and/or
existing shares in Lloyds if CT1
falls <5%
n/a
Rabobank 2010 Senior Contingent Notes (not
convertible)
2020 1.25bn 6.875% Equity Capital Ratio < 7% Automatic and permanent 75%
write-down if trigger occurs
4.9%
Rabobank 2011 Hybrid Tier 1 Notes Perpetual $2.0bn 8.40% to Jun 2017 thereafter US
Treasury +749bps
Equity Capital Ratio < 5% Notes will absorb losses pro rata
with equity capital and other loss
absorbing instruments
7.9%
Rabobank 2011 Hybrid Tier 1 Notes Perpetual $2.0bn 8.375% to Jul 2016 thereafter US
Treasury +642.5bps
Equity Capital Ratio < 8% Cancel accrued unpaid interest
and write down
7.3%
UBS 2012 Tier 2 Notes 2022 $2.0bn 7.625% Core Tier 1 < 5% Write-down 6.2%
UBS 2012 Tier 2 Notes 2022 $2.0bn 7.25% to Feb 2017 thereafter US
SW5 +606.1bps
Core Tier 1 < 5% Write-down 6.5%
UBS 2013 Tier 2 Notes 2023 $1.5bn 4.75% to May 2018 thereafter
US SW5 +376.5bps
Core Tier 1 < 5% Write-down 5.6%
UCG 2010 Tier 1 Capital Notes Perpetual 0.5bn 9.375% fixed to July 2020
thereafter Euribor 3M + 749bps
Total Capital <6% or the prevailing
min requirement in Italy
Write-down 8.0%
Source: Bloomberg and company reports. *Bloomberg prices close of 2 Sept 2013.
77
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
We estimate parameters around the potential yield increase we would expect once
senior unsecured debt qualifies as bail-in debt, based on three principles
i) CoCos: CoCos already price in writedown risk by design and so should not
see increased premiums due to bail-in
ii) Sub debt: the sub bail-in premium should be 0 or greater as newly issued
regulatory qualifying capital must have bail-in qualities from Jan 2013
under Basel 3
iii) Senior unsecured debt: the senior bail-in premium should be greater than
0 as writedown powers are not yet generally applicable in a non-bankruptcy
scenario (i.e. LGD should go up)
The figure below and discussion in the comments illustrate a potential scenario.
In the figure below we would conclude that the maximum potential yield pick-up for
senior unsecured instruments from bail-in is equal to the CoCo senior unsecured
spread (in the example below: 12% - 3% = 9%) minus the CoCo Sub spread (in the
example below: 12% - 8% = 4%) i.e. 5% maximum pick-up from bail-in in this
example. In other words, we have assumed that the senior unsecured spreads could
potentially reach up to the level of the subordinated spreads.
Figure 6: Illustrative picture for comparative CoCo, Sub and senior unsecured issuance (same
maturity, currency, amount, call features etc.)
Source: J.P. Morgan.
Key conclusions on spreads
post bail-in
Senior increase (5%) will be
larger than sub increase (3%)
Senior + Senior-bail-in
premium (3%+5% = 8%)
should remain lower than Sub
+ Sub-bail-in premium
(8%+3% = 11%)
Sub + Sub-bail-in premium
(11%) should remain below
CoCos (12%) (written down
afterwards)
Spread between Sub and
Senior post bail-in (11%-8% =
3%) should decrease
compared to current spread
(8%-3%= 5%)
The maximum potential
Senior bail-in premium should
not exceed the difference
between the current CoCo-
Snr Unsecured spread (12% -
3% = 9%) and the current
CoCo-Sub spread (12%-8% =
4%) i.e. it should not exceed
5% otherwise the cost of
Senior Bail-inable debt
(3%+5% =8%) could exceed
the cost of Sub Bail-inable
(8%+x%) in a scenario where
there is no additional bail-in
premium paid for Sub debt.
78
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
For the purpose of comparing the spreads between CoCos, sub and senior issuances,
we have used the Z-Spread. The Z-Spread is the flat spread over the treasury
yield curve required in discounting the scheduled coupon at present market
price. The advantage of the Z-Spread is that is not dependent upon only one point on
the yield curve and takes account of all of the relevant term-structure. Should we
have used the yield-to maturity (YTM) instead, the spreads could be markedly
different depending on the coupon payment even if the bonds have the same cash
flow dates and maturity. This issue is eliminated using the Z-Spread. We however
highlight that the respective CoCo, sub and senior instruments i) are of different
amounts (we have tried to select benchmark issues only, where possible), ii) in some
instances have been issued in different currencies given the lack of comparable
instruments in the same currency, and iii) have slightly different maturities, which in
our view could account for part of the spread difference. Hence yield comparison
method is only a rough estimate.
Applying these principles to the issuances from CS, KBC, Lloyds, Rabobank and
UBS, we calculate a potential pick-up premium in the range of 90bp to 170bp and an
average pick-up of 125bps, as shown in Table 54.
Table 54: Selected European banks: CoCo, Senior and Sub Z spread comparison
Currency billion
Issuer Coupon %
Maturity
year Tenor Outstanding Currency YTM*
Z-
Spread*
CoCo Snr
Unsecured Z
spread
CoCo
Sub Z
spread
Maximum
spread pick
up
CS CoCo 7.125 2022 10 0.750 CHF 6.3% 4.4% 3.5% 2.6% 0.9%
Sub 5.400 2020 10 2.500 USD 4.0% 1.8%
Senior 4.375 2020 10 2.000 USD 3.4% 1.0%
KBC CoCo 8.000 2023 10 1.000 USD 8.1% 6.0% 5.1% 3.6% 1.5%
Sub 4.050 2020 15 1.450 SKK 4.3% 2.4%
Senior 4.600 2021 10 0.100 EUR 2.9% 0.9%
Lloyds CoCo 9.875 2023 14 0.057 GBP 8.0% 5.3% 3.9% 2.2% 1.7%
Sub 9.625 2023 30 0.300 GBP 5.9% 3.2%
Senior 7.500 2024 15 0.606 GBP 4.3% 1.5%
Rabobank CoCo 6.875 2020 10 1.250 EUR 4.9% 3.4% 2.7% 1.8% 1.0%
Sub 3.750 2020 10 1.000 EUR 3.2% 1.6%
Senior 4.125 2021 10 2.000 EUR 2.3% 0.7%
UBS CoCo 7.250 2022 10 2.000 USD 5.8% 4.2% 3.8% 2.8% 1.1%
Sub 4.500 2019 15 0.893 EUR 1.6% 1.4%
Senior 6.000 2018 10 1.500 EUR 1.7% 0.3%
Average 3.8% 2.6% 1.25%
Source: Bloomberg. * Bloomberg prices close of 9 Sept 2013.
b) Danish banks
Here we consider the CDS behavior of Danske Bank. There was a step-up in CDS
spreads on 1st October 2010 when Denmark enacted its bail-in laws as part of its
Bank Package 3, where unsecured creditors and depositors >100k bear the losses.
Looking at the performance of the 5yr senior CDS of Danske Bank and compared to
simple average of the 5yr senior CDS of Nordea, SEB, Svenska Handelsbanken and
Swedbank, we note a substantial change in their relationship. In 2H10, the spread
between these two measures has moved from an average of -9bp before October 1st
2010, to an average of +28bp after, a swing of almost 40bp (see Figure 7).
Z-Spread: The constant spread
that will make the price of a
security equal to the present value
of its cash flows when added to the
yield at each point on the spot rate
Treasury curve where a cash flow
is received. In other words, each
cash flow is discounted at the
appropriate Treasury spot rate plus
the Z-spread. In other words, the Z-
spread is the basis point spread
that would need to be added to the
implied spot yield curve such that
the discounted cash flows of a
bond are equal to its present value
(its current market price).
79
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Figure 7: Danskes 5yr senior vs. average 5yr senior CDS of Nordic peers and Danish bail-in events
bps
Source: Bloomberg.
Around the times of the Amagerbanken (Feb 2011) and Fjordbank Mors (Jun 2011)
bankruptcies, where senior creditors were subject to bail-in, there were further step-
ups in CDS levels, for example from 27
th
June to 29
th
June the CDS jumped from
126bps to 168bps then settled around 145-150bps, so a further 25bp to 40bp impact
from collapse of small banks representing <1% of domestic banking assets, adding
up to 65-80bps (i.e. 40bps initial move + 25-40bps additional impact) total impact
of bail-in for Danske. In terms of the losses suffered by bondholders, the initial
estimates of 41% haircuts were revised down to ~25% within a few quarters of the
defaults, and down to 16% for Amagerbanken and 14% for Fjordbank Mors as the
final loss.
It is worth noting that Bank Package 3 had a much greater impact on the smaller
Danish banks, effectively shutting many out of the funding markets and so after this
the Danish government introduced two additional support packages, the
Consolidation Package (Bank Package 4) and the Development Package (Bank
Package 5). Under the Consolidation Package the government encourages mergers
between a distressed bank and a non-distressed bank by providing state-guaranteed
funding and taking over the non-performing assets of the distressed bank. The
Development Package, which is designed to strengthen growth, support export
financing and provide credit to SMEs and the agricultural sector, has been used as a
means of transferring bad assets (e.g. for FIH where DKK16bn of commercial real
estate loans were the transferred to the government).
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3
Difference (bps) Danske Bank 5yr Snr CDS Average Nordic Peers 5 yr Snr CDS
Bank Package 3
introduced
Amagerbanken
failed
Fjordbank Mors
failed
Bank Package 4
introduced
Danske DKK7bn
capital increase
80
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Following Bank Package 3, the perceived implicit guarantees came under pressure
both in the case of small but also large banks, with the top credit rating of the Danish
sovereign remaining unchanged at the highest level. For example, Danske, the largest
bank in Denmark, experienced an increase in its secondary market yield spreads over
bonds from other banks from the region (Figure 8), even though the stand-alone
credit ratings of Danske as well as those of the three reference banks remained
unchanged (although Danskes all-in rating was lowered as a result of the credit
uplift compression). That said, Danske was also characterized by some important
weaknesses, such as exposure to Ireland and high asset impairment, and the removal
of the general state guarantee for bank liabilities implied that market participants paid
more attention to those weaknesses.
c) The bail-in survey conducted by our Fixed Income colleagues.
Here we look at our Fixed Income colleagues investor survey on the impact of bail-
in on funding costs. As detailed in the note, European Bank Bail-In Survey Results:
Investor Views on Bail-in Senior Debt and Basel III Subordinated Debt, the
respondents suggested an 85bps average increase for single A rated bank, of which
30% is already priced into the current market levels. Assuming an 85bps bail-in
premium and that 30% is already incorporated into the existing market levels would
imply that the senior spreads would have to widen a further 59bps for the bail-in
premium to be fully priced in. The results of the survey also indicated a greater
degree of divergence between covered and senior spreads as well as senior and
subordinated spreads, with respondents expecting an average covered/senior spread
of 0.30x and a senior/subordinated spread of 0.70x under a bail-in framework.
Additionally, the survey suggested that investors are becoming more demanding in
terms of the minimum capital requirements in order to invest in bail-inable senior
debt, with over 50% of the respondents requiring a 17% capital buffer, implying that
issuers would be incentivized to populate loss-absorbing buffers with subordinated
debt, which also in our view explains the greater divergence between senior and
subordinated spreads compared to previous surveys. The survey also suggested that
investors plan to maintain a reduced allocation to bank debt post bail-in, with the
caveat that it remained investment grade rather than high yield.
Table 55: Waterfall capital structure
hierarchy, based on Article 43 of
the EC Crisis Management
Directive Proposal
1st written
down
Common Equity
2nd AT1 and T2
3rd Subordinated debt
4th Senior Unsecured
4th Secured liab not fully
covered by collateral
5th Uncov. Deposits
6th Deposit Guar. Fund
Source: EC Crisis Mgt Directive Proposal, J.P.
Morgan
Note 1: Uncovered deposits and deposit
guarantee funds are also subject to bail-in, but
latest EC Directive proposals (19 June 2013)
suggests that they rank behind snr unsecured.
81
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
We note that the spreads have tightened since the previous Fixed Income survey in
July 2012 (European Bank Bail-In Survey Results: Investor Views on Bail-In Senior
Debt and Resolution Regimes) when respondents suggested an 117bp average
increase for single A rated bank, or 64% of the average spreads for a single A rated
bank at the time. At that time less than half believed that bail-in was priced in.
d) Estimating the bail-in premium by assuming an increase in the LGD
Our fourth calculation method for estimating the cost of bail-in is based on the
expected loss, probability of default and loss given default function. We would argue
that loss given default (LGD) should go up due to the resolution regimes (i.e. bail-in
vs. bail-out previously), while the probability of default (PD) could come down due
to improved regulatory requirements (Basel 3, LCR, NSFR etc). In other words,
although senior unsecured loss absorption could be higher in future in case of a
bank failure, banks should be less likely to fail given the tougher regulatory
environment.
While the overall PD would decrease in a bail-in environment where the authorities
have more tools to ensure the going concern nature of banks, the actual point of
default is no longer the reference point for the determination of losses for
bondholders and losses will occur at the point of regulatory intervention, known
as the point of non-viability, which would be more relevant for bondholders. It is
likely that regulators would intervene early if a banks ET1 ratio fell below the
regulatory minimum where a point of non-viability could be triggered. Although the
point of non-viability is less clearly defined than a default, we believe tougher capital
and liquidity requirements will counteract any increase in the PD from government
intervention. Hence, for the purpose of estimating the EL we assume that the PD
remains unchanged.
For the purpose of our analysis i) we assume that CDS reflects the expected loss
(EL), ii) the probability of default is based on the S&P rating
3
, iii) the loss given
default is the expected loss divided by probability of default, and iv) the LGDs rise
by 20% as a result of bail-in given that bail-out is removed. The 20% increase in
LGD is based on JPMs best estimate of the impact of the removal of the implied
government guarantee and could in reality be lower or higher. Using this formula we
arrive at an estimated 74bps cost for bail-in for senior unsecured instruments.

3
PDs are based on JPMe equity research best estimates: 0.02% PD for AAA & AA rating,
0.03% for A rating, 0.07% for BBB rating and 1.32% for BB rating.
Article 98a in EU Council
proposal from June 2013:
eligible deposits from natural
persons and micro, SMEs
shall have a higher priority
ranking than the claims of
ordinary unsecured, non-
preferred creditors;
covered deposits shall have a
higher priority ranking than
that part of eligible deposits
from natural persons and
micro, SMEs which exceeds
the coverage level;
the ranking of the deposit
guarantee scheme
subrogating to the rights and
obligations of covered
depositors in insolvency shall
correspond to the ranking of
covered deposits
liabilities to the EIB shall have
a higher priority ranking than
the claims of ordinary
unsecured, non-preferred
creditors
82
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 56: Estimated bail-in premium assuming 20% higher LGD
bps
5 yr snr
CDS* (EL)
(a) *
S&P long-term snr
foreign currency
rating (PD)
Implied S&P
LGD** (EL/PD)
LGD increase
due to bail-in
LGD
post
bail-in
Implied 5 yr snr CDS
due to higher LGD
(PD*LGD) (b)
Difference between
implied CDS and actual
CDS (b-a)
BBVA 265 BBB- 38% 20% 58% 405 140
BNP 120 A+ 40% 20% 60% 180 60
Caixabank 540 BBB- 77% 20% 97% 680 140
CASA 161 A 54% 20% 74% 221 60
Commerzbank 167 A- 56% 20% 76% 227 60
CS 100 A- 33% 20% 53% 160 60
Danske 119 A- 40% 20% 60% 179 60
Deutsche 110 A 37% 20% 57% 170 60
DNB 76 A+ 25% 20% 45% 136 60
Erste 149 A 50% 20% 70% 209 60
Handelsbanken 65 AA- 32% 20% 52% 105 40
HSBC 102 AA- 51% 20% 71% 142 40
Intesa 282 BBB 40% 20% 60% 422 140
KBC 161 A- 54% 20% 74% 221 60
Lloyds 74 A- 25% 20% 45% 134 60
Nordea 68 AA- 34% 20% 54% 108 40
RBS 165 A- 55% 20% 75% 225 60
Santander 249 BBB 36% 20% 56% 389 140
SEB 91 A+ 30% 20% 50% 151 60
Soc Gen 159 A 53% 20% 73% 219 60
Stan 140 A+ 47% 20% 67% 200 60
Swedbank 104 A+ 35% 20% 55% 164 60
UBS 90 A 30% 20% 50% 150 60
UCG 316 BBB 45% 20% 65% 456 140
Average 173 41% 20% 61% 235 74
Source: J.P. Morgan estimates and Bloomberg. *Bloomberg close prices as of 2 Sept 2013. **LGDs are based on JPMe estimates of PDs corresponding to respective rating class: 0.02% PD for
AAA & AA rating, 0.03% for A rating, 0.07% for BBB rating and 1.32% for BB rating.
Other examples of higher funding costs post bail-in
Whilst the EC impact assessment reduced the theoretical cost of funding with the
assumption that the no creditor worse off principle should reduce the theoretical
cost of bail-in by 50%, we do not apply this mitigant as this principle does not
guarantee lower losses than insolvency, and therefore we do not view it as
automatically value-enhancing.
Similar to Denmark, we believe that the removal of implicit government guarantee
may be better understood in the UK relative to other markets. The Banking (Special
Provisions) Act 2008 was passed in parliament on 21 February 2008 in order to
enable the UK Government to nationalize Northern Rock (22 Feb 2008). This Act
also allowed the Treasury to nationalize the mortgage and personal loan book of
Bradford and Bingley in September 2008. This Banking (Special Provisions) Act
2008 expired on 21 Feb 2009 when it was superseded by the Banking Act 2009.
Although there is by no means conclusive evidence of reduced implicit guarantee in
the UK post the Banking (Special Provisions) Act 2008, UK bank CDS spreads have
showed reduced correlation to UK sovereign CDS post February 2008. The table
below shows that the CDS spreads for the domestic UK banks were highly correlated
with the sovereign CDS spreads before the introduction of the Banking (Special
Provisions) Act 2008.
83
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 57: UK banks CDS coupled with sovereign pre 2008 financial crisis
start date 07 Apr 06 07 Apr 06 07 Apr 06
end date 21 Feb 08 21 Feb 08 21 Feb 08
R^2 0.91 0.94 0.93
Table 58: UK banks CDS less correlated with sovereign post 2008 removal of government
guarantee
start date 22 Feb 08 22 Feb 08 22 Feb 08
end date 9 Sept 13 9 Sept 13 9 Sept 13
R^2 0.23 0.15 0.20
Whilst bail-in so far has been used only as a resolution tool, we believe the
decoupling of the UK banks CDS spreads from the governments CDS suggests that
funding spreads could go up as a consequence. As shown in Figure 8, UK banks have
on average been trading at a ~30bps premium vs. Deutsche and BNP compared to a
2bps discount pre-bail-in. Hence, this is in our view an indication that markets have
yet to discount for the European proposal on resolution & recovery schemes,
including bail-in.
Figure 8: 5 year snr CDS of HSBC, Lloyds and RBS vs. the average 5yr snr CDS for Deutsche and
BNP
bps
Source: Bloomberg.
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Difference (bps) UK bank 5yr snr CDS ave DB & BNP 5yr snr CDS ave
Implicit government guarantee removed
84
11 September 2013
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
We also note the possibility for using our Fixed Income colleagues comparison of
the differential between existing Rabobank senior contingent notes (SCN; contingent
but not convertible) and plain vanilla senior unsecured from the same issuer with
similar maturity as there are similarities in risk profile of senior contingent notes
(SCN) and bail-in senior. Our Fixed Income colleagues conclude that for senior
instruments with a similar maturity and issuer risk, there is on average an
incremental risk premium of 345bp for the contingent features in their report The
$2.8 Trillion Question? Assessing The Impact of EU Resolution Regimes on Senior
Debt published on 23 March 2012. This would potentially represent a negative
read-across for the rest of the European banking sector given Rabobank is one of the
highest rated European banks (Aa2 by Moodys/AA- by S&P/AA by Fitch) with a
substantial buffer over the trigger level. For banks with weaker ratings/capital
buffers, this could imply a proportionally higher risk premium. Since the issuance,
the 345bp spread differential has narrowed to 254bps, but is still quite substantial in
absolute terms, representing a high 2.7x multiple of the matched maturity senior
CDS mid-level of 80bp. Despite the negative read-across for the bail-in premium we
highlight issues that should be taken into consideration and the reasons why we
exclude Rabobank from our bail-in valuations:
The senior contingent note (SCN) is the first of its kind and an illiquid
instrument; hence we do not believe it is a good comparison.
The trigger point is more clearly defined for the SCN than under the proposed
bail-in language.
We believe the 75% writedown could potentially be larger than in a bail-in
scenario given that investors have on average lost ~48% in the bank failures seen
since 2008.
Rabobanks subordinated debt issuances with similar maturity trade tighter than
the SCN. In our view there is an argument that the 75% initial loss for the SCN is
more junior than the senior part of an unsecured instrument, given that the SCN
will be immediately written-down to 25% of par when the trigger point is
reached.
Rabobank contingent issuances:
In Mar 2010 Rabobank issued a
1.25bn senior contingent note
("SCN") with a coupon of 6.875%.
The note is contingent, but not
convertible. If Rabobanks equity
capital ratio falls <7% before the
notes mature, the par amount and
unpaid coupons will be written
down by 75% and investors will
immediately be repaid at this
redemption price. Unless
previously redeemed or purchased
and cancelled, the SCN will be
redeemed at 100% of the principal
amount on in March 2020.
We would highlight that the
Rabobank issuance is unusual for
a number of reasons: i) Rabobank
is unlisted, ii) Rabobank is mutually
owned and therefore cant convert
bonds into equity, and iii)
Rabobank's current equity capital
ratio is 15.3%, providing a
substantial capital buffer before its
contingent debt can be written
down.
85
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
BASE CASE Impact on existing sub and senior debt if
with no replacement
With the EU Council proposing that a minimum of 8% of total liabilities must be
bailed-in before resolution funds can be used, we believe the minimum requirement
could be set above 8%, given that the 8% (of losses that must be absorbed before
bail-out) is measured prospectively from the point of resolution (i.e. losses that have
been absorbed prior to the resolution action do not count towards the 8% min level of
bail-in). Therefore we assume that banks would need at least a 2% add-on to
cover any future losses that could occur prior to the point of resolution and
hence set the JPMe min bail-in requirement at 10%.
In our first scenario we assume:
The JPMe minimum bail-in requirement of 10% of total liabilities excluding
derivatives is met by own funds and bail-inable liabilities
Any shortfall to the 10% minimum requirement is covered by subordinated debt,
as we believe it could be more difficult to issue senior bail-inable debt if the loss-
absorbing buffers are smaller. In our view institutions that have large parts of
senior instruments potentially excluded (e.g. short-term debt, customer deposits,
secured instruments and potentially derivatives), significant amounts of secured
instruments relative to senior unsecured and/or smaller own fund buffers could
potentially enforce higher losses on senior unsecured creditors in a bail-in
scenario, given that there is less senior unsecured funding available to cover the
losses.
The current yields on sub and senior unsecured debt equal the respective 5-year
CDS spreads.
The additional yield pick-up from bail-in equals 100% of our estimated increase
in sub debt and for senior unsecured debt, apart from the UK and Danish banks,
where we have assumed only a 50% yield pick-up given that bail-in has already
been implemented as resolution tool and banks have as a consequence already
seen a spread pick-up.
We do not see any sector deficit in terms of the absolute amount of bail-in
liabilities required although we note that BBVA has a deficit of 1% of liabilities,
with the bank needing to raise 4.1bn in eligible bail-in liabilities in order to comply
with a JPMe 10% minimum level. Additionally, Danske, SEB and Swedbank have
deficits of 1.2bn, 0.9bn and 0.9bn respectively equaling a ~0.3-0.4% of total
liabilities. Despite no sector deficit, we see the bail-in premium cost as a drag on
banks profitability. We estimate that bail-in will lead to JPM 2015e RoNAVs to
fall from 11.3% on average to 10.4% post bail-in.
The most impacted banks vs. JPMe earnings are CASA, Caixabank and CBK (2.7%,
2.1% and 1.7% RoNAV hits respectively) whilst the UK and Swiss banks are
relatively unimpacted (0.2-0.4% RoNAV hits respectively), reflecting the optimal
level of bail-in own funds and liabilities. We recognize that in our base case scenario
banks with large excess bail-inable funds get penalized, for example Handelsbanken
sees a 1.9% hit on RoNAV and 14% on PBT, given its large excess of bail-inable
liabilities (29% of total liabilities vs. 13% average). Note also that we have run the
exercise on CASA, although capital, leverage and bail-in requirements will apply to
Credit Agricole Group ,including the well capitalized Regional Banks, and hence,
actual impact could be much smaller in our view.
86
11 September 2013
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Swiss banks: UBS and CS are the least impacted from the proposed bail-in rules
with a 0.2% and 0.3% hit on RoNAV and 1% and 2% hit on PBT respectively in
2015e. We estimate RoNAV of 15.6% for UBS and 13.1% for CS post bail-in in
2015e. In our view this reflects the banks just right level of own funds and
bail-inable liabilities, which results in a relatively lower increase in existing
funding costs.
German banks: The impact from bail-in on DBK is in line with the sector
average with a 1.2% hit on RoNAV and 9% hit on PBT driven by the increase in
cost of existing senior debt. For CBK the impact is more dramatic, with a 1.7%
fall in RoNAV and 41% cut in PBT post bail-in. We estimate RoNAV of 11.3%
for DBK and 2.0%for CBK post bail-in in 2015e.
UK banks: Similar to the Swiss banks, the UK banks are relatively unaffected
from the proposed bail-in rules, with an average 0.3% hit on RoNAV and 2.7%
hit on PBT. We estimate a JPMe RoNAV of 12.3% for HSBC, 12.0% for Lloyds,
5.8% for RBS and 13.6% for Standard Charter post bail-in in 2015e.
French banks: The average impact from bail-in on the French banks is 1.5% hit
on RoNAV and 14% hit on PBT, with CASA seeing the biggest impact (2.7% hit
on RoNAV and 24% hit on PBT) reflecting a) the higher bail-in cost as a result of
the weaker capital position, and b) the high proportion of subordinated debt. Note
however that we have run the sensitivity scenario on CASA, although the
leverage, capital and bail-in requirements will apply to Credit Agricole Group,
including the well capitalized Regional Banks, and hence, actual impact could be
lower. Earnings impact is more limited for SG & BNP at -11% and -7%
respectively. We estimate a JPMe RoNAV of 8.8% for BNP, 8.4% for CASA and
7.5% for SocGen post bail-in 2015e.
Italian banks: We see a 17% PBT hit and 1.2% RoNAV hit for UCG from bail-
in, while the impact on Intesa is slightly smaller with a 13% reduction in PBT and
1.0% in RoNAV post bail-in. The earnings drag for UCG and ISP reflect to a
large extent their excess bail-in buffers (20% and 19% bail-in buffers to total
liabilities vs. 13% average for Eurobanks). We estimate a JPMe RoNAV of 6.3%
for ISP and 5.1% for UCG post bail-in in 2015e.
Spanish banks: Caixabank is the most impacted Spanish bank from bail-in
(2.0% hit on RoNAV and 37% hit on PBT), reflecting its large bail-in buffers,
while BBVA is the second most impacted Spanish bank given its 4.1bn bail-in
shortfall (0.8% hit on RoNAV and 7% hit on PBT). Santander is seeing only a
0.6% RoNAV and 4% PBT hit from bail-in. We estimate a JPMe RoNAV of
9.9% for Santander, 9.1% for BBVA, 8.4% for Popular and 4.6% for Caixabank
post bail-in in 2015e.
Nordic banks: We estimate that bail-in will lead on average to a 0.8% decline in
JPMe RoNAV to 13.0% and a 6% fall in PBT post bail-in in 2015e.
Handelsbanken is the most impacted Nordic bank from bail-in (1.9% RoNAV
and 14% PBT hit) given its large excess bail-in buffers (29% of total liabilities).
We estimate a JPMe 2015e RoNAV of 10.4% for Danske, 11.7% for DNB,
11.7% for Handelsbanken, 14.2% for Nordea, 12.9% for SEB and 17.0% for
Swedbank post bail-in in 2015e.
Erste and KBC: We estimate a JPMe RoNAV of 14.2% for Erste and 13.0% for
KBC post bail-in in 2015e. The two banks are seeing on average an 11% decline
in PBT and 1.9% fall in RoNAV post bail-in.
87
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 59: European Banks: BASE CASE Scenario - Impact on cost of funding due to bail-in increase on existing sub and senior debt (Table 1 of 2)
EUR million
Additional issuance requirement to meet 10% total liabilities (ex der) 0 0 0 0 0 0 0 0 0 0 0 0 0
Current yield on sub-debt 3% 3% 3% 4% 5% 3% 4% 4% 3% 4% 5% 6% 5%
additional yield from bail-in 0.3% 0.3% 0.6% 0.3% 0.3% 0.3% 0.3% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6%
Current yield on senior debt 2.4% 2.3% 2.5% 2.8% 3.1% 2.4% 2.8% 3.0% 2.6% 3.0% 3.1% 4.6% 4.2%
Increase in interest cost on current sub ex perpetuals and CoCos due to bailin
23 20 116 36 71 96 40 67 125 198

72 101 64
Increase in interest cost on senior debt due to bailin
107 88 751 150 276 236 70 592 667 889

463 861 601
Increase in interest cost due to additional sub debt issuance
- - - - - - - - - -

- - -
Total increase in interest cost on sub and senior
130 108 867 186 347 332 110 658 791 1,087

535 961 665
2015E Clean PBT 6,625 7,499 9,426 8,972 6,242 21,378 6,938 5,959 11,030 4,623 1,321 5,548 4,966
2015E Normalised PBT 6,635 7,423 9,563 8,854 6,432 21,223 6,492 6,705 12,238 5,244 1,321 5,976 5,324
Post bail-in clean 2015E PBT 6,495 7,391 8,559 8,787 5,895 21,046 6,828 5,300 10,238 3,536 786 4,587 4,301
Post bail-in normalised 2015E PBT 6,505 7,315 8,696 8,668 6,085 20,891 6,382 6,047 11,447 4,157 786 5,014 4,659
Impact on PBT from bail-in (%) -2% -1% -9% -2% -6% -2% -2% -11% -7% -24% -41% -17% -13%
Impact on normalised PBT from bail-in (%) -2% -1% -9% -2% -5% -2% -2% -10% -6% -21% -41% -16% -12%
RoNAV 2015E 13.4% 15.8% 12.4% 12.2% 6.2% 12.5% 13.8% 8.6% 9.6% 11.0% 3.7% 6.4% 7.3%
RoNAV 2015E post bailin 13.1% 15.6% 11.3% 12.0% 5.8% 12.3% 13.6% 7.5% 8.8% 8.4% 2.0% 5.1% 6.3%
RoNAV 2015E normalised (for loan losses) 13.4% 15.7% 12.6% 12.1% 6.4% 12.4% 12.9% 9.9% 10.8% 12.5% 3.7% 6.9% 7.8%
RoNAV normalised 2015E post bailin 13.1% 15.4% 11.5% 11.8% 6.0% 12.2% 12.7% 8.8% 10.0% 9.9% 2.0% 5.7% 6.8%
Net impact of bail-in in % points -0.3% -0.2% -1.2% -0.3% -0.4% -0.2% -0.2% -1.1% -0.8% -2.7% -1.7% -1.2% -1.0%
88
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 60: European Banks: BASE CASE Scenario - Impact on cost of funding due to bail-in increase on existing sub and senior debt (Table 2 of 2)
EUR million
SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBC Total/Average
Additional issuance requirement to meet 10% total liabilties (ex der) 0 4,060 0 0 0 947 877 0 1,203 0 0 0 7,088
Increase in interest cost on current sub ex perpetuals and CoCos due to bailin 75 55 49 11 17 6 5 5 17 13 57 53 1,390
Increase in interest cost on senior debt due to bailin 369 103 591 155 172 59 42 306 70 174 200 252 8,243
Increase in interest cost due to additional sub debt issuance - 234 - - - 33 30 - 46 - - - 342
Total increase in interest cost on sub and senior 444 393 640 166 189 98 77 310 132 187 257 304 9,975
2015E Clean PBT 10,072 5,306 1,722 1,308 5,333 2,139 2,395 2,192 2,686 3,194 2,320 2,584 141,779
2015E Normalised PBT 13,720 9,127 1,722 1,386 5,206 1,995 2,302 2,166 2,660 3,254 2,090 2,345 151,403
Post bail-in clean 2015E PBT 9,628 4,913 1,082 1,142 5,145 2,041 2,318 1,881 2,554 3,007 2,063 2,280 131,804
Post bail-in normalised 2015E PBT 13,276 8,734 1,082 1,221 5,017 1,896 2,225 1,856 2,527 3,067 1,833 2,041 141,428
RoNAV 2015E 10.5% 9.9% 6.7% 9.6% 14.8% 13.5% 17.6% 13.7% 10.9% 12.5% 16.2% 14.9% 11.3%
RoNAV 2015E post bailin 9.9% 9.1% 4.6% 8.4% 14.2% 12.9% 17.0% 11.7% 10.4% 11.7% 14.2% 13.0% 10.4%
RoNAV normalised 2015E post bailin 14.6% 17.2% 4.6% 9.0% 13.9% 12.0% 16.4% 11.6% 10.2% 12.0% 12.5% 11.4% 10.8%
89
11 September 2013
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Sofie Peterzens
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[email protected]
Sensitivity to base case scenario - Lower bail-in premium
for excess bail-inable senior debt
Not to discourage banks from holding excess bail-in liabilities, bond investors may
request a smaller bail-in premium for banks with excess bail-in buffers in our view.
We believe institutions that have large bail-in buffers, less secured instruments
relative to senior unsecured and/or large own fund buffers could potentially
enforce lower losses on senior unsecured creditors in a bail-in scenario, given
that there is more senior unsecured funding available to cover the losses. In
order to not penalize banks with large bail-inable buffers, we assume that the bail-in
premium for excess senior funding diminishes.
Specifically in this sensitivity we assume that Banks with excess bail-in liabilities
face a lower bail-in premium for their excess bail-in liabilities. Further we assume:
The JPMe minimum bail-in requirement of 10% of total liabilities excluding
derivatives is met by own funds and bail-inable liabilities
Any shortfall to the 10% minimum requirement is covered by subordinated debt,
as we believe it could be more difficult to issue senior bail-inable debt if the loss-
absorbing buffers are smaller.
CDS spreads.
in sub debt and for senior unsecured debt for all bail-inable liabilities up to 10%
to total liabilities, 50% for excess bail-in liabilities over the minimum 10% and
zero for excess bail-in liabilities over 20%. Moreover, for banks operating in the
UK and Denmark we have assumed only a 50% yield pick-up given that bail-in
has already been implemented as resolution tool and banks have as a consequence
already seen a spread pick-up.
As we show in the Table 61 and Table 62, we see an 8% average 2015e PBT hit and
0.8% RoNAV hit after assuming a lower bail-in premium for excess senior
unsecured debt. Overall we see the sector JPMe RoNAV of 11.3% pre-bail-in falling
to 10.5% post bail-in. Similar to our base case, the most impacted banks vs. JPMe
earnings are CBK, Caixabank and CASA (32%, 28% and 22% PBT hits
respectively) whilst UBS and Standard Chartered are relatively unimpacted (1% PBT
hits both). However, we note that the earnings drag on the banks with large excess
bail-in funds is smaller in the sensitivity analysis compared to our base case.
Swiss banks: The impact on UBS and CS is relatively limited, with an average
0.3% hit on RoNAV and 1.6% on PBT in 2015e, given the lack of significant
excess bail-inable debt. We estimate 2015e RoNAV of 15.6% for UBS and
13.1% for CS under this scenario.
German banks: Adjusting the bail-in premium for excess bail-in senior debt, we
see a 1.0% hit on DBs RoNAV and 8% hit on PBT. However, the impact on
CBK is more significant with a 1.3% reduction in RoNAV and 32% hit on PBT.
We estimate RoNAV of 11.5% for DBK and 1.3% for CBK post bail-in in 2015e
in the sensitivity analysis.
90
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UK banks: The impact on RoNAV is limited, averaging 0.2% and 2.2% for PBT
with RBS being the most impacted UK bank (0.3% RoNAV hit and 4% PBT hit).
Under this scenario we estimate a JPMe RoNAV of 12.3% for HSBC, 12.0% for
Lloyds, 5.9% for RBS and 13.7% for Standard Chartered post bail-in in 2015e.
French banks: The impact from bail-in is limited on BNP and SocGen (0.7%
and 1.0% hits on RoNAV respectively), while CASA is seeing a 2.5%hit on
RoNAV and 22% hit on PBT in our sensitivity analysis reflecting a) the higher
bail-in cost as a result of the weaker capital position, and b) the high proportion
of subordinated debt. Note however that we have run the sensitivity scenario on
CASA, although the leverage, capital and bail-in requirements will apply to
Credit Agricole Group, including the well capitalized Regional Banks, and hence,
actual impact could be lower. Earnings impact is more limited for SG & BNP at
-10% and -6% respectively. We estimate a JPMe RoNAV of 8.9% for BNP, 8.5%
for CASA and 7.6% for SocGen post bail-in 2015e.
Italian banks: UCG and Intesa are on average seeing a 10% hit on PBT and
0.7% hit on RoNAV post bail-in. In our sensitivity analysis we estimate a JPMe
RoNAV of 6.6% for ISP and 5.6% for UCG post bail-in in 2015e.
Spanish banks: In our sensitivity analysis Caixabank and Popular are the most
impacted Spanish banks, with a 1.5% and 1.1% hit on RoNAV respectively and
28% and 11% hit on PBT. The impact on Caixabank reflects its excess bail-in
buffers (loss-absorbing funds/total liabilities of 15% vs. 13% average for
Eurobanks and 10% average for its Spanish peers). In our sensitivity analysis we
estimate a JPMe RoNAV of 9.9% for Santander, 9.1% for BBVA, 8.6% for
Popular and 5.1% for Caixabank post bail-in in 2015e.
Nordic banks: The impact on the Nordic banks in our sensitivity analysis is
manageable, with an average 0.6% decline in JPMe 2015e RoNAV and 5%fall in
PBT post bail-in in 2015e. In our sensitivity analysis we estimate a JPMe
RoNAV of 10.4% for Danske, 11.9% for DNB, 12.5% for Handelsbanken, 14.3%
for Nordea, 12.9% for SEB, and 17.0% for Swedbank post bail-in in 2015e.
Erste and KBC: In our sensitivity analysis we estimate a JPMe RoNAV of
14.7% for Erste and 13.2% for KBC post bail-in in 2015e. The two banks are
seeing on average a 1.6% decline in RoNAV and 9% in PBT post bail-in in
2015e.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 61: European Banks: Sensitivity to base case - Impact on existing sub and senior debt with lesser impact on excess senior debt (Table 1 of 2)
EUR million
Additional sub debt issuance requirement to meet 10% net liab (ex der) 0 0 0 0 0 0 0 0 0 0 0 0 0
Excess senior debt after 10% requirement 1,220 6,163 36,122 8,952 45,703 53 11,770 18,871 26,656 10,706 26,355 82,415 54,647
Excess senior debt after 20% requirement 0 0 0 0 0 0 0 0 0 0 0 0 0
Increase in interest cost due to additional sub debt issuance - - - - - - - - - - - - -
Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 23 20 116 36 71 96 40 67 125 198 72 101 64
Increase in interest cost on senior debt due to bail-in 101 62 444 112 82 236 20 431 440 780 239 160 137
Increase in interest cost on excess senior debt due to bail-in 3 13 154 19 97 0 25 80 113 55 112 350 232
Total increase in interest cost on sub and senior 127 95 714 167 250 332 85 578 678 1,033 423 611 433
2015E Clean PBT 6,625 7,499 9,426 8,972 6,242 21,378 6,938 5,959 11,030 4,623 1,321 5,548 4,966
2015E Normalised PBT 6,635 7,423 9,563 8,854 6,432 21,223 6,492 6,705 12,238 5,244 1,321 5,976 5,324
RoNAV 2015E 13.4% 15.8% 12.4% 12.2% 6.2% 12.5% 13.8% 8.6% 9.6% 11.0% 3.7% 6.4% 7.3%
RoNAV 2015E post bail-in 13.1% 15.6% 11.5% 12.0% 5.9% 12.3% 13.7% 7.6% 8.9% 8.5% 2.3% 5.6% 6.6%
RoNAV normalised 2015E post bail-in 13.1% 15.5% 11.7% 11.8% 6.1% 12.2% 12.7% 8.9% 10.1% 10.0% 2.3% 6.1% 7.2%
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Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 62: European Banks: Sensitivity to base case - Impact on existing sub and senior debt with lesser impact on excess senior debt (Table 2 of 2)
EUR million
SAN BBVA Caixabank POP NDA SEB Swed SHB Danske DnB Erste KBC
Total/
Average
Additional sub debt issuance requirement to meet 10% net liab(ex der) 0 4,060 0 0 0 947 877 0 1,203 0 0 0 7,088
Excess senior debt after 10% requirement 1,406 0 19,011 2,734 16,049 0 0 56,342 0 10,312 7,454 4,372 447,312
Excess senior debt after 20% requirement 0 0 0 0 0 0 0 27,002 0 0 0 0 27,002
Increase in interest cost due to additional sub debt issuance - 234 - - - 33 30 - 46 - - - 342
Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 75 55 49 11 17 6 5 5 17 13 57 53 1,390
Increase in interest cost on senior debt due to bail-in 357 103 267 108 104 59 42 66 70 87 73 177 4,758
Increase in interest cost on excess senior debt due to bail-in 6 - 162 23 34 - - 120 - 44 63 37 1,742
Total increase in interest cost on sub and senior 438 393 478 142 155 98 77 191 132 143 194 267 8,232
2015E Clean PBT 10,072 5,306 1,722 1,308 5,333 2,139 2,395 2,192 2,686 3,194 2,320 2,584 141,779
2015E Normalised PBT 13,720 9,127 1,722 1,386 5,206 1,995 2,302 2,166 2,660 3,254 2,090 2,345 151,403
RoNAV 2015E 10.5% 9.9% 6.7% 9.6% 14.8% 13.5% 17.6% 13.7% 10.9% 12.5% 16.2% 14.9% 11.3%
RoNAV normalised 2015E post bail-in 14.6% 17.2% 5.1% 9.2% 14.0% 12.0% 16.4% 12.3% 10.2% 12.1% 13.0% 11.7% 11.0%
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BEAR CASE - Banks fulfill 10% requirement through own
funds to protect senior creditors
Whilst eligible bail-in liabilities and own funds can be used as part of the minimum
bail-in requirement, we think banks may be incentivized to cover the minimum or at
least a large part of the minimum with own funds (i.e. T1 and T2) to minimize the
increase in funding costs.
In our Bear Case we assume that the minimum bail-in requirement is 10% of total
liabilities (excluding derivatives) and that it will be fully covered by own funds
only. We believe the cost of senior unsecured instruments could be lower if the banks
regulatory capital base is relatively larger, which should absorb the first losses once the
bank reaches the point of non-viability. Therefore we think banks may be encouraged
by the funding markets to cover the minimum bail-in levels by own funds.
Assuming that equity and subordinated debt are wiped first in line with the waterfall
loss hierarchy, could potentially lead to a higher difference between sub and senior
recoveries than in the recent past given the larger regulatory capital buffer and could
be supportive of higher sub/senior ratios. Capital retention, equity capital raisings
and/or issuance of subordinated/hybrid debt could in our view be ways for banks to
mitigate the cost of bail-in debt, as it could potentially i) be a cheaper form of
funding for fast and profitably growing banks, ii) reduce the need for new senior debt
issuances, and iii) act as sufficient protection for senior unsecured debt holders not to
require a bail-in premium. For the purpose of our analysis we assume:
The JPMe minimum bail-in requirement is 10% of total liabilities excluding
derivatives.
Banks fulfill the 10% minimum through sub debt/own funds to protect senior
unsecured creditors. As a health warning we highlight that we have used the
Basel 3 definition for Core Equity Tier 1 and Basel 2 definition for Additional
Tier 1 and Tier 2.
Any shortfall to the JPMe 10% minimum requirement is met by issuing
sub/hybrid debt. Further we assume that any increase in sub debt/own funds
replace existing senior debt.
CDS spreads.
in sub debt, but we have assumed no increase in senior unsecured debt funding
costs, as we believe the increase in own funds would protect senior debt investors
from taking the first hit before the resolution fund steps in. Additionally, for
banks operating in the UK and Denmark, we have assumed only a 50% sub yield
pick-up given that bail-in has already been implemented as resolution tool and
banks have as a consequence already seen a spread pick-up.
In our bear case we see a sector deficit of 3.6% of total liabilities with no
European bank meeting the minimum with own funds. Standard Chartered, RBS
and Erste with 9.1%, 8.0% and 8.0% respectively of own funds to total liabilities are
best placed, while CASA with 4.4% and Handelsbanken with 4.7% of own funds to
total liabilities are in the weakest position. Although the Nordic banks are on a B3
Core Equity Tier 1 measure some of the best capitalized banks in Europe, on a bail-in
measure they stack up slightly below average with own funds to total liabilities
averaging 5.5% vs. a sector average of 6.4%.
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Assuming that the JPMe bail-in minimum of 10% is met by own funds (i.e. equity
and sub debt), but that any increase in subordinated/hybrid issues replace senior
funding, we see a 11% average PBT hit and 1.0% RoNAV hit in 2015e with the
sector JPMe RoNAV falling to 10.3% (from 11.3%). In this scenario we see the
biggest earnings drag on CASA, CBK and Caixabank (3.6%, 2.7% and 2.0%
RoNAV hits respectively), while the Swiss and UK banks are best placed to meet the
bail-in requirement with own funds.
Swiss banks: Limited impact on UBS and CS with their RoNAVs falling by only
0.3% and PBT by 2% in 2015e. We estimate a JPMe 2015e RoNAV of 15.5% for
UBS and 13.1% for CS post bail-in under this scenario.
German banks: Assuming that the 10% JPMe min bail-in level is met by own
funds and any subordinated issuances replace senior debt, we see a 2.7% cut in
RoNAV and 65% cut in PBT for CBK, while only a 1.1% hit on RoNAV and 8%
hit to PBT for Deutsche Bank. We estimate Deutsche Bank RoNAV to decline to
11.4% post bail-in in this scenario and 1.0% for CBK in 2015E.
UK banks: UK banks are well placed to meet the JPMe 10% bail-in requirement
with own funds with an average 0.4% hit on RoNAV and 4% hit on PBT
reflecting the banks relatively high level of own funds to total liabilities (average
of 7.9% vs. sector average of 6.4%). We estimate a JPMe RoNAV of 12.1% for
HSBC, 11.8% for Lloyds, 5.7% for RBS and 13.6% for Standard Chartered post
bail-in in 2015e.
French banks: With below sector average own funds to total liabilities of 5.3%
vs. 6.4% for the sector, the average impact on the French banks is a 1.9% hit on
RoNAV and 18% hit on PBT, with CASA seeing the biggest impact (3.6% hit on
RoNAV and 32% on PBT) reflecting a) the higher bail-in cost as a result of the
weaker capital position, and b) the high proportion of subordinated debt. Note
however that we have run the sensitivity scenario on CASA, although the
leverage, capital and bail-in requirements will apply to Credit Agricole Group,
including the well-capitalized Regional Banks, and hence, actual impact could be
lower. Earnings impact is more manageable for SG & BNP, with a 14% and 7%
hit respectively. We estimate a JPMe RoNAV of 8.8% for BNP, 7.4% for CASA
and 7.2% for SocGen post bail-in 2015e.
Italian banks: In our bear case scenario we see ISPs and UCGs RoNAV fall by
0.5% and 0.6% respectively and PBT by 7% and 8%, reflecting the banks
relatively high level of own funds to total liabilities (ISP 7.4% and UCG 7.7%).
Under this scenario we estimate a JPMe RoNAV of 6.7% for ISP and 5.8% for
UCG post bail-in in 2015e.
Spanish banks: With the Spanish banks having own funds to total liabilities of
6.2% on average, slightly below sector average of 6.4%, the average RoNAV
impact of -1.4% for the Spanish banks is manageable in our view. Assuming that
the JPMe 10% min. bail-in level is met by own funds, we see a JPMe RoNAV of
9.5% for Santander, 8.9% for BBVA, 8.2% for Popular and 4.7% for Caixabank
post bail-in in 2015e.
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Nordic banks: Whilst the Nordic banks have among the highest B3 ET1 ratios
across Europe, they score less well when it comes to own funds (equity and sub
debt) as % of total liabilities. The Nordic banks JPMe 2015e RoNAV falls on
average by 0.9% and PBT by 6% in 2015e, with SEB and Danske seeing the
largest RoNAV impacts (1.2% and 1.0% respectively). In our bear case we
estimate a JPMe RoNAV of 9.9% for Danske, 11.9% for DNB, 12.9% for
Handelsbanken, 14.1% for Nordea, 12.3% for SEB, and 16.7% for Swedbank
post bail-in.
Erste and KBC: If the JPMe 10% min bail-in level is met by own funds, Erstes
and KBCs JPMe 2015e RoNAV would fall by 1.2% and 1.5% respectively and
PBT by 7% and 9% respectively. We estimate a JPMe RoNAV post bail-in of
15.0% for Erste and 13.4% for KBC under this scenario.
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Sofie Peterzens
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[email protected]
Table 63: European Banks: BEAR CASE- Impact of funding cost if banks fulfill the 10% requirement through capital and sub debt and protect senior (Table 1 of 2)
EUR million
Total available loss absorbing liabilities incl senior debt (% of liabs ex der) 10% 11% 13% 11% 15% 10% 12% 12% 12% 11% 14% 20% 19%
Total available loss absorbing liabilities excl senior debt (% of liabs ex der) 6% 7% 6% 7% 8% 7% 9% 5% 6% 4% 6% 8% 7%
Add sub debt issuance requirement to meet 10% net liabilities (ex der) 23,840 14,525 52,198 26,364 19,211 55,424 4,630 50,719 51,750 76,463 28,095 18,825 16,094
Senior debt which gets replaced 23,793 14,497 52,198 26,527 19,330 55,146 4,606 50,719 51,750 76,463 28,095 18,825 16,094
Current yield on sub-debt 2.6% 2.8% 3.2% 3.7% 4.7% 3.0% 3.6% 3.9% 3.3% 3.9% 5.3% 5.9% 5.4%
additional yield from bail-in (sub-debt) 0.3% 0.3% 0.6% 0.3% 0.3% 0.3% 0.3% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6%
additional yield from bail-in (snr debt) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 23 20 116 36 71 96 40 67 125 198 72 101 64
Interest cost on new sub debt 680 446 1,980 1,051 958 1,815 182 2,281 2,036 3,565 1,650 1,226 970
Total increase in interest cost on sub (current +additional) 703 466 2,096 1,087 1,030 1,911 222 2,347 2,161 3,763 1,722 1,326 1,033
Interest savings from replacing senior debt 583 341 1,320 733 593 1,346 130 1,517 1,366 2,313 862 872 692
2015E Clean PBT 6,625 7,499 9,426 8,972 6,242 21,378 6,938 5,959 11,030 4,623 1,321 5,548 4,966
2015E Normalised PBT 6,635 7,423 9,563 8,854 6,432 21,223 6,492 6,705 12,238 5,244 1,321 5,976 5,324
Impact on clean PBT from bail-in (%) -2% -2% -8% -4% -7% -3% -1% -14% -7% -32% -65% -8% -7%
RoNAV 2015E 13.4% 15.8% 12.4% 12.2% 6.2% 12.5% 13.8% 8.6% 9.6% 11.0% 3.7% 6.4% 7.3%
RoNAV 2015E normalised post bail-in 13.1% 15.4% 11.6% 11.6% 5.9% 12.0% 12.7% 8.5% 10.0% 8.9% 0.9% 6.3% 7.3%
97
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Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 64: European Banks: BEAR CASE- Impact of funding cost if banks fulfill the 10% requirement through capital and sub debt and protect senior (Table 2 of 2)
EUR million
SAN BBVA Caixabank Popr NDA SEB Swed SHB Danske DnB Erste KBC
Total/
Average
Total available loss absorbing liabilities incl senior debt (% of liabs ex der) 10% 9% 15% 12% 13% 10% 10% 29% 10% 13% 13% 12% 13%
Total available loss absorbing liabilities excl senior debt (% of liabs ex der) 6% 7% 6% 6% 6% 5% 5% 5% 6% 7% 8% 6% 6%
Add sub debt issuance requirement to meet 10% net liabilities (ex der) 42,015 16,229 15,727 6,375 24,451 14,908 10,869 15,570 17,563 10,197 4,296 10,428 626,767
Senior debt which gets replaced 42,015 12,169 15,727 6,375 24,451 13,983 10,007 15,594 16,360 10,255 4,296 10,428 619,704
Current yield on sub-debt 5.0% 5.2% 5.9% 7.8% 2.7% 3.2% 3.1% 2.5% 3.5% 2.8% 4.0% 3.6% 4.0%
additional yield from bail-in (sub-debt) 0.6% 0.6% 1.2% 1.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.6% 1.2% 1.2% 0.6%
additional yield from bail-in (snr debt) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Increase in interest cost on current sub ex perpetuals & CoCos due to bail-in 75 55 49 11 17 6 5 5 17 13 57 53 1,390
Interest cost on new sub debt 2,344 936 1,107 571 733 515 369 434 667 344 225 505 27,589
Total increase in interest cost on sub (current +additional) 2,419 991 1,156 582 749 521 374 439 684 357 282 557 28,978
Interest savings from replacing senior debt 1,667 501 558 383 521 330 249 327 431 225 130 317 18,308
2015E Clean PBT 10,072 5,306 1,722 1,308 5,333 2,139 2,395 2,192 2,686 3,194 2,320 2,584 141,779
2015E Normalised PBT 13,720 9,127 1,722 1,386 5,206 1,995 2,302 2,166 2,660 3,254 2,090 2,345 151,403
Impact on clean PBT from bail-in (%) -8% -9% -36% -15% -5% -9% -5% -5% -10% -4% -7% -9% -11%
RoNAV 2015E 10.5% 9.9% 6.7% 9.6% 14.8% 13.5% 17.6% 13.7% 10.9% 12.5% 16.2% 14.9% 11.3%
RoNAV 2015E normalised post bail-in 14.2% 17.0% 4.7% 8.7% 13.7% 11.3% 16.0% 12.8% 9.7% 12.2% 13.3% 11.8% 10.8%
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Conclusions for 25 large cap EU banks in our analysis
We see bail-in reducing JPMe 2015e RoNAVs by 1%to 10.4% for the European
banks. The most impacted banks vs. JPMe earnings are CBK, Caixabank and
CASA (40%, 37% and 24% PBT hits respectively) whilst the Swiss and UK
banks are relatively unimpacted given their high levels of bail-inable own funds
and optimal levels of senior unsecured debt.
We do not see any sector deficit in terms of the absolute amount of bail-in
liabilities required although we note that BBVA has a deficit of 1% of
liabilities, with the bank needing to raise 4.1bn in eligible bail-in liabilities in order
to comply with a JPMe 10% minimum level. Additionally, Danske, SEB and
Swedbank have deficits of 1.2bn, 1.0bn and 0.9bn respectively, equaling a ~0.3-
0.4% of total liabilities. Despite no sector deficit, we see the bail-in premium cost as
a drag on banks profitability. We estimate that bail-in will lead to JPM 2015e
RoNAVs to fall by 1.0% from 11.3% on average to 10.4% post bail-in.
In our base case we see the lowest average impact on PBT post bail-in in
2015e for UBS, HSBC and Standard Chartered with a 1.4%, 1.5% and 1.6%
PBT hit respectively. Post bail-in in 2015e we see the JPMe RoNAV for UBS,
HSBC and Standard Chartered at 15.6%, 12.3% and 13.6% respectively.
We estimate that only CBK, Caixabank and CASA are likely to see a severe
earnings impact from bail-in, hurting their 2015 PBT by 40%, 37% and
24% respectively. This equates to an estimated post bail-in RoNAV of 2.0%,
4.6% and 8.4% respectively in 2015e for the three banks.
We realize that in our base case scenario banks with large excess bail-inable
funds get penalized, for example Handelsbanken sees a 1.9% RoNAV hit and
14% PBT hit, given its large excess of bail-inable liabilities (29% of total
liabilities vs. 13% average). We recognize institutions that have large bail-in
buffers, less secured instruments relative to senior unsecured and/or large
own fund buffers could potentially enforce lower losses on senior unsecured
creditors in a bail-in scenario, given that there is more senior unsecured
funding available to cover the losses.
Assuming a 50% lower bail-in premium for excess senior unsecured debt, we see
on average an 8%hit on 2015e PBT and 0.8% hit on RoNAV for the European
banks. Overall we see the sector JPMe RoNAV of 11.3% pre-bail-in falling to
10.5% post bail-in if we assume a lower bail-in premium for excess bail-inable
debt. In our sensitivity analysis the most impacted banks vs. JPMe earnings are
CBK, Caixabank and CASA (32%, 27% and 22% PBT hits respectively) whilst
Standard Chartered, UBS and HSBC are relatively unimpacted (1.2%, 1.2% and
1.5% hits on PBT respectively).
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Whilst eligible bail-in liabilities and own funds can be used as part of the
minimum bail-in requirement, we think banks may be pushed by the funding
markets to cover the minimum or at least a large part of the minimum with
own funds (i.e. T1 and T2) to minimize the increase in funding costs. We
believe the cost of senior unsecured instruments could be lower if the banks
regulatory capital base is relatively larger, which should absorb the first
losses once the bank reaches the point of non-viability. Assuming that the
JPMe bail-in minimum of 10% is met by own funds (i.e. T1 and T2) and any new
subordinated debt replaces existing senior debt, we see an 11% average PBT
earnings hit and 1.0% RoNAV hit in 2015e with the sector JPMe RoNAV falling
to 10.3% from 11.3%. In our bear case scenario the most impacted banks vs.
JPMe earnings are CASA, CBK and Caixabank (3.6%, 2.7% and 2.0% RoNAV
hits respectively), while Standard Chartered, UBS and HSBC remain relatively
unimpacted (0.2%, 0.3%and 0.4% RoNAV hits respectively).
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L
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V
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R
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Leverage ratio
The leverage ratio impact from Basels latest proposals from the 26 June 2013
consultation document is not as bad as feared by the market, although proposals
would lead to an 11% average increase in balance sheet. However, the revised
leverage rules could become more important than capital ratios and could impact IB-
related businesses such as long-dated credit derivatives, securitization, Delta 1 &
prime brokerage due to limited netting & recognition of collateral. The risk is that
certain business lines cannot be maintained, especially in FICC-geared IB, or the cost
of doing business becomes more expensive for the end-user.
Based on minimum3% leverage ratio, the great majority of banks would stand
above minimums end 2015e; however, banks will need to run with a buffer over the
minimum 3% in our view, and we view 3.5% as a more adequate level.
Compared to the 3.5% minimum, total shortfall would amount to 72bn in our
estimates, or banks would need to reduce assets by 2.1 trillion. Most exposed banks
would be: DB with 11.5bn shortfall, CBK with 7.3bn, CASA with 33.9bn (note
however that regulators focus on Credit Agricole Group solvency ratios rather than
CASA), whilst the best positioned banks are STAN with 6% Basel leverage ratio,
Erste Bank (5.4%), BBVA (4.8%) and SAN (4.7%).
We would be also concerned about local regulators imposing tougher or
additional requirements:
The UK PRAs (Prudential Regulation Authority) capital exercise
introduced a new PRA adjusted leverage ratio requirement of 3% for UK
listed banks. We believe that this is a highly punitive measure in the context of
global peers, with UK listed banks having to comply with stricter UK
requirements by 1H14 rather than 2018 or 2015. Note that this leverage ratio
requirement is not applicable to all the entities regulated by the PRA. UK PRA
Leverage ratio calculation methodology is also more challenging than the current
CRD4 Leverage ratio rules The denominator of the PRA Leverage ratio is same
as CRD4, however, the numerator is adjusted for additional provisions and future
conduct costs and only high trigger (fully loaded) CoCos are included in the
numerator. The adjustments to capital include
i) Additional provisions: Expected losses on commercial real estate and Euro-area
assets on a 3-year view instead of 1-year as required under IFRS, ii) Future
conduct costs: Potential litigation and redress costs that may evolve over the next
3 years and iii) Additional PVA (Prudent Valuation Adjustment) on top of PVA
adjustments already in the CET1 capital.
US regulators have proposed higher supplementary leverage ratio standards
for U.S. top tier bank holding companies (BHCs) - 5% for the BHC and 6%
for their Insured Depositary Institution (IDI) subsidiaries. The agencies
proposed a supplementary leverage ratio buffer of 2% for U.S. top-tier BHCs
with at least $700 billion in total consolidated assets or at least $10 trillion in
assets under custody, and a 3% buffer for all their IDI subsidiaries, taking the
supplementary leverage ratio requirement to 5% for the US top-tier BHC and 6%
for their IDI subsidiaries. Specific rules for US operations of foreign banks
remain unclear, with no further clarity on the Fed proposals for enhanced
supervision of foreign banks.
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We also warn that the rules are far from final, implementation long-dated, and
we make material assumptions, in particular on:
Netting of credit protection: The Basel Committee has proposed in the recent
Consultative Document on the revised leverage ratio framework that the sold
credit protection (written credit derivatives) are accounted for at full effective
notional value, unless the bank holds offsetting credit protection bought on the
same reference name with the same level of seniority. The rationale for this
adjustment is to show the full potential future loss in the event that the underlying
credit event is triggered on the underlying reference entity. In our base case
scenario we assume that 90% of the credit protection bought can be used to offset
against the credit protection sold. We recognize that this assumption could vary
from bank to bank and that the number could be lower or higher in some cases, as
some hedges might not qualify under the proposed Basel III leverage ratio
framework. Despite our assumption that 90% of the credit protection bought can
be used to offset against the credit protection sold, total derivative exposure (incl.
potential future exposure) is one of the key constituents of the new proposed
Basel 3 exposure measure (denominator) based on our estimates ranging from
-9% to 44% of the total exposure.
Basel leverage proposals punitive for repo transactions: In the Consultative
Document on the revised leverage ratio framework, the Basel Committee is
proposing that securities financing transactions are reported gross of collateral
with no recognition of accounting netting. This means that the revised guidance
on the leverage ratio is punitive for repo transactions as it does not allow for
netting of collateral or exposure (i.e. banks are not allowed to offset repos against
reverse repos). The rationale for this adjustment is to discourage banks from
rehypothecating assets. In our base case scenario, we assume that gross securities
financing transactions (SFT) match the reported on balance sheet number. We
recognize that this assumption could potentially underestimate the impact from
valuing SFTs at gross value and that the number could be higher in some cases,
given that netting of repos and reverse is currently allowed under IFRS and US
GAAP reporting. The inability of banks to offset repos against reverse repos
could increase the denominator of the leverage ratio by up to $6tr according to
JPMs Asset Allocation Research (Flows & Liquidity: Leverage ratios to hit repo
markets).
Basel 3 Leverage ratio framework based on the revised
consultation
The Basel Committee is proposing a 3% minimum leverage ratio for banks in its
latest Consultative Document on Leverage. With the revised leverage ratio
framework the Basel Committee aims to introduce a simple, transparent, non-
risk-based leverage ratio that doesnt take into account the riskiness of the
underlying assets, unlike the other proposed capital requirements that depend on the
inherent balance sheet risks. With the revised leverage ratio framework the Basel
Committee intends to create a level playing field for all banks worldwide, and has
noted it aims to:
restrict the build-up of leverage in the banking sector to avoid destabilising
deleveraging processes that can damage the broader financial system and the
economy and
reinforce the risk-based requirements with a simple, non-risk-based backstop
measure.
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Whilst the Basel Committee aims for a harmonized simple, transparent non-risk-
based leverage ratio, the accounting and exposure treatments are complex, in our
view. The leverage ratio is intended to force banks to hold the same amount of
capital against all loans, derivatives and securities financing transactions (without
recognizing most of the collateral), however, we believe it could decrease the
attractiveness of some collateralized businesses such as long-dated credit derivatives,
securitization, Delta 1, and prime brokerage for banks, which are likely materially
impacted under the revised leverage framework in the Consultative Document.
Although leverage is coming into increased focus following the Basel Committees
Consultative Document: Revised Basel III leverage ratio framework and disclosure
requirement from June 2013, it is not new. The leverage ratio was discussed by the
Basel Committee in the Basel III: A global regulatory framework for more resilient
banks and banking systems document from Dec 2010 (revised June 2011). The main
objective with introducing a leverage ratio is to strengthen global capital and
liquidity rules, as well as improve the banking sectors ability to absorb shocks
arising from financial and economic stress. We discuss the parameters of the
preceding version of the leverage ratio framework in the Global Investment Banks:
Can universal banking model survive the new wave of uncoordinated IB regulations?
OW Tier II IBs report from 11 Apr 2013 (pages 110 to 116).
Timing and Disclosure requirement of Revised Basel 3
Leverage Consultation Ratio
Under Basel 3, a leverage ratio will be used as a supplementary measure to the risk-
based framework. The ratio defined as Tier 1 capital to total exposure must be
at least 3% and would be calculated as an average over the fiscal quarter. The
Committee will test a minimum Tier 1 leverage ratio of 3% during the parallel run
period from 1 January 2013 to 1 January 2017. Banks need to disclose this ratio and
its components from 1 January 2013 to supervisors and will need to disclose publicly
starting 1 January 2015 and final rules will come into force from 2018.
The Basel Committee proposes in the Consultative Document that four items must be
publicly disclosed quarterly, irrespective of the frequency of financial statement
publication: i) the Basel III leverage ratio based on the average of the monthly
leverage ratios over the quarter, ii) end of the quarter Tier 1 capital (numerator), iii)
end of the quarter Exposure Measure (denominator), and iv) the end of quarter
leverage ratio. With the exception of the mandatory quarterly frequency requirement,
disclosures must be published by banks with the same frequency as, and concurrent
with, the publication of their financial statements.
Revised Basel 3 Leverage Consultation Ratio definition
The revised Basel 3 leverage consultation ratio is defined as Tier 1 capital to the
exposure measure. The minimum is proposed at 3% and the ratio would be
calculated as an average over the fiscal quarter as well as end of the quarter number.
The definition of the proposed leverage ratio framework is:
Capital Measure: Numerator of the leverage ratio would consist of only high quality
capital that is generally consistent with the Basel 3 Tier 1 capital (CET1 and
Additional Tier I capital).
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Exposure Measure: The exposure measure under the revised leverage framework in
the consultation paper is defined as the sum of a bank's:
a) on-balance sheet exposures
b) derivative exposures
c) securities financing transaction exposures (i.e. repos, securities lending &
borrowing)
d) other off-balance sheet exposures.
Whilst the general principles and off-balance sheet items related to
commitments remain broadly the same as in the preceding proposal, the major
change is in the calculation of derivative (especially credit derivatives) and repos
exposure. We list the key aspects of the Basel Committees Consultative Document
below:
specification of a broad scope of consolidation for the inclusion of exposures;
clarification of the general treatment of derivatives and related collateral;
enhanced treatment of written credit derivatives; and
enhanced treatment of Securities Financing Transactions (SFTs) (i.e., repos).
There is more clarity on the treatment of derivatives-related collateral in the revised
proposal; both written credit derivatives and gross repos are included in Exposure
Measure.
Treatment of derivatives the Consultative Document proposes that banks
calculate their derivatives exposures as the replacement cost (obtained by
marking-to-market) for the current exposure plus an add-on for potential future
credit exposure (PFE). Further, collateral received or provided (cash or non-
cash) cannot be used to offset the exposure, irrespective of whether it was
received or provided in relation to derivatives traded on an exchange, through a
central counterparty, or otherwise (under US GAAP derivatives are reported net
of collateral, while under IFRS derivatives are reported gross of collateral):
Derivatives Exposure: Total Exposure = replacement cost (RC) + add-on
Collateral received in connection with derivative contracts does not reduce the
economic leverage inherent in a banks derivatives position. In particular, the
exposure arising from the contract underlying is not reduced. As such, collateral
received (cash or non-cash) may not be netted against derivatives exposures
whether or not netting is permitted under the banks operative accounting or
risk-based framework. When calculating the exposure amount by applying
paragraphs 23 to 25 above, a bank must not reduce the exposure amount by
any collateral received from the counterparty. Furthermore, the replacement
cost (RC) must be grossed up by any collateral amount used to reduce its value,
including when collateral received by a bank has reduced the derivatives assets
reported on-balance sheet under its operative accounting framework.
Similarly, with regards to collateral provided, all banks must gross up their
Exposure Measure by the amount of any derivatives collateral provided where
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the provision of that collateral reduced their on-balance sheet assets under their
operative accounting framework.
Written credit derivatives the Consultative Document proposes that written
credit derivatives will be treated in the same way as cash instruments (e.g. loans
and bonds) and are to be included in the exposure measure at their effective
notional amounts. The effective notional amount of a written credit derivative
may be reduced by the effective notional amount of a purchased credit derivative
on the same reference name and level of seniority.
Treatment of Securities Financing Transactions (SFT) SFTs are transactions
such as repurchase agreements, reverse repurchase agreements, security lending
and borrowing, and margin lending transactions, where the value of the
transactions depends on market valuations and the transactions are often subject
to margin agreements. The Consultative Document proposes that SFT assets are
recognized at gross value for accounting purposes and hence does not give
any recognition of accounting netting of (cash) payables against (cash)
receivables (e.g. as currently permitted under the IFRS and US GAAP
accounting frameworks). Additionally, the SFT exposure measure now also
includes counterparty credit risk calculated as current exposure without an add-on
for potential future exposure for SFTs.
The key changes to the exposure definition are highlighted in box below.
Table 65: Leverage Ratio Common Disclosure Template
Item
Leverage Ratio
Framework
On-balance sheet exposures
1 On-balance sheet items (exclude derivatives and SFTs; include collateral)
2 (Assets deducted in determining Basel III Tier 1 capital)
3 Total on-balance sheet exposures (excluding derivatives and SFTs)
Derivative exposures
4 Replacement cost
5 Add-on amount
6 Gross up for derivatives collateral provided
7 Gross notional credit derivatives sold
8 (Notional offsets and add-on deductions for written credit derivatives)
9 Total derivative exposures
Securities financing transaction exposures
10 Gross SFT assets (with no recognition of accounting netting)
11 SFT counterparty exposure
12 Agent transaction exposures
13 Adjustment for sales accounting transactions (if any)
14 Total securities financing transaction exposures
Other off-balance sheet exposures
15 Off-balance sheet exposures with 100% credit conversion factors; of which:
15 a) for example, Commitments including liquidity facilities
...
16 Off-balance sheet exposures with 10% credit conversion factor; of which:
16 a) for example, Credit card lines
...
17 Other off-balance sheet exposures
Capital and Total Exposures
18 Tier 1 capital (end of reporting period value)
19 Total Exposures (end of reporting period value)
Leverage Ratios
20 End of period leverage ratio (end of reporting period value)
21 Basel III leverage ratio (avg. of the monthly leverage ratios over the quarter)
Source: BCBS
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JPMe Leverage ratio calculation methodology and Health
Warning
The Consultative Document on the Revised Basel III Leverage Ratio
Framework requires a health warning given the limited information available
for some of the items in the new Basel III leverage disclosure template. Our
assumptions are based on our best estimates and we recognize that the actual
reported numbers could differ from our estimates. Our key assumptions for our
Basel III leverage ratio are:
Consultation paper and not final version given that this is a Consultative
Document issued for comments by 20 Sept 2013, the document is subject to
changes and thus we believe the final leverage ratio framework could look
different from the framework proposed in this Consultative Document.
Minimum level - we assume that banks would need at least a JPMe 3.5%
leverage ratio by 2015e, including a 50bp buffer over the minimum 3.0%
regulatory requirement. We recognize that the minimum could be higher, with the
Dutch Finance Minister calling for a 4% leverage ratio minimum for SIFIs.
Disclosure not detailed enough to make accurate estimates whilst the Basel
Committee aims for a simple, transparent non-risk-based leverage ratio, some
of the details around the accounting and exposure treatments are complex, in our
view. With the Basel Committee proposing to revise the treatment of written
credit derivatives and securities financing transactions (SFT), we lack details,
especially on these line items and have therefore made assumptions that we
discuss in more detail below.
Accounting differences between different accounting standards the Basel
Committee aims with the revised leverage ratio to have a uniform measure to
calculate leverage for all banks worldwide, despite differences in accounting
standards used. This means that banks reporting under different accounting
standards could have different calculations depending on the accounting
treatment.
The insurance assets are not deducted from the total leverage exposure
measure: the Basel leverage ratio proposals are still unclear on the treatment of
insurance and do not make any mention of the specific treatment of insurance
capital under CRD IVs Danish Compromise. However, the proposals do state
that where a banking, insurance and financial investee is included in the
accounting consolidation where the investment by a bank in the capital of an
investee is included in the definition of Tier 1 capital of the bank, the investees
assets and its other exposures are to be included in the Exposure Measure of the
bank. This applies to investees that are inside the scope of regulatory
consolidation or inside the scope of accounting consolidation, irrespective of
whether these investees are banking, insurance, financial, commercial, or
securitisation investees. Our understanding is that, given that the insurance
capital is not deducted from Tier I capital for French banks which apply CRD
IV's Danish compromise, then insurance assets on their balance sheet are to be
included in the total leverage exposure for the calculation of the Basel 3 leverage
ratio. Note that implementation of Basel 3 could differ in the EU which could
introduce adjustments to the leverage rules, to address the treatment of insurance
under the Danish compromise. However, these are still early days, and at this
point, our analysis and estimates are based on the global Basel proposals.
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Intra-group exposures in order to avoid double counting of exposures
between consolidated entities, banks may offset the on- and off-balance sheet
exposures of consolidated entities to calculate the exposure measure. Intra-group
exposures are typically already consolidated under a banks accounting or
regulatory consolidation; therefore we have not made any adjustments for
potential intra-group exposure offsets. The Basel 3 leverage proposals do not
allow the netting of loans and deposits, and we understand that intragroup
exposures would also be included in the total leverage exposure measure.
Basel 3 Tier 1 Capital according to the Consultative Document, the numerator
of the leverage ratio would consist of Basel 3 Tier 1 capital (CET1 and AT1
capital). We include in our leverage calculation the Basel III common equity tier I
capital and Tier 1 notes issued by banks (incl. Tier 1 contingent capital) in the
capital measure wherever applicable (e.g. CSG). We understand that as the Basel
III T1 would be subject to transitional arrangements from 2013 to 2018, so
theoretically leverage ratios could be higher than our estimates, but we have not
included phased-in arrangements for capital in our leverage ratio calculation as
we look at capital on a fully loaded basis.
Gross amounts assumed with the Basel Committee focusing on the gross
amounts, we have used the gross derivatives (PRV) and SFT values as the basis
of our calculations.
Assumptions around the potential future exposure the potential future
exposure (PFE) is an add-on factor to the replacement value and should reflect
the potential future credit exposure that could arise from the derivative over the
remaining life of the contract. Some banks report this number, but others do not.
For the banks that dont report the PFE, we have calculated the number by
applying the add-on factor formula proposed by the Basel Committee.
The gross add-on (Agross) is calculated by applying a weighting factor to the
notional principal amount of the underlying book (Table 66). The net add-on is
defined as Anet = 0.4*Agross + 0.6*NGR*Agross where Agross is the gross add-on
and NGR = (net current replacement cost) / (gross replacement cost). All banks in
our analysis provide notional values of derivatives by products. For banks which
dont disclose the maturity breakdown or an estimate of Potential Future
Exposure on derivatives, we use BIS published aggregate data as a proxy.
Table 66: Basel Credit Conversion factors under the current exposure method
Within 1 year 1-5 years After 5 years
Interest rate products 0.0% 0.5% 1.5%
FX products 1.0% 5.0% 7.5%
Equity products 6.0% 8.0% 10.0%
Commodities* 8.5% 9.5% 11.5%
Precious metal except gold 7.0% 7.0% 8.0%
Other Commodities 10.0% 12.0% 15.0%
Source: Basel http://www.bis.org/publ/bcbs116.pdf., J.P. Morgan estimates. Note:* Assuming average of precious metal except gold
and other commodities
Bilateral regulatory counterparty netting in the Consultative Document the
Basel Committee proposes that derivatives exposure is calculated as the
replacement cost plus the PFE add-on minus regulatory bilateral netting. The
consultative document proposes that the netting rules from the Basel II
framework are used (except for cross product netting).
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Banks must calculate their derivatives exposures, including where a bank sells
protection using a credit derivative, as the replacement cost (RC) for the current
exposure plus an add-on for potential future exposure as described in paragraph
24 applying the regulatory bilateral netting rules
For the purpose of our estimates we have assumed that 90% of all
counterparty netting agreements are legally enforceable should a termination
event be triggered. We recognize that the netting benefit could in reality be higher
or lower, given cross product netting for example.
Different treatment of derivatives collateral under US GAAP and IFRS
The Basel opinion is that whilst collateral is used to mitigate credit risk, it does
not reduce the economic leverage in a banks derivates book. Our opinion,
however, differs from the Basel opinion. In our view, derivative and financing
positions that are mark-to-market on a daily basis should not be treated like an
accrual book and hence should be netted against collateral adjusted on a daily
basis. In addition, in our view capital should be used for unexpected losses and
not for gross notional exposures. However, the Basel Committee is proposing
that derivates should be accounted for gross of collateral. Under US GAAP
netting of derivative collateral is allowed, while IFRS does not give any
recognition of collateral. To adjust for this, the Basel Committee is proposing that
collateral received (cash or non-cash) may not be netted against the derivatives
exposure even if it is allowed under the prevailing accounting treatment. This
means that for banks reporting under US GAAP collateral received is added back,
while under IFRS no adjustment is needed (since IFRS does not allow for netting
of collateral against the exposure). Similarly, for collateral provided, banks have
to include any derivatives collateral that has been posted and subsequently
reduces the banks on-balance sheet items under the accounting framework.
Simply put, the Basel Committee aims for consistency and proposes that
derivatives exposure is reported excluding collateral (similar to a loan, which
is not netted against the value of underlying collateral/security) and any
collateral posted, which reduces the size of the on-balance sheet assets which
is included (i.e. restricts banks to reduce the size of the balance sheet by
posting more collateral).
Non-cash collateral provided (or posted) is not generally netted from a banks
assets under the accounting frameworks. However, cash collateral posted often
is netted, e.g. primarily under US GAAP. Generally, under IFRS, when a bank
with derivatives liabilities posts cash collateral, the decrease in its cash assets is
offset by a corresponding increase in receivables assets. As such, its total
accounting assets remain unchanged. Under US GAAP, which provides an
exception to the intent to settle on a net basis criterion, when a bank with
derivative liabilities posts cash collateral, the banks cash assets decrease and its
derivatives liabilities fall by a corresponding amount. Such banks must gross up
their Exposure Measure by the amount of the posted cash collateral. This
treatment is necessary to ensure a consistent policy treatment for reporting under
US GAAP and IFRS. Finally, under IFRS or under other accounting frameworks,
banks must gross-up their Exposure Measure by the amount of derivatives
collateral provided if the provision of derivatives collateral reduced their on-
balance sheet assets.
This means that we have adjusted the derivatives exposure for collateral for all
banks that report under US GAAP, while we have made no adjustment for banks
that report under IFRS.
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Gross amount of the credit protection sold the Basel Committee is proposing
in the Consultative Document that the sold credit protection (written credit
derivatives) are accounted for at full effective notional value, unless the bank
holds offsetting credit protection bought on the same reference name with the
same level of seniority. The rationale for this adjustment is to show the full
potential future loss in the event that the underlying credit event is triggered on
the underlying reference entity. For the purposes of our estimates, we have
assumed that 90% of the credit protection bought can be used to offset credit
protection sold. We recognize that this assumption could vary from bank to bank
and that the number could be lower or higher in some cases, as some hedges
might not qualify under the proposed Basel III leverage ratio framework.
Double counting of credit protection adjusted for since written credit
protection is included in the exposure at the notional amount and as an add-on for
derivatives, written credit derivatives could be double counted. We have therefore
deducted the individual add-on relating to a written credit derivative, in line with
the revised leverage ratio framework in the Consultative Document.
No accounting netting for securities financing transactions (SFT) in line
with the treatment of derivatives collateral, the Basel Committee is proposing in
the Consultative Document that securities financing transactions (repos, reverse
repos, securities financing and borrowing) are accounted for gross of collateral,
i.e. it should be viewed as a loan on a gross basis (instead of a securitized net
product). We use 100% gross exposures for SFTs for US banks; whereas for
banks which report under IFRS, we use the on balance sheet SFTs which may be
understated due to netting permitted under IFRS due to limited disclosure around
SFTs. JPMs Asset Allocation Research (Flows & Liquidity: Leverage ratios to
hit repo markets) estimates that the inability of banks to offset repos against
reverse repos could increase the denominator of the leverage ratio by up to $6tr.
Gross SFT assets recognised for accounting purposes should reflect no
recognition of the accounting netting of (cash) payables against (cash)
receivables (e.g. as currently permitted under the IFRS and US GAAP accounting
frameworks).
We note that the treatment of SFT under the revised leverage ratio framework in
the Basel Consultation document is more punitive than CRD 4 as it does not
allow netting of exposure and collateral in the exposure calculation (i.e. repos and
reverse repos can not be offset against each other with the same counterparty),
which is currently allowed under IFRS and US GAAP reporting.
Additionally, counterparty credit risk is to be included as a credit risk in the
Consultative Document. For the purpose of our calculations we have assumed
that the counterparty credit risk is 5% of the gross SFT assets. The low credit
risk reflects the collateralized and short-dated nature of SFT transactions
(generally <6 months with collateral haircuts, hence the counterparty risk should
be relatively low).
Sale accounting transactions and bank acting as agent with no disclosure
available on sale accounting or agent SFT transactions, we have assumed zero
impact from these two items for the purpose of our estimates. We recognize that
they are unlikely to be zero in reality, but these items are likely to have a limited
impact on the leverage ratio in our view.
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Other deductions from the leverage exposure measure: To ensure the
consistency of the leverage ratio, the exposure measure should be measured
consistently with capital with respect to deductions from capital, e.g. goodwill
and intangibles deducted from Basel 3 Tier I capital are also deducted from the
leverage exposure. Similarly, DTAs and financial stakes are also deducted from
the leverage exposure measure, to the extent that they are deducted from Basel 3
capital.
Asset reduction plans included in our leverage ratio calculations - We include
the asset reduction plans outlined by the banks by FY15E in our leverage ratio
calculations. We dont include the asset reductions for the banks which have not
outlined asset reduction targets. We include $520bn (SF493bn) asset reduction
for UBS, $72bn asset reduction for CSG, $75bn asset reduction for DB and $6bn
for SG by FY15E in our leverage ratio calculation.
Conclusions from our Basel 3 leverage ratio analysis based
on revised consultation
We see that the 3% leverage ratio requirement under the new Basel III is
manageable for most of banks in our coverage by 2015E. The table overleaf
shows our leverage ratio estimates for European banks and US IBs based on the
revised proposals outlined in the recent Basel consultation in FY15E Basel 3 capital
forecast. In respect to balance sheet data, we use the latest data available (end Dec
2012 or June 2013). We adjust assets for asset reduction plans.
Based on 3.5% minimum however, we estimate 72bn shortfall for banks in our
coverage, equivalent to 9% additional Tier I issuance required. Alternatively, banks
would have to reduce 2.1 trillion of assets, or 6% of total exposures.
We estimate that STAN, Erste Bank, BBVA, Santander, DNB and HSBC
will have the highest Basel leverage ratios by end 2015e, with 6.0%, 5.4%,
4.8%, 4.7%, 4.5% and 4.5% respectively without any asset reductions.
Lloyds also has relatively high Basel leverage ratios, reaching 4.5%on our
estimates, however, it is based on material asset reduction plans of 50bn.
We estimate that only DB, CBK and CASA are likely to have significant
leverage ratio shortfalls in FY15E with an estimated B3 Tier 1 leverage ratio
of 2.8%, 2.6%, and 1.7% respectively. This equates to an estimated 11.5bn,
7.3bn and 33.9bn capital shortfall, equivalent to over 50% of their Tier I capital
base.
Socit Gnrale and BNP Paribas Basel leverage ratios stand at 3.0% and
3.3% respectively end 2015e in our estimates, slightly short of the minimum
3.5%. Implied capital shortfall would also be significant, amounting to 6.6bn for
SG and 4.3bn for BNPP or asset reduction required would be 189bn and
123bn respectively. Note that for SG, We have included the $1.25bn Tier I
cocos issued end Aug 2013.
Credit Suisse Basel leverage ratio stands at 3% end 2015e, including Additional
Tier 1 capital issued or in place to be issued by CSG. Excluding the additional
Tier 1 capital, CS Basel leverage ratio would stand at 2.6% end 2015e. Total
shortfall to reach our potential target of 3.5% would amount to 5.5bn or 17% of
Tier I capital base.
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For CASA, we have estimated 1.7% Basel leverage ratio for the listed entity,
however, we note that the regulator looks at Credit Agricole Group instead, and
the 3% minimum requirement will likely only be required for Credit Agricole
Group in our view. Credit Agricole Group Basel leverage stands at 3.3% in our
2015e estimates; however, investors and shareholders will likely focus on
CASA's 1.7% Basel leverage. We estimate that the minimum 3% could be
achieved by end 2017e, through retained earnings, unwinding 267bn of
intragroup exposures, issuing 7.3bn of Tier I hybrids/cocos and reducing assets
by 100bn, with limited impact on EPS. To improve CASA Basel leverage
earlier, by end 2015e, CASA could consider several mitigation initiatives:
1) issue additional Basel 3 Tier I cocos/hybrids; or 2) raise equity and issue
additional Basel 3 Tier I cocos/hybrids; or 3) sell the insurance business to the
Regional Banks, unwind the intragroup exposures and exit capital markets. As
discussed in our note Credit Agricole: high cost of equity on Basel leverage
uncertainties on 29 July 2013, EPS dilution in these scenarios could however be
significant, up to estimated 19%, and execution risk would be high with many
practical issues in our view.
For Deutsche Bank, we estimate 2.8% Basel leverage ratio end 2015e, implying
11.5bn capital shortfall or 329bn asset reduction to reach our minimum target
of 3.5%. DBK with its Q2 conference call provided a glide path to meet CRD 4
leverage ratio requirements through asset reductions on balance sheet as well as
reduction in CRD 4 gross up. However, we believe investor focus is on Basel
consultation on leverage in June as well as FDIC leverage ratio proposals in the
US. Basel consultation proposals are much more punitive on the denominator of
the leverage ratio than CRD 4 and we estimate DB to reach Basel leverage ratio
of 2.8% by 2015E on a fully loaded Basel 3 common equity T1 capital basis. In
order to meet our 3.5% minimum by 2015E, DB in our estimates needs 11.5bn
in Basel 3 compliant additional T1 capital on top of the 250bn in planned
exposure reduction. DBK has indicated that it plans to comply with CRD 4
requirements through reduction in balance sheet assets of 80bn-130bn and
reduction in CRD 4 gross up of 120bn-170bn. The key components of 80bn-
130bn balance sheet asset reduction as indicated by DB are: a) NCOU de-risking,
b) Optimization of collateral management, c) Review level of trading inventory,
d) Review of cash and liquidity pool, and e) Portfolio measures. DBK on the Q2
conference call indicated 300mn (c.3% of JPM 2015E PBT) in estimated
negative PBT impact from the use of the leverage toolbox. However, the indirect
impact on franchise earnings from these measures is still uncertain in our view.
The key components of measures to reduce CRD 4 gross up by 120bn-170bn as
indicated by DB are: i) Clearing house netting, ii) Tear-ups / trade compression,
iii) Review of unutilized lending commitments.
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Morgan Stanley, with a Basel leverage ratio of 3.2%, would also be short of our
3.5% minimum, and the shortfall of 3bn would be equivalent to 8% of Tier I
capital base. Note also that US requirements for leverage could be higher, with
US agencies proposing 5% minimum supplementary leverage for US SIFIs.
Based on the U.S. Proposed Supplementary Leverage ratio, MS indicated that the
pro-forma Supplementary Leverage ratio of Holding Company was c.4.2% at
June 30, 2013 and it has a clear path to meet the 5% ratio requirement in 2015.
The key components of this path would be focused on the denominator, with
RWA reductions as well as exposure reduction through compression of offsetting
bilateral trades as well as benefits from central clearing.
Total derivative exposure (incl. potential future exposure) is one of the key
constituents of the revised Basel 3 exposure measure (denominator),
contributing up to 40% to the exposure measure. Amongst the banks in our
analysis, GS has the biggest absolute derivative exposure, followed by BNP and
DB based on our estimates. However, as a % of total exposure measure, GS, UBS
and MS derivative exposure contribute 40%, 36% and 33% to the asset base
respectively.
Reverse repos and SFTs contribute up to 25% to the exposure measure
based on our estimate, with GS and MS reverse repos and SFTs contributing
23% and 25% to the asset base (exposure measure).
We include SF342bn asset reduction for UBS, SF78bn asset reduction for
CSG, 250bn asset reduction for DB, 65bn for RBS and 50bn for Lloyds
by FY15E in our leverage ratio calculation.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 67: JPMe Leverage ratio calculations based on new Basel proposal guidelines - (1/3)
EUR million
CSG UBS DB Lloyds RBS HSBC STAN Socgen BNPP
Balance sheet as at Q2 13 Q2 13 Q2 13 H113 H113 H113 Q2 13 Q2 13 Q2 13
On-balance sheet items: 746,133 915,789 1,909,879 1,032,144 1,431,745 2,005,150 503,167 1,254,082 1,861,338
exclude derivatives -31,828 -269,082 -635,866 -51,138 -439,910 -226,803 -41,347 -189,270 -344,848
exclude Securities Financing Transactions -140,648 -81,269 -161,350 -3,335 -116,876 -159,241 -7,535 -57,570 -159,670
Assets deducted in determining Basel III Tier 1 capital -7,371 -7,017 -5,149 -111,975 -4,709 -72,036 -6,691 -8,900 -14,700
Total on-balance sheet exposures (excluding derivatives and SFTs) 566,286 558,421 1,107,514 865,696 870,250 1,547,069 447,594 998,342 1,342,120
Replacement cost 31,828 269,082 586,581 51,138 429,062 226,803 41,347 177,603 321,510
Counterparty netting 62,195 -200,793 -532,903 -30,655 -326,693 -173,331 -22,421 -152,343 -276,073
Add-on amount 154,790 118,223 255,360 27,681 175,403 116,810 14,235 81,055 270,448
Gross up for derivatives collateral provided 48,355 0 0 0 0
Gross notional credit derivatives sold 663,561 861,074 1,274,960 3,630 267,224 305,573 21,867 269,345 1,052,751
Notional offsets and add-on deductions for written credit derivatives -639,690 -793,039 -1,212,632 -3,267 -240,502 -275,015 -19,680 -242,410 -947,475
Total derivative exposures 321,038 254,547 371,366 48,526 304,495 200,840 35,348 133,249 421,160
Gross SFT assets (with no recognition of accounting netting) 140,648 81,269 161,350 3,335 182,148 226,534 7,535 57,570 159,670
SFT counterparty exposure 0 0 0 0
Total securities financing transaction exposures 147,680 85,332 169,418 3,502 191,256 237,861 7,912 60,449 167,654
Other off-balance sheet exposures 110,877 80,799 202,570 95,480 223,668 506,931 96,948 190,156 276,800
Total exposures 1,145,882 979,099 1,850,868 1,013,205 1,589,668 2,492,700 587,802 1,382,196 2,207,734
Total asset reduction by 2015E -63,172 -277,396 -250,000 -58,860 -76,518 0 0 3,386
Total exposure post asset reduction 1,082,710 701,703 1,600,868 954,345 1,513,150 2,492,700 587,802 1,385,582 2,207,734
2015E Basel 3 Common equity T1 capital (fully loaded) 27,976 28,431 44,506 42,586 53,955 111,987 35,252 40,946 72,974
Current Additional Tier 1 outstanding 1,298 0 0 0 0 0 0 0 0
Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 4,380 0 0 0 0 0 0 944 0
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32,356 28,431 44,506 42,586 53,955 111,987 35,252 41,890 72,974
2015E Leverage ratio (B3CET1) post asset reduction 2.6% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3%
2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3%
To reach 3.5% leverage ratio (B3ET1+AT1 fully loaded)
Total additional exposure reduction required (in mn) 158,251 - 329,266 - - - - 188,726 122,772
Further total exposure reduction required (%) 15% 0% 21% 0% 0% 0% 0% 14% 6%
Total additional tier 1 issuance required (mn) 5,539 - 11,524 - - - - 6,605 4,297
Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 0% 0% 16% 6%
BCNs. **We do not include loss absorbing capital of SF4.2bn issued by UBS or any potential further CoCo issuance by UBS in our analysis. UBS - Total asset reduction target of SF493bn at 2012 year end, split as SF400bn in Corporate Center Non-core, SF38bn
Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn. CASA: the leverage ratio is for CASA
the listed entity, and the ratio has not been adjusted for insurance and not adjusted for intragroup exposures either (text unclear); note however that the regulator looks at Credit Agricole group rather than CASA. SG: includes $1.25bn of Tier I cocos issued in Aug
2013.
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[email protected]
million
CASA CBK UCI ISP SAN BBVA Caixabank POP Nordea
Balance sheet as at Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13
On-balance sheet items: 1,784,905 636,963 889,632 647,785 1,223,118 618,503 350,989 160,297 621,896
exclude Securities Financing Transactions -82,642 -128,955 -48,921 -23,609 -34,128 -10,377 -39 -6,311 -47,367
Assets deducted in determining Basel III Tier 1 capital -17,100 -5,553 -3,481 -2,100 -22,559 -13,073 -11,371 -2,217 -3,684
Total on-balance sheet exposures (excluding derivatives and SFTs) 1,357,466 422,413 777,467 565,456 1,074,994 546,331 332,089 149,967 491,970
Replacement cost 316,701 196,665 118,479 54,940 166,149 53,616 7,490 1,801 137,303
Counterparty netting -263,427 -100,958 -66,467 -30,113 -94,129 -43,783 0 0 -59,990
Add-on amount 57,776 45,172 1,026 1,503 2,049 21,154 0 0 54,796
Gross up for derivatives collateral provided 0 0 0 0 0 0 0 0
Gross notional credit derivatives sold 538,137 34,317 70,365 77,513 478 23,969 0 0 25,350
Notional offsets and add-on deductions for written credit derivatives -484,323 -30,885 47,734 70,114 -430 -21,330 0 0 -22,815
Total derivative exposures 164,863 144,312 171,137 173,957 74,116 33,626 7,490 1,801 134,644
Gross SFT assets (with no recognition of accounting netting) 82,642 128,955 48,921 23,609 34,128 10,377 39 6,311 47,367
SFT counterparty exposure 0 0 0 0 0 0 0 0 0
Total securities financing transaction exposures 86,774 135,403 51,367 24,789 35,834 10,896 41 6,627 49,735
Total exposures 1,896,593 788,495 1,088,417 820,156 1,233,831 723,491 403,893 183,057 782,268
Total asset reduction by 2015E 0 60,000 -800 0 0 0 0 0 -5,608
Total exposure post asset reduction 1,896,593 848,495 1,087,617 820,156 1,233,831 723,491 403,893 183,057 776,660
Current Additional Tier 1 outstanding 0 0 0 2,544 0 1,139 0 0 0
Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 0 0 0 0 0 0 0 0 0
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32,491 22,395 47,099 34,988 58,229 34,940 15,217 7,417 25,851
2015E Leverage ratio (B3CET1) post asset reduction 1.7% 2.6% 4.3% 4.3% 4.7% 4.8% 3.8% 4.1% 3.3%
2015E Leverage ratio (B3CET1+AT1) post asset reduction 1.7% 2.6% 4.3% 4.3% 4.7% 4.8% 3.8% 4.1% 3.3%
Total additional exposure reduction required (in mn) 968,288 208,647 - - - - - - 38,053
Further total exposure reduction required (%) 51% 25% 0% 0% 0% 0% 0% 0% 5%
Total additional tier 1 issuance required (mn) 33,890 7,303 - - - - - - 1,332
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[email protected]
million
SEB SWED SHB Danske DNB Erste KBC GS MS
Average ex
GS & MS
Balance sheet as at Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13 Q2 13
On-balance sheet items: 298,005 216,833 274,312 444,824 314,342 210,201 253,297 706,188 604,025
exclude Securities Financing Transactions -14,592 -7,316 -7,721 -45,388 -6,925 -2,016 -12,745 -246,885 -204,385
Assets deducted in determining Basel III Tier 1 capital -983 -1,566 -941 -3,062 -1,082 0 0 0 0
Total on-balance sheet exposures (excluding derivatives and SFTs) 261,235 199,745 255,300 356,477 294,464 198,830 230,677 408,243 370,472
Replacement cost -22,117 8,796 10,537 66,914 14,574 9,339 8,299 51,059 29,168
Counterparty netting -13,051 -7,630 -6,262 -50,700 -8,460 -4,791 -3,959 39,808 51,573
Add-on amount 8,312 5,876 2,913 43,421 8,908 4,893 5,035 154,212 78,352
Gross up for derivatives collateral provided 0 0 0 0 6,908 0 0 77,192 72,858
Gross notional credit derivatives sold 414 571 115 1,240 7 699 19,025 1,289,786 1,306,947
Notional offsets and add-on deductions for written credit derivatives -414 -514 -114 -1,004 -7 -629 -17,123 -1,066,669 -1,161,822
Total derivative exposures -26,856 7,099 7,190 59,871 21,929 9,511 11,278 545,388 377,074
Gross SFT assets (with no recognition of accounting netting) 14,592 7,316 7,721 103,994 7,297 2,016 12,745 295,924 270,791
SFT counterparty exposure 0 0 0 0 0 0 0
Total securities financing transaction exposures 15,322 10,974 8,107 109,193 7,661 2,117 13,382 310,721 284,330
Total exposures 297,891 241,641 314,021 555,995 406,129 231,414 283,966 1,376,360 1,141,009
Total asset reduction by 2015E 0 -47 0 0 0 0 0
Total exposure post asset reduction 297,891 241,594 314,021 555,995 406,129 231,414 283,966 1,376,360 1,141,009
Current Additional Tier 1 outstanding 0 0 0 0 0 0 0 0 0
Total Additional Tier 1 capital outstanding including existing hybrids to be converted to
BCNs 0 0 0 0 0 0 0 0 0
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to
BCNs) 13,004 9,965 12,161 18,161 18,344 12,524 9,847
48,149 36,813
2015E Leverage ratio (B3CET1) post asset reduction 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%
2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%
Total additional exposure reduction required (in mn) - - - 37,096 - - 2,616 683 89,208 2,053,714
Further total exposure reduction required (%) 0% 0% 0% 7% 0% 0% 1% 0% 8% 6%
Total additional tier 1 issuance required (mn) - - - 1,298 - - 92 24 3,122 71,880
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[email protected]
Sensitivity to changes in net credit derivatives exposure
The Basel Committee has proposed in the recent Consultative Document on the revised
leverage ratio framework that the sold credit protection (written credit derivatives) are
accounted for at full effective notional value, unless the bank holds offsetting credit
protection bought on the same reference name with the same level of seniority. The
rationale for this adjustment is to show the full potential future loss in the event that the
underlying credit event is triggered on the underlying reference entity.
In our base case scenario we assume that 90% of the credit protection bought
can be used to offset against the credit protection sold. We recognize that this
assumption could vary from bank to bank and that the number could be lower or
higher in some cases, as some hedges might not qualify under the proposed Basel III
leverage ratio framework. Despite our assumption that 90% of the credit protection
bought can be used to offset against the credit protection sold, total derivative
exposure (incl. potential future exposure) is one of the key constituents of the new
proposed Basel 3 exposure measure (denominator) based on our estimates, ranging
from -9% to 40% of the total exposure.
We have given the banks in our analysis the benefit of the doubt, netting 90%
of credit protection, although we believe some derivatives written are not fully
hedged under Basel suggested standards and create basis risk. Hence, in this
section we perform a sensitivity analysis for changes to assumptions around the
percentage of credit derivatives bought which can be used to offset the credit
protection sold.
Scenario 1: Base Case - 90% of the credit protection bought can be used to
offset against the credit protection sold
In this scenario, we estimate 72bn of overall Tier I leverage shortfall, with DB, CBK
and CASA likely to have a significant leverage ratio shortfall in FY15E with an
estimated B3 Tier 1 leverage ratio of 2.8%, 2.6% and 1.7% respectively. This equates to
an estimated 11.5bn, 7.3bn and 33.9bn capital shortfall respectively. For CASA
however, we note that regulators focus on Credit Agricole Group rather than the listed
entity, and CA Group Basel leverage is higher at 3.3% in our estimates.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 70: JPMe Leverage ratio calc based on new Basel proposal guidelines and assuming 90% of the credit protection bought can be used to offset against the credit protection sold (1/2)
EUR billion
CSG UBS DB Lloyds RBS HSBC STAN SG BNPP CASA CBK UCI ISP
Gross notional credit derivatives sold 664 861 1,275 4 267 306 22 269 1,053 538 34 70 78
Notional offsets and add-on deductions for written credit derivatives -640 -793 -1,213 -3 -241 -275 -20 -242 -947 -484 -31 48 70
Total exposure measure 1,146 979 1,851 1,013 1,590 2,493 588 1,382 2,208 1,897 788 1,088 820
Total exposure measure post asset reduction 1,083 702 1,601 954 1,513 2,493 588 1,386 2,208 1,897 848 1,088 820
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32.4 28.4 44.5 42.6 54.0 112.0 35.3 41.9 73.0 32.5 22.4 47.1 35.0
2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 3.6% 4.5% 6.0% 3.0% 3.3% 1.7% 2.6% 4.3% 4.3%
Total additional exposure reduction required (bn) 158 0 329 0 0 0 0 189 123 968 209 0 0
Further total exposure reduction required (%) 15% 0% 21% 0% 0% 0% 0% 14% 6% 51% 25% 0% 0%
Total additional tier 1 issuance required (bn) 6 0 12 0 0 0 0 7 4 34 7 0 0
Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 0% 0% 16% 6% 104% 33% 0% 0%
Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn. SG: leverage ratio including $1.25bn
of Additional Tier I cocos issued in Aug 2013. CASA: Basel leverage ratio for listed entity, but note that regulators focus on Credit Agricole Group solvency ratios instead.
Table 71: JPMe Leverage ratio calc based on new Basel proposal guidelines and assuming 90% of the credit protection bought can be used to offset against the credit protection sold (1/2)
EUR billion
SAN BBVA
Caixa
bank Popular Nordea SEB SWED SHB Danske DNB Erste KBC GS MS
Average ex
GS & MS
Gross notional credit derivatives sold 0 24 0 0 25 0 1 0 1 0 1 19 1,290 1,307
Notional offsets and add-on deductions for written credit derivatives 0 -21 0 0 -23 0 -1 0 -1 0 -1 -17 -1,067 -1,162
Total exposure measure 1,234 723 404 183 782 298 242 314 556 406 231 284 1,376 1,141
Total exposure measure post asset reduction 1,234 723 404 183 777 298 242 314 556 406 231 284 1,376 1,141
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to
be converted to BCNs) 58.2 34.9 15.2 7.4 25.9 13.0 10.0 12.2 18.2 18.3 12.5 9.8
48.1 36.8
2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.7% 4.8% 3.8% 4.1% 3.3% 4.4% 4.1% 3.9% 3.3% 4.5% 5.4% 3.5% 3.5% 3.2% 3.9%
Total additional exposure reduction required (bn) 0 0 0 0 38 0 0 0 37 0 0 3 1 89 2,054
Further total exposure reduction required (%) 0% 0% 0% 0% 5% 0% 0% 0% 7% 0% 0% 1% 0% 8% 6%
Total additional tier 1 issuance required (bn) 0 0 0 0 1 0 0 0 1 0 0 0 0 3 72
Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 0% 5% 0% 0% 0% 7% 0% 0% 1% 0% 8% 9%
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Sofie Peterzens
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[email protected]
Scenario 2: 75% of the credit protection bought can be used to offset against the credit protection sold
In this scenario, we estimate that Basel Tier I leverage shortfall increases to 94bn, with DB, CS, CASA, SG, BNP and CBK all
having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from 0.2bn for KBC to 37bn for CASA. For
CASA however, we note that regulators focus on Credit Agricole Group rather than the listed entity, and CA Group Basel leverage is
higher at 3.3% in our estimates.
Table 72: JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming 75% of the credit protection bought can be used to offset against the credit protection sold
EUR billion
Notional offsets and add-on deductions for written credit derivatives -533 -661 -1,011 -3 -200 -229 -16 -202 -790 -404 -26 40 58
Total exposure measure 1,252 1,111 2,053 1,014 1,630 2,539 591 1,423 2,366 1,977 794 1,080 808
Total exposure measure post asset reduction 1,189 834 1,803 955 1,553 2,539 591 1,426 2,366 1,977 854 1,080 808
Total additional exposure reduction required (bn) 265 22 531 0 12 0 0 229 281 1,049 214 0 0
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EUR billion
SAN BBVA
Caixab
ank Pop Nordea SEB SWED SHB Danske DNB Erste KBC GS MS
Average ex
GS & MS
Notional offsets and add-on deductions for written credit derivatives 0 -18 0 0 -19 0 0 0 -1 0 -1 -14 -889 -968
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to
be converted to BCNs) 58.2 34.9 15.2 7.4 25.9 13.0 10.0 12.2 18.2 18.3 12.5 9.8
48.1 36.8
Scenario 3: 50% of the credit protection bought can be used to offset against the credit protection sold
In this scenario, we estimate that Basel Tier I leverage shortfall increases to 139bn, with DB, UBS, CS, CASA, SG, BNP, RBS
and CBK all having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from 0.4bn for KBC to 41bn
for CASA. For CASA however, we note that regulators focus on Credit Agricole Group rather than the listed entity, and CA
Group Basel leverage is higher at 3.3% in our estimates.
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EUR billion
Notional offsets and add-on deductions for written credit derivatives -355 -441 -674 -2 -134 -153 -11 -135 -526 -269 -17 27 39
Total exposure measure 1,430 1,332 2,390 1,015 1,697 2,615 597 1,490 2,629 2,112 802 1,067 789
Total exposure measure post asset reduction 1,367 1,054 2,140 956 1,620 2,615 597 1,493 2,629 2,112 862 1,066 789
Total additional exposure reduction required (bn) 443 242 868 0 78 0 0 296 544 1,184 222 0 0
EUR billion
SAN BBVA
Caixab
ank Popular Nordea SEB SWED SHB Danske DNB Erste KBC GS MS
Average ex
GS & MS
Notional offsets and add-on deductions for written credit derivatives 0 -12 0 0 -13 0 0 0 -1 0 0 -10 -593 -645
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids
to be converted to BCNs) 58.2 34.9 15.2 7.4 25.9 13.0 10.0 12.2 18.2 18.3 12.5 9.8
48.1 36.8
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Sensitivity to changes in gross repo exposure
In the Consultative Document on the revised leverage ratio framework the Basel
Committee is proposing that securities financing transactions are reported gross of
collateral with no recognition of accounting netting. This means that the revised
guidance on the leverage ratio is punitive for repo transactions as it does not allow for
netting of collateral or exposure (i.e. banks are not allowed to offset repos against
reverse repos). The rationale for this adjustment is to discourage banks from
rehypothecating assets.
In our base case scenario we assume that gross securities financing transactions
(SFT) match the reported on balance sheet number. We recognize that this
assumption could potentially underestimate the impact from valuing SFTs at
gross value and that the number could be higher in some cases, given that netting of
repos and reverse repos is currently allowed under IFRS and US GAAP reporting.
The inability of banks to offset repos against reverse repos could increase the
denominator of the leverage ratio by up to $6tr according to JPMs Asset Allocation
Research (Flows & Liquidity: Leverage ratios to hit repo markets). In the case of US
broker dealers for example the net repo exposure reported in the liability side was
only $185bn as of the end of Q1, vs. gross exposure of $2.6tr, so reported net
exposure was less than 10% of gross exposure or in other words the gross exposure
was 10x the reported number. However, under IFRS banks report repos gross of
collateral while under US GAAP they report net of collateral, which means that the
difference between the on balance sheet exposure and the gross exposure should be
smaller for banks reporting under IFRS than under US GAAP. In Europe only 3
banks report the gross SFT exposure, HSBC, RBS and Danske, which would suggest
that under IFRS the gross SFTs are on average ~2x larger than the balance sheet
number.
Table 76: Gross SFTs to balance sheet SFTs for Danske and RBS, end-12
Local currency millions
Danske HSBC RBS
Balance sheet SFTs 338,461 159,241 99,283
Gross SFTs 775,494 226,534 154,730
Gross SFTs/BS SFTs 2.3x 1.4x 1.6x
Source: Company reports.
We have given the banks in our analysis the benefit of the doubt, using the
reported balance sheet repo amount, although we recognize that inability to
offset repos with reverse repos under the Basel proposed standards. Therefore,
in this section we perform a sensitivity analysis for changes to assumptions
around the level of gross SFTs.
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Sofie Peterzens
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[email protected]
Scenario 1: Base Case the gross SFTs match reported balance sheet SFTs
In this scenario, we estimate 71bn of overall Tier I leverage shortfall, with DB, CBK and CASA likely to have a significant
leverage ratio shortfall in FY15E with an estimated B3 Tier 1 leverage ratio of 2.8%, 2.6% and 1.7% respectively. This equates to an
estimated 11.5bn, 7.3bn and 33.9bn capital shortfall respectively.
Table 77: European Banks - JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming gross repo exposure to be 1x reported numbers (Table 1 of 2)
bn CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISP
Assuming gross repos exposure to be 1x reported number
Gross SFT assets (with no recognition of accounting netting) 141 81 161 3 8 58 160 83 129 49 24
Total exposure measure 1,146 979 1,851 1,013 588 1,382 2,208 1,897 788 1,088 820
Total exposure measure post asset reduction 1,083 702 1,601 954 588 1,386 2,208 1,897 848 1,088 820
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35
2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 4.5% 6.0% 3.0% 3.3% 1.7% 2.6% 4.3% 4.3%
Total additional exposure reduction required (in bn) 158 - 329 - - 189 123 968 209 - -
Further total exposure reduction required (%) 15% 0% 21% 0% 0% 14% 6% 51% 25% 0% 0%
Total additional tier 1 issuance required (bn) 6 - 12 - - 7 4 34 7 - -
Total additional tier1 issuance required (% of B3CET1+AT1) 17% 0% 26% 0% 0% 16% 6% 104% 33% 0% 0%
Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities
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bn
SAN BBVA Caixab
ank
Popular Nordea SEB SWED SHB DNB Erste KBC Ave
Gross SFT assets (with no recognition of accounting netting) 34 10 0 6 47 15 7 8 7 2 13
Total exposure measure 1,234 723 404 183 782 298 242 314 406 231 284
Total exposure measure post asset reduction 1,234 723 404 183 777 298 242 314 406 231 284
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 58 35 15 7 26 13 10 12 18 13 10
2015E Leverage ratio (B3CET1+AT1) post asset reduction 4.7% 4.8% 3.8% 4.1% 3.3% 4.4% 4.1% 3.9% 4.5% 5.4% 3.5% 3.9%
Total additional exposure reduction required (in bn) - - - - 38 - - - - - 3 2,017
Further total exposure reduction required (%) 0% 0% 0% 0% 5% 0% 0% 0% 0% 0% 1% 6%
Total additional tier 1 issuance required (bn) - - - - 1 - - - - - 0 71
Total additional tier1 issuance required (% of B3CET1+AT1) 0% 0% 0% 0% 5% 0% 0% 0% 0% 0% 1% 10%
Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities.
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Scenario 2: Gross SFT are 2x larger than the reported balance sheet SFTs
In this scenario, we estimate that Basel Tier I leverage shortfall increasing to 99bn, with DB, CS, CASA, SG, BNP, and CBK all
having significant leverage ratio shortfall in FY15E, with capital shortfalls ranging from 1bn for KBC to 37bn for CASA.
bn
CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISP SAN
Gross SFT assets (with no recognition of accounting netting) 281 163 323 7 15 115 319 165 258 98 47 68
Total exposure measure 1,287 1,060 2,012 1,017 595 1,440 2,367 1,979 917 1,137 844 1,268
Total exposure measure post asset reduction 1,223 783 1,762 958 595 1,443 2,367 1,979 977 1,137 844 1,268
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35 58
Total additional exposure reduction required (in bn) 299 - 491 - - 246 282 1,051 338 - - -
Total additional tier 1 issuance required (bn) 10 - 17 - - 9 10 37 12 - - -
Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities
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Sofie Peterzens
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[email protected]
Table 80: European Banks- JPMe Leverage ratio calculations based on new Basel proposal guidelines and assuming gross repo exposure to be 2x reported numbers (Table 2 of 2)
bn
BBVA Caixab
ank
Popular Nordea SEB SWED SHB DNB Erste KBC
Average
Gross SFT assets (with no recognition of accounting netting) 21 0 13 95 29 15 15 15 4 25
Total exposure measure 734 404 189 830 312 249 322 413 233 297
Total exposure measure post asset reduction 734 404 189 824 312 249 322 413 233 297
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 35 15 7 26 13 10 12 18 13 10
Total additional exposure reduction required (in bn) - - - 85 - - - - - 15 2,808
Total additional tier 1 issuance required (bn) - - - 3 - - - - - 1 98
Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities
Scenario 3: Gross SFT are 3x larger than the reported balance sheet SFTs
In this scenario, we estimate that Basel Tier I leverage shortfall increases to 129bn, with DB, CASA, SG, BNP, CSG, UBS, and
CBK likely to have a leverage ratio shortfall in FY15E, with capital shortfalls ranging from 1bn for KBC to 40bn for CASA.
bn
CSG UBS DB Lloyds STAN Socgen BNPP CASA CBK UCI ISP SAN
Gross SFT assets (with no recognition of accounting netting) 422 244 484 10 23 173 479 248 387 147 71 102
Total exposure measure 1,427 1,142 2,174 1,020 603 1,497 2,527 2,062 1,046 1,186 867 1,302
Total exposure measure post asset reduction 1,364 864 1,924 961 603 1,501 2,527 2,062 1,106 1,185 867 1,302
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 32 28 45 43 35 42 73 32 22 47 35 58
Total additional exposure reduction required (in bn) 440 52 652 - - 304 442 1,134 467 - - -
Total additional tier 1 issuance required (bn) 15 2 23 - - 11 15 40 16 - - -
Source: J.P. Morgan estimates, Company data. Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities.
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bn
BBVA Caixaban
k
Popular Nordea SEB SWED SHB DNB Erste KBC
Average
Gross SFT assets (with no recognition of accounting netting) 31 0 19 142 44 22 23 22 6 38
Total exposure measure 744 404 196 877 327 256 329 421 235 309
Total exposure measure post asset reduction 744 404 196 871 327 256 329 421 235 309
2015E Basel III Tier 1 Capital (CET1 + AT1 incl existing hybrids to be converted to BCNs) 35 15 7 26 13 10 12 18 13 10
Total additional exposure reduction required (in bn) - - - 133 - - - - - 28 3,650
Total additional tier 1 issuance required (bn) - - - 5 - - - - - 1 128
Source: J.P. Morgan estimates, Company data Note: We exclude RBS, HSBC, GS, MS and Danske from repo sensitivities
128
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UK regulatory leverage requirements
The PRAs (Prudential Regulation Authority) capital exercise (see our note UK
Banks: PRA - active approach on capital should be a long term positive published 21
June 2013) introduced a new PRA adjusted leverage ratio requirement of 3% for
UK listed banks. We believe that this is a highly punitive measure in the context
of global peers, with UK listed banks having to comply with stricter UK
requirements by 1H14 rather than 2018 or 2015. Note that this leverage ratio
requirement is not applicable to all the entities regulated by the PRA.
UK PRA Leverage ratio calculation methodology: The starting point of the PRA
Leverage ratio methodology is the current CRD4 Leverage ratio rules. The
denominator of the PRA Leverage ratio is same as CRD4, however, the numerator is
adjusted for additional provisions and future conduct costs and only high trigger
(fully loaded) CoCos are included in the numerator. The adjustments to capital
include i) Additional provisions: Expected losses on commercial real estate and
Euro-area assets on a 3-year view instead of 1-year as required under IFRS, ii) Future
conduct costs: Potential litigation and redress costs that may evolve over the next 3
years and iii) Additional PVA (Prudent Valuation Adjustment) on top of PVA
adjustments already in the CET1 capital.
Table 83: PRA methodology on leverage
PRA Leverage calculation methodology Comments
Capital starting point CRD4 CET1 Capital including PVA adjustments (to place greater emphasis on the inherent uncertainty
around the value at which positions could be exited in trading book)
- Additional Provisions adjustments Expected losses on UK CRE, Euro-area assets and some other portfolios identified as
having significant embedded expected loss on a 3-year view instead of 1-year as
required under IFRS
- Future conduct costs Potential litigation and redress costs that may evolve over the next 3 years incl PPI,
swaps, LIBOR etc.
- Additional PVA On top of the PVA adjustment in the CET1 capital
+ CoCos with High trigger on a fully loaded basis
Numerator Tier 1 capital on a PRA basis
Denominator CRD4 Leverage measure as per CRD4 rules
Leverage ratio = Tier 1 Capital on PRA basis
--------------------------------------------
CRD4 Leverage measure
= (CRD4 CET1 Capital - Additional provisions on 3yr basis - future conduct costs -
additional PVA + high trigger fully loaded CoCos)
-----------------------------------------------------------------------------------------------------------------
(CRD4 Leverage measure)
Source: J.P. Morgan estimates, PRA.
PRA adjustments to UK Banks capital: The table below shows the adjustments
made by the UK PRA to the UK Banks' capital. Note that the PRA adjustments were
based on FY12 data and the banks have likely taken mitigation actions to reduce the
adjustments in 1H13, including taking provisions for conduct costs, deleveraging and
increasing coverage on problematic asset classes. Hence the PRA adjustments are
likely to be lower at H113 level.
Table 84: UK Banks: PRA adjustments to capital
billion
HSBC Lloyds RBS Stan
PRA adjustments to capital at FY12 -7.8 -12.1 -7.1 0
as % of 1H13 capital -9% -42% -17% 0%
as % of B3 RWAs -1.0% -4.0% -1.5% 0.0%
as % of CRD4 Leverage measure -0.39% -1.48% -0.58% 0.00%
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UK Banks Leverage ratio: The table below shows our estimates of the UK Banks
Leverage ratio on various metrics. UK Banks fare relatively well in the context of the
European banking sector on our estimates. However, the benchmark is also set higher
in the UK by the PRA with compliance on a PRA adj CRD4 basis by H114.
We dont have enough disclosure to calculate the leverage ratio of UK Banks on
PRA-adjusted basis given the banks dont disclose the PRA adjustments at H113
level. However, PRA said in its June release that HSBC, Lloyds, RBS and Stan
Chartered will likely exceed the 3% leverage ratio post adjustments by FY13E based
on their plans submitted to the PRA.
Table 85: UK Banks: Leverage ratio based on various standards
HSBC Lloyds RBS Stan
New Basel proposals 4.5% 4.5% 3.6% 6.0%
CRD4 rules 4.8% 4.7% 4.0% 6.0%
PRA rules (CRD4 post adjustments) >3% by FY13E >3% by FY13E >3% by FY13E >3% by FY13E
Source: J.P. Morgan estimates, Company data. Note that we do not assume balance sheet growth for HSBC and Standard Chartered
for the leverage calculation and include the planned asset reduction for RBS and Lloyds.
Prudent Valuation Adjustment (PVA): CRD4 capital rules include provisions on
prudent valuation of the trading book which should apply to all instruments
measured at fair value. This adjustment should be made to the own funds while
calculating the CET1 capital. The text below is an excerpt from the final CRD4 text:
When marking to market, an institution shall use the more prudent side of bid and
offer unless the institution can close out at mid market. Where institutions make use
of this derogation, they shall every six months inform their competent authorities of
the positions concerned and furnish evidence that they can close out at mid-market.
The EBA is expected to develop and submit draft regulatory technical standards on
PVA to the European Commission by 1st Feb 2015.
UK Application of PVA: UK banks have taken significant PVA charges in their
B3CET1 capital based on the PRA guidelines. During the capital and leverage
exercise undertaken by the UK PRA, a further PVA adjustment was made to the B3
CET1 capital but the amounts were not disclosed by the banks or the PRA.
Table 86: PVA adjustments in the B3CET1 capital
billion
RBS HSBC Stan
PVA adjustment in B3 CET1 capital -0.5 -1.5 -0.1
as % of B3 RWAs -0.11% -0.18% -0.06%
as % of CRD4 Leverage measure -0.04% -0.07% -0.02%
The PRA says that the PVA adjustments place greater emphasis on the inherent
uncertainty around the value at which positions could be exited. PRA indicates that
further work is being undertaken internationally, and this PVA adjustment was an
interim measure by the PRA while it waits for the conclusions of more detailed
studies.
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US: Differences in leverage ratio levels and definitions
compared to the revised Basel leverage ratio consultation
Under US proposals, US top tier banks would be required to meet minimum
supplementary leverage of 5% for the bank holding company and 6% for the
deposit-taking subsidiaries, as of 1 Jan 2018. The US supplementary leverage ratio
is also based on the old Basel leverage ratio guidelines from June 2011, as detailed
in our note "Global Investment Banks: Can universal banking model survive the new
wave of uncoordinated IB regulations? OW Tier II IB on 11 April 2013, rather than
the latest Basel leverage proposals from June 2013 which are much more stringent as
less netting is permitted. US regulators are however likely to adjust the leverage ratio
definition more in line with global standards in our view, once Basel leverage ratios
are finalized.
US 2013 capital rules make no specific mention of the treatment for foreign
banks' US operations, and we are still waiting for further clarity from the Fed
on its proposals for enhanced supervision of foreign banks. Although the Fed will
comment on its proposals in a separate document, we see some read-across to
European banks:
European banks' US operations will in our view likely need to operate with a
US GAAP leverage ratio of at least 4%(minimum unchanged).
We note that in December 2012, the Federal Reserve published a Notice of
Proposed Rulemaking compelling larger foreign banking organizations (FBOs)
with material US operations to establish an Intermediate Holding Company (IHC)
for virtually all of their US subsidiaries. The proposal included that IHCs of
foreign banks would be subject to the same risk-based and leverage capital
standards applicable to US bank holding companies. The aim with the proposal
is to strengthen capital positions of the IHCs and promote a level playing field
among banks operating in the US. IHCs with $50bn or more in assets also would
be subject to the Feds capital plan rule. We believe the US subsidiaries of
foreign banks with large broker-dealer operations could be more penalized
under the leverage rules given the large amount of low risk assets booked
either outright or via repos in the US. Foreign bank subsidiaries in the US may
have to shed a significant portion of the low-risk, but balance sheet-consumptive
assets, given higher capital costs which would be a blow to repo markets. More
than half of the NY Feds primary dealers are foreign-related, suggesting that a
potential retrenchment from foreign broker dealers could have a material impact
on repo markets via reduced intermediation and willingness to make markets.
We also see a risk that US operations could also be subject to a 3% Basel
leverage ratio if total asset size in the US exceeds $250bn this is the general
threshold to be considered as an advanced approach bank such banks are
required to maintain a 3% supplementary leverage ratio.
Timeframe for European banks US operations is as uncertain as minimum
requirements in our view. According to the Fed Dec 2012 proposals, foreign
banking organizations with total global consolidated assets of $50bn or more as of 1
July 2014 will be subject to the proposed rules starting on 1 July 2015.
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Timeframe for the leverage ratio: focus will be on 2015 rather than 2018 in our
view. Under US proposals, US top tier banks would be required to meet minimum
supplementary leverage of 5% for the bank holding company and 6% for the deposit-
taking subsidiaries, as of 1 Jan 2018. Public disclosure and reporting however starts 1
Jan 2015. In our view, investors will focus on 2015e rather than 2018, as we believe
that banks will be under market pressure as soon as disclosure is available and the
2018 implementation date is irrelevant.
Capital & Asset reduction analysis by bank based on 2015
Based on the Basel leverage ratio definition under their latest proposal, the 5%
supplementary leverage ratio requirement for US IBs would be challenging: GS
and MS would likely be short of the 5%, with an estimated 3.5% and 3.2% end
2015e. This would imply $27bn supplementary leverage ratio shortfall for both GS
and MS, equivalent to 43% and 55% additional Tier I issuance required, or $550bn
(30% of leverage exposure) and $538bn (35%) of asset reduction respectively. This
could limit dividend payout or share buyback in our estimates.
European banks would be required to maintain a minimum of 3% Basel
leverage ratio, under Basel's latest proposals. We estimate that European banks
have lower Basel 3 leverage ratios vs. US IBs, with 2.8% for DB, 3.0% for CS, 3.0%
for SG, 3.3% for BNPP and 4.1% for UBS end 2015e. Based on Basel 3% minimum,
only DB, SG and CS would likely have a leverage ratio shortfall end 2015e with
$4.6bn, $0.8bn and $0.2bn of capital shortfall respectively, equivalent to 7%, 1% and
0.4% of additional Tier I issuance required.
We add GS and MS for comparability purposes with European Banks, as we believe
the US is ahead of the curve in terms of both the starting point of leverage ratio as
well as the proposals on leverage ratios. Both GS and MS will need to operate at a
5% supplementary leverage ratio over time, including the 2% leverage buffer. In
addition, Insured Depository institution subsidiaries of both banks would need to
operate at the 6% well capitalized threshold under the proposals.
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Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 87: JPMe Basel Leverage ratio calculations based on latest proposals (June 2013) and US GAAP
$ million
CSG UBS DB Socgen BNPP GS MS Avg.
Balance sheet as at Q2 13 Q2 13 Q2 13 2012 2012 Q2 13 Q2 13
On-balance sheet items: 973,441 1,194,783 2,484,753 1,631,561 2,421,601 938,456 802,691
exclude derivatives -41,524 -351,058 -827,262 -246,240 -448,647 -67,853 -38,761
exclude Securities Financing Transactions -183,496 -106,027 -209,916 -74,899 -207,731 -328,087 -271,608
Assets deducted in determining Basel III Tier 1 capital -9,617 -9,154 -6,699 -11,579 -19,125 0 0
Total on-balance sheet exposures (excluding derivatives and SFTs) 738,805 728,543 1,440,876 1,298,843 1,746,098 542,516 492,322
Replacement cost 41,524 351,058 763,142 231,062 418,285 67,853 38,761
Counterparty netting 81,143 -261,964 -693,306 -198,198 -359,171 52,901 68,535
Add-on amount 201,946 154,239 332,223 105,452 351,853 204,933 104,122
Gross up for derivatives collateral provided 63,086 102,581 96,821
Gross notional credit derivatives sold 865,713 1,123,399 1,658,723 350,417 1,369,628 1,714,001 1,736,806
Notional offsets and add-on deductions for written credit derivatives -834,571 -1,034,637 -1,577,634 -315,375 -1,232,666 -1,417,501 -1,543,950
Total derivative exposures 418,841 332,094 483,147 173,357 547,929 724,768 501,095
Gross SFT assets (with no recognition of accounting netting) 183,496 106,027 209,916 74,899 207,731 393,255 359,855
SFT counterparty exposure 9,175 5,301 10,496 3,745 10,387 19,663 17,993
Total securities financing transaction exposures 192,671 111,329 220,412 78,643 218,117 412,918 377,848
Other off-balance sheet exposures 144,656 105,414 263,544 247,393 360,117 148,848 145,026
Total exposures 1,494,973 1,277,380 2,407,979 1,798,237 2,872,261 1,829,049 1,516,291
Total asset reduction by 2015E -82,417 -361,904 -325,250 4,405
Total exposure post asset reduction 1,412,556 915,475 2,082,729 1,802,642 2,872,261 1,829,049 1,516,291
2015E Basel 3 Common equity T1 capital (fully loaded) 36,499 37,092 57,902 53,270 94,939 63,985 48,921
Current Additional Tier 1 outstanding 1,693
Total Additional Tier 1 capital outstanding including existing hybrids to be converted to BCNs 5,714
2015E Basel III Tier 1 Capital (CET1 + AT1 incl. existing hybrids to be converted to BCNs) 42,213 37,092 57,902 53,270 94,939 63,985 48,921
2015E Leverage ratio (B3CET1) post asset reduction 2.6% 4.1% 2.8% 3.0% 3.3% 3.5% 3.2% 3.2%
2015E Leverage ratio (B3CET1+AT1) post asset reduction 3.0% 4.1% 2.8% 3.0% 3.3% 3.5% 3.2% 3.3%
Min. Basel leverage ratio requirement 3.0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0%
To reach min. leverage ratio (B3ET1+AT1 fully loaded)
Total additional exposure reduction required (in mn) 5,446 - 152,649 26,963 - 549,350 537,871
Further total exposure reduction required (%) 0.4% 0% 7% 1% 0% 30% 35% 11%
Total additional tier 1 issuance required (mn) 163 - 4,579 809 - 27,468 26,894
Total additional tier1 issuance required (% of B3CET1+AT1) 0.4% 0% 8% 2% 0% 43% 55% 15%
Total additional tier1 issuance required (% of market cap) 0% 0% 11% 3% 0% 37% 53%
2015E US GAAP leverage ratio ex derivs & repos 4.9% 5.0% 4.0% 4.1% 5.4% 11.8% 9.9% 6%
Min. US GAAP leverage ratio requirement 4.0% 4.0%
Corporate Center legacy portfolio and SF55bn in Group treasury activities. CS - Total balance sheet reduction target of less than SF900bn and total off-balance sheet exposures (including derivative add-ons) of less than Sf290bn.
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[email protected]
No clarity yet for European banks' US operations
Specific rules for US operations of foreign banks remain unclear, with no
further clarity on the Fed proposals for enhanced supervision of foreign banks.
US 2013 capital rules make no mention of the treatment for foreign banks' US
operations.
Under the Dec 2012 Fed proposals, European banks would be required to organize
US subsidiaries under a single US intermediate holding company (IHC) which would
be subject to the same risk-based and leverage capital standards applicable to US
BHCs, i.e. minimum generally applicable US GAAP leverage ratio of 4% which
remains unchanged.
European banks US operations would likely need to operate with a US GAAP
leverage ratio above 4%, as well as potentially meet the 3% minimum
supplementary leverage ratio in our view. We see these requirements as significant
constraints.
European banks would need to operate in the US with a US GAAP leverage
ratio above 4% in our view, as a) the Fed will likely require 5%, which is the
level needed to be considered as well capitalized, b) the 4% minimum would
likely have to be met in future stress testing exercises/CCARs as well, which
would imply higher ratios on a business-as-usual basis.
There is also a risk that European banks' US operations would need to
comply with the 3% Basel leverage ratio in our view, which would be an
additional constraint and may trigger asset reduction by banks to avoid falling
into the scope of the proposed requirement. The Basel leverage ratio is required
only for advanced approaches bank holding companies, generally BHCs with
over $250bn of total consolidated assets. In our view, US operations of DB, with
total assets over $300bn, would likely fall in the scope of the advanced
approaches banks and be required to maintain the 3% Basel leverage ratio.
Whether they would have to maintain 3% under stress is unclear however, as the
3% minimum is only a prompt corrective action (PCA) requirement for insured
depositary institutions. Over time, DB could reduce total assets in the US
(wholesale operations, renegotiating client books) to run under $250bn in our
view. BNPP, with estimated total assets of $240bn, may fall outside the scope
and might have to comply only with the 4% generally applicable leverage ratio.
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[email protected]
Table 88: PCA levels for all insured depository institutions
PCA category Total Risk-based
Capital (RBC) measure
(total RBC-ratio-
(percent)
Tier 1 RBC
measure (tier 1
RBC ratio
percent)
Common equity tier 1
RBC measure
(common equity tier 1
RBC ratio (percent)
Leverage Measure PCA requirements
Leverage
ratio
(percent)
Supplementary
leverage ratio
(percent)*
Well capitalized 10 8 6.5 5 Not applicable Unchanged from current
rule*
Adequately-capitalized 8 6 4.5 4 3.0 "
Undercapitalized < 8 < 6 < 4.5 < 4 < 3.00 "
Significantly
undercapitalized
< 6 < 4 < 3 < 3 Not applicable "
Critically
undercapitalized
Tangible Equity (defined as tier 1 capital plus non-tier 1 perpetual stock) to Total Assets 2 Not applicable
Source: FDIC. Note: The supplementary leverage ratio as a PCA requirement applies only to advanced approaches FDIC-supervised institutions that are insured depository institutions. The
supplementary leverage ratio also applies to advanced approaches bank holding companies, although not in the form of a PCA.
Balance sheet size in the US likely to be reduced by most
European IBs but P&L impact uncertain
We believe most European banks with large IB operations in the U.S. would work
towards reducing the size of their US balance sheets to comply with 1. US Foreign
Banking organization proposals and 2. Potential leverage ratio requirements for the
US operations.
We believe repo book would be one area which most banks would be targeting to
reduce total assets, but the P&L impact of these reductions remains uncertain in our
view. Also, the impact of repo book reduction on the ability of these banks to
participate in the government bond market is also uncertain at this point.
Deutsche Bank Trust Corporation is a US bank holding company with $72bn in
assets as of Jun-13. Besides this, Deutsche has other material entities in the US, such
as Deutsche Bank Securities Inc. which had $240bn in assets as of Dec-11.
We estimate DB may be able to reduce the size of its funded balance sheet in the
US to c.$300bn. DB management also indicated on its Q2 conference call that
capital is not a constraint for its US business and it also has a plan in place to meet
the 3% supplementary leverage ratio requirement in the US While DBK management
has outlined to an extent its plan to comply with the US FBO proposals, it is still not
clear to us if these plans are likely to get the approval of BaFin and with the Fed rules
not final yet, uncertainty has remained.
CSG has a legal entity structure which we believe is most suited for the new
regulatory landscape. CSG had $345bn in assets at the end of H1 13 in Credit Suisse
(USA), Inc. We estimate CSG could reduce its balance sheet size in the US by
c.30% i.e. towards $240bn, which means it would be subject to only the 4%
generally applicable leverage ratio.
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[email protected]
UBS Americas Inc., which is a wholly owned subsidiary of UBS AG, had SF215bn
in assets as of Dec-12, down from SF302bn at the end of Dec-11. We believe UBS
operates mainly through branches with the equity sitting in parent bank UBS AG.
However, UBS is undergoing a major FICC restructuring which means the balance
sheet size is likely to decline further. We estimate UBS Americas Inc. balance sheet
to reduce further by SF75bn to SF83bn on an adjusted basis.
BNP Paribas' US subsidiaries had total assets of $240bn in our estimates, including
$63.3bn for Bank of the West, $39.2bn for BNP Paribas Prime Brokerage and
$126.7bn for BNP Paribas Securities as of end 2012, as per the SEC filings. Bank of
the West is the only well capitalized subsidiary with equity of $11.6bn and Tier I
leverage ratio of 12.5%, whilst BNP Paribas Securities had equity of $2bn only. To
comply with Dodd Frank Section 165, the group will likely reconsider the legal
structure of its operations, to benefit from Bank of the West strong capital.
Socit Gnrale's US subsidiaries had total assets of $53bn in our estimates,
including $36.4bn for SG Americas Securities, and $16.2bn for Newedge USA, as of
end 2012 as per SEC filings. SG Americas Securities had shareholders' equity of
$2.2bn, whilst Newedge USA had equity of $581m only. To comply with Dodd
Frank Section 165, the group will also likely reconsider the legal structure of its
operations.
Table 89: European IBs: US operation balance sheets likely to be reduced to comply with leverage ratio requirements 1/2
$ million
CS
1
UBS DB
Credit
Suisse
(USA), Inc.
Credit Suisse
Securities
(Europe) Limited
Credit Suisse
International
UBS
Americas
Inc.
2
UBS
Ltd.
3
Deutsche
Bank US
subsidiaries
Deutsche
Bank UK
subsidiaries
Subsidiary Net Income 877 2,267 -658 -732 -2,508 -2,538 29 - - -
Subsidiary Equity 46,845 22,899 8,357 15,589 6,007 2,225 3,782 - - -
Total Assets 500,568 243,836 128,670 128,063
149,61
4 90,973 58,642 600,000 300,000 300,000
Source: Company reports and J.P. Morgan estimates. Note: **Subsidiary assets include Credit Suisse (USA) Inc. and Credit Suisse (Europe) Limited for CS; UBS Americas Inc. and UBS Limited
for UBS;. DB subsidiary assets are estimated numbers for US and UK. 1. Subsidiary P&L data for 2012; 2.P&L data for 2012; 3.P&L data for 2011.
Table 90: European IBs: US operation balance sheets likely to be reduced to comply with leverage ratio requirements 2/2
$ million
BNP SocGen
BancWest
BNP Paribas
Prime
Brokerage
BNP Paribas
Securities
Corporation
BNP Paribas
UK Holdings
Ltd
Newedge
USA****
SG Americas
Securities LLC
Societe Generale
Investments (UK)
Limited
Subsidiary Net
Income -
555
- - 58 - - 25 22
Subsidiary Equity 15,747 11,654 533 2,034 2,059 3,104 581 2,225 299
Total Assets 192,095 63,343 39,251 126,692 2,059 58,802 16,215 36,450 6,137
Source: Company reports and J.P. Morgan estimates. Note: * **Subsidiary assets include Credit Suisse (USA) Inc., Credit Suisse International and Credit Suisse (Europe) Limited for CS; UBS
Americas Inc. and UBS Limited for UBS;. DB subsidiary assets are estimated numbers for US and UK; **** 50% consolidated.
136
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Overview of the US regulatory agencies
rules and proposals
Generally applicable leverage ratio
The generally applicable Leverage ratio remains unchanged at 4% minimum,
however, it is more conservative than the current ratio as it incorporates a more
stringent definition of Tier 1 capital under Basel 3.
The generally applicable leverage ratio is the ratio of Tier 1 capital to the total
consolidated assets as reported minus amounts deducted fromtier 1 capital. The
consolidated reported assets for the US institutions remain on a US GAAP basis
which allows netting of repos and derivatives.
Supplementary leverage ratio
A new minimum supplementary leverage ratio of 3%, starting on 1 Jan 2018,
was established for banking organizations subject to advanced approaches
rules, which are generally mandatory for banking organizations and their
subsidiaries that have $250 billion or more in total consolidated assets or that have
consolidated total on-balance sheet foreign exposure at the most recent year-end
equal to $10 billion or more.
The supplementary leverage ratio is calculated as Tier 1 capital to total leverage
exposure. The total leverage exposure equals the sum of the following:
1) The balance sheet carrying value of all of the on-balance sheet assets
less amounts deducted from tier 1 capital
2) The PFE amount for each derivative contract to which the FDIC-
supervised institution is counterparty (or each single-product netting set
of such transactions). The FDIC notes that collateral may not be used to
reduce the PFE amount for derivative contracts.
3) 10% of the notional amount of unconditionally cancellable
commitments made; and
4) The notional amount of all other off-balance sheet exposures (ex.
securities lending, securities borrowing, reverse repos, derivatives and
unconditionally cancellable commitments). While the introduction of
the no netting rule for off-balance sheet repos is not explicit in the US
leverage ratio proposal, the Notice of the Proposed Rulemaking did
make note of the Basel Committees consultative paper, leaving the
door open for similar Basel 3 no-netting treatment for off-balance sheet
repos in the US.
The calculation of total leverage exposure in the proposed FDIC rules is based on the
June 2011 Basel leverage ratio guidelines rather than the latest Basel consultation
paper released on 26 June 2013. However, US regulators will consider whether or
not to adopt the final Basel leverage rules, once theyre finalized.
137
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
US regulators have proposed higher supplementary leverage ratio standards for
US top tier bank holding companies (BHCs) - 5% for the BHC and 6% for their
Insured Depositary Institution (IDI) subsidiaries. The agencies proposed a
supplementary leverage ratio buffer of 2% for US top-tier BHCs with at least $700
billion in total consolidated assets or at least $10 trillion in assets under custody, and
a 3% buffer for all their IDI subsidiaries, taking the supplementary leverage ratio
requirement to 5% for the US top-tier BHC and 6% for their IDI subsidiaries.
Timing of implementation: "Consistent with Basel III, the interim final rule
implements for reporting purposes the proposed supplementary leverage ratio for
advanced approaches FDIC-supervised institutions starting on January 1, 2015 and
requires advanced approaches FDIC-supervised institutions to comply with the
minimum supplementary leverage ratio requirement starting on January 1, 2018"
(page 51 of the 2013 interim final rule).
138
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Implication of a higher leverage ratio on
the banking industry
In our view, the proposed changes decrease the attractiveness of collateralized
businesses for banks, which may see a varying degree of negative impact as a
result of the revised leverage ratio framework outlined in the recent
consultation. In particular, banks with large derivatives and repos books are
affected. The risk is that certain business lines cannot be maintained or the cost
of doing business becomes more expensive for the end-user. For example:
Leverage ratio could significantly hurt the repo markets. The revised guidance on
leverage ratio regulations is punitive for repo transactions as it not only forbids
netting of collateral but does not allow netting of exposure either. In other words,
repos are accounted for on a gross basis with no benefit given for offsetting repo
and reverse repo positions in the calculation of the exposure measure. The
inability of banks to offset repos against reverse repos could increase the
denominator of the leverage ratio by up to $6tr according to JPMs Asset
Allocation Research (Flows & Liquidity: Leverage ratios to hit repo markets).
Repos are a $7tr universe approximately across the US, Europe and Japan, which
is equal to close to 10% of the $77tr of the reported assets of G4 commercial
banks including US broker-dealers. However, off-balance repos as well as
accounting reporting which allows for netting between repos and reverse repos
under both IFRS and US GAAP as well as collateral netting under US GAAP,
means that most of this $7tr of repos is not captured in reported balance sheets,
i.e. it is not included in the above $77tr figure of commercial bank assets. Repos
are typically reported in the liability side while reverse repos are reported in the
asset side. But when netting is allowed, only the net exposure is reported either as
a net reverse repo exposure in the asset side or as a net repo exposure in the
liability side. This net exposure is small. In the case of US broker dealers for
example, the net repo exposure reported in the liability side was only $185bn as
of the end of Q1, vs. gross exposure of $2.6tr, so reported net exposure was less
than 10% of gross exposure.
If the same 10% is applied to the whole of the $7tr of G4 repos, i.e. assuming that
around $700bn is accounted via existing reporting of net repos in banks balance
sheets, then under the revised Basel proposal which forces reporting of total gross
rather than net exposures, the Exposure Measure would increase by more than
$6tr. Applying the 3% minimum capital requirement to this $6tr potentially
results to additional capital of $180bn across the whole of the G4.
A retrenchment in repo markets seems inevitable following these rules, especially
in the US where subsidiaries of foreign banks, which typically have large broker-
dealer businesses in the US, are required to meet the leverage ratio specifically
for the balance sheet assets and capital located in the US. This is unwelcome
news for the liquidity of the underlying securities, given the historically tight
relationship between trading volumes in bond markets and the outstanding
amount of repos.
139
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Liquidity in the government securities markets could be impaired: The
ability for banks to offset their reverse repos and repos has always supported the
matched book trading business, which has facilitated in making government
securities one of the most liquid markets. It is the repo market which makes
government securities more liquid by allowing fast and efficient financing and
short covering. The removal of offsets could force banks to scale back their
matched repo books, impairing liquidity in the government securities markets. It
could also force dealers to scale back their participation in Treasury auctions if
they cannot buy and sell Treasuries or make markets cost effectively. For more
detailed discussion, please refer to our US Fixed Income strategists report Q&A
about leverage ratios on 19 Aug 2013.
While we see a bigger impact on repo markets, the impact on derivatives markets
should not be underestimated. Similar to repos, banks will have to reassess their
derivative portfolios and businesses against the higher leverage buffer. The
derivative exposures arise both from the contracts underlying asset and from
counterparty credit risk exposure.
Financing businesses that rely on collateral to reduce or mitigate risk while
carrying large but relatively liquid gross asset positions, such as parts of Delta 1
and Prime brokerage.
Long-dated credit derivatives may suffer due to the additional treatment for
written credit derivatives where the full effective notional value referenced by a
written credit derivative is required to be incorporated into the exposure measure.
The effective notional amount of the written credit derivative may be reduced by
the purchased credit derivative on the same reference name and level of seniority
under certain conditions. We believe at times it is difficult to hedge credit
derivatives due to liquidity in the underlying and hence it is too expensive to
hedge in-line with proposed Basel guidelines and hence offset would not be
available.
Given the treatment of repos and derivatives under the proposed revised Basel 3
leverage ratio, we believe it could increase hedging costs for banks and clients,
potentially significantly.
Structuring and securitization inventory would be impacted as they cannot be
hedged perfectly in line with Basel requirements. In addition, credit protection
would be more expensive when inventory is held. So the originator will have to
pay extra fees or securitization will become a pure facilitation business, limiting
the scope of potential issuance.
One aspect that the revised Basel 3 leverage ratio proposal tries to address is re-
hypothecation and to which extent rehypothecation should be encouraged.
According to BIS, the recent crisis suggests that greater reliance on
rehypothecation in banks balance sheets i) increase interconnectedness, ii) make
banks more vulnerable to financial shocks, iii) delay the recovery of assets, and
iv) prompt banks to build up leverage in good times.
Table 91: Global IBs: Re-
hypothecation at FY12
$ billion
MS* 469.0
GS* 459.3
DBK 344.3
CSG 320.2
UBS 311.6
Note: *GS and MS are at Q113
140
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Rehypothecation decreases however the (net) demand for collateral and the
funding liquidity requirements of banks, since collateral can be reused to support
more than one transaction. This in turn lowers the cost of trading, which is
beneficial for market liquidity. Certain types of collateral rehypothecation (and
reuse) play an important role in financial market functioning, and reduce
transaction and liquidity costs.
Re-hypothecation could be impacted in our view as the non cash collateral
received, if re-hypothecated for cash assets, will count towards the leverage ratio
under the revised Basel Leverage ratio consultation document. This may impact
liquidity for banks, reduce collateral velocity as well as cost for end users in our
view.
Of all collateral delivered in 2011
76% was cash and 21% was
government securities. 95% of
the cash collateral was eligible
for and 90% used in
rehypothecation, and in the
region of 60% and 40% for
securities. Additionally, 93% of
credit derivative trades in 2011
had collateral arrangements,
which is the highest of any OTC
derivative asset class.
141
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
B
A
S
E
L

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R
E

E
Q
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Y

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R

1
142
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Basel 3 Core Tier I capital against JPM
required capital requirement
European banks; average Basel 3 Core Tier I to improve to
12.0% end 2015e from 10.5% end 2013e
We estimate that average Basel 3 Core Tier I will improve from 10.5% on average
end 2013e to 12.0% end 2015e, mainly driven by retained earnings, as well as RWAs
reduction for a few banks e.g. UBS, UK domestic banks, CASA, domestic Spanish
banks, and ISP.
Figure 9: European Banks Basel 3 Core Tier I ratios (fully loaded) 2015e vs. 2013e
%
Most European Banks to close their capital shortfall vs.
JPM minimum requirement by 2015e
In Table 92 below, we compare European Banks Basel 3 Core Tier I ratios fully
loaded end 2015e to our JPM minimum requirements including SIFI buffer - with
our methodology based on business mix and/or bank management target levels. Note
that our JPM minimum levels are generally higher than regulatory minimums
including SIFI buffers.
We estimate 31bn of capital shortfall vs. minimum requirement (including SIFI
buffer) end 2013e, mostly concentrated at:
1
5
.
9
%
1
5
.
7
%
1
3
.
0
%
1
3
.
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%
1
4
.
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%
1
2
.
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%
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.
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%
1
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.
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%
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16.0%
18.0%
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2013e 2015e
143
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
CASA, with a 10bn shortfall to minimum 10% at end 2013e vs. >10% for peers
SG and BNPP: Note however that: a) the regulator focuses only on Credit
Agricole Group which is well capitalized with Basel 3 Core Tier I already at 10%
end June 2013, b) this excludes the extension of Switch guarantee mechanism to
35bn of insurance RWAs in our estimates, by year end. The extension of Switch
would improve Basel 3 Core Tier I to 8% end 2013e.
Spanish Banks with a 11bn shortfall end-2013e vs. minimum 9%, split
Santander with 5.6bn shortfall, Caixabank with 2.3bn, Popular 1.5bn and
BBVA 1.4bn. However, we note that this shortfall disappears by 2015e
driven by retained earnings and as such, the Spanish banks are adequately
capitalized in our view.
RBS, with 4.2bn capital shortfall FY13E (90bps shortfall) vs. minimum 10%
UK requirement.
KBC, with a 3bn shortfall vs. minimum 10% - we expect fully loaded Basel 3
equity ratio (ex government capital) to reach 9.2% by YE13, improving to 10.9%
by 2015E. However, this includes positive AFS reserves (1bn) and does not
adjust for penalty payments on remaining state capital. Removing the positive
AFS reserves and incorporating penalty payments on remaining government
capital, B3 fully loaded equity ratio comes to 7.1% YE 2013, increasing to 8.2%
by 2014E and 9.3% by 2015E, on the back of improving profitability and
ongoing restructuring - these ratios represent a capital shortfall (against 10%
levels) of 3bn 2013E and 700mn 2015E. Please note that while the market
would factor in capital shortfall (on a clean basis) in valuations, regulatory
pressure should be limited - as state capital is grandfathered as common equity
and AFS reserves are included. Management intends to maintain a fully loaded
B3 ratio (with grandfathering of state aid, inclusion of AFS reserves etc) of 10%
from 2013 onwards.
DNB, with a 12.8% B3 ET1 ratio, has a NOK2.6bn capital shortfall in 2013e
assuming no increase in mortgage risk weights and a 13% B3 ET1 minimum
target, in line with Nordic peers. However, DNB is well above the regulatory B3
ET1 minimum of 9% by Jul13 and 10% by Jul14 (which rises to 11% by Jul15
and 12% by July 16).
Danske has a DKK2.3bn capital shortfall in 2013e vs. its internal B3 ET1 target
of 13.0%, but it is well above the regulatory B3 minimum of 10.5% in 2022.
We are however conservative in our assumptions as we use DKK100bn increase
in corporate risk weights (pending appeal with the Danish FSA) in our B3 ET1
assumption, which reduces the JPMe B3 ET1 by ~160bps (i.e. without this
adjustment Danske's B3 ET1 would be ~14.3% by end-13e).
Swiss banks: FINMA capital requirement for both UBS and CSG is minimum
10% Basel 3 CET1 ratio, another 3% in high trigger CoCo and low trigger CoCo
of up to 6% depending on balance sheet size. UBS reaches a strong Basel 3
common equity Tier 1 ratio of 13.0% by 2013E, which is well above the 10%
minimum requirement from FINMA. UBS however has decided to run at 13%
B3CET1 ratio and meet the balance capital requirements through CoCo. CSG on
the other hand reaches 9.5% B3CET1 ratio at the end of 2013E and has indicated
that it plans to run with 10% B3CET1 ratio and meet the additional capital
requirements through high and low trigger CoCo. Please note we include SF1bn
in net litigation charge for both UBS and CSG in our capital calculation.
144
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Table 92: European Banks Basel 3 Core Tier I shortfall vs. JPMe minimum requirements
EUR million
Basel 3 Core
Tier I 2013e Min 2013e
Excess/Short
fall 2013e
Shortfall %
market cap
Basel 3 Core
Tier I 2015e Min 2015e
Excess/Short
fall 2015e
Shortfall %
market cap
CASA 7.2% 10.0% -10,109 -52% 9.5% 10.0% -1,805 -9%
KBC 7.1% 10.0% -2,957 -21% 9.3% 10.0% -711 -5%
Popular 7.3% 9.0% -1,455 -23% 8.9% 9.0% -88 -1%
DnB 12.8% 13.0% -292 0% 12.8% 13.5% -1,016 -1%
SEB 14.0% 13.0% 830 1% 15.0% 13.0% 1,740 1%
Swed 15.7% 13.0% 1,559 1% 16.6% 13.0% 2,151 1%
Danske 12.7% 13.0% -355 0% 14.5% 13.0% 1,831 2%
SHB 15.9% 13.0% 1,941 1% 17.1% 13.0% 2,942 2%
Caixabank 7.6% 9.0% -2,332 -17% 9.3% 9.0% 438 3%
HSBC 10.3% 10.0% 2,901 1% 10.7% 10.0% 7,764 4%
STAN 10.8% 10.0% 2,113 4% 11.2% 10.0% 3,668 7%
SAN 8.0% 9.0% -5,625 -9% 9.7% 9.0% 4,330 7%
UBS 13.0% 13.0% -92 0% 16.4% 13.0% 5,920 8%
BBVA 8.6% 9.0% -1,391 -3% 10.1% 9.0% 3,823 9%
Erste 10.3% 10.0% 301 3% 11.0% 10.0% 1,091 10%
NDA 13.8% 13.0% 1,382 4% 15.5% 13.0% 4,179 11%
CS 9.5% 10.0% -1,226 -3% 12.2% 10.0% 5,040 12%
DB 9.9% 10.0% -441 -1% 11.2% 10.0% 4,941 14%
BNPP 10.6% 10.0% 3,529 6% 11.4% 10.0% 9,159 15%
RBS 9.1% 10.0% -4,939 -13% 11.2% 10.0% 5,772 15%
Soc Gen 10.1% 10.0% 226 1% 11.4% 10.0% 5,097 19%
Lloyds 10.4% 10.0% 1,262 2% 13.0% 10.0% 9,902 19%
CBK 9.0% 9.0% -39 0% 10.1% 9.0% 2,426 24%
ISP 9.7% 9.0% 2,200 9% 11.1% 9.0% 6,517 27%
UCG 10.3% 9.0% 5,419 21% 10.6% 9.0% 7,097 28%
Total shortfall / av. 10.5% 10.5% -31,255 -13% 12.0% 10.6% -3,620 -5%
By end 2015e year end however, we expect the great majority of banks to reach at
least minimum requirements, with capital shortfall reduced to 3.6bn, including
1.8bn for CASA, 1.0bn for DnB, 0.7bn for KBC. We note that DNBs capital
position is calculated using 25% mortgage risk weights vs. 11% currently, and KBCs
capital position is calculated after deducting positive AFS reserves (c. 800mn by 15E) and
including penalty payments on remaining government capital
Although DNB is well capitalized in a European context, we see a capital
shortfall in 2015e reflecting the Norwegian regulators desire to have the toughest
capital requirements in Europe. In addition to the 12% B3 ET1 minimum
requirement for SIFI banks by July 2016, the regulator is proposing to introduce
an up to 2.5% countercyclical buffer that needs to be covered by ET1 and
doubling/tripling mortgage risk weights from ~11% to ~20-35%. Norway is
expected to make a decision on the countercyclical buffer and mortgage risk
weights in 2H13e. Assuming a 13.5% minimum B3 ET1 requirement (including a
1.5% countercyclical buffer) and 25% mortgage risk weights, would translate into
a NOK8.2bn capital shortfall for DNB in 2015e (B3 ET1 of 12.8%).
With the Swedish banks being among the best capitalized banks across Europe,
Sweden is moving ahead of Europe by implementing stricter and earlier capital
requirements than those proposed under CRD4. In Sweden SIFI banks must hold
a 12% min B3 ET1 by Jan 2015 and all banks target at least a 13% fully loaded
B3 ET1. Additionally the regulators are considering potentially introducing a
countercyclical buffer of up to 2.5% and increasing mortgage risk weights even
further from the recent hike to 15% (from ~5%, done in Pillar 2). Adjusting for
15% mortgage risk weights and generous dividend payouts (~50-75%), we see
the Swedish banks reaching a B3 ET1 of 13.8-15.9% by end-13e and 15.5-17.1%
by end-15e.
145
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Denmark is looking to implement slightly stricter B3 ET1 requirements than
Europe, but in line with the European timeframe. Under the latest proposal
Danske would need to hold a 10.5% min ET1 (includes a 3.5% SIFI buffer) and a
total capital ratio of 17.6% by 2022. In addition, risk weights are increasing.
After benchmarking risk weights across banks, the Danish FSA ordered Danske
to increase its corporate risk weights by at least 10% from the current ~32% (ex
Ireland), translating into a ~DKK100bn increase in RWAs in 13e. Adjusting for
the higher corporate risk weights we see Danske's B3 ET1 reaching 14.5% by
end-15e vs. 13.0% internal target, hence Danske is in view our well placed to
meet the tougher regulatory environment and its internal target.
SG & BNPP: SG & BNPP would be well capitalised at 11.4% Basel 3 Core Tier
I end 2015e, with respectively 5bn and 9bn of excess capital above the
minimum 10%.
CASA would reach 9.5% end 2015e including current Switch, implying a 1.8bn
shortfall to our minimum 10%. However, with the extension of Switch expected
by year end, Basel 3 Core Tier I would improve further to 10.5% end 2015e.
Swiss banks: UBS reaches a strong Basel 3 common equity Tier 1 ratio of 16.4%
by 2015E which is well above the 13% B3CET1 ratio target it aims to operate
with. CSG reaches 12.2% B3CET1 ratio at the end of 2015E and has indicated
that it plans to run with 10% B3CET1 ratio and meet the additional capital
requirements through high and low trigger CoCo. Please note we include SF1bn
in net litigation charge for both UBS and CSG in our capital calculation.
Deutsche Bank reaches 11.2% B3CET1 ratio by the end of 2015E, after
including 1bn in net litigation charges in our capital calculation; which is
170bps above the 9.5% minimum requirement including the 2.5% SIB charge.
Lloyds and HSBC: We estimate both Lloyds and HSBC to be at 13.0% and
10.7% B3CET1 ratio at FY15E which is above the minimum UK B3CET1
requirement of 10%. We note that at H113, HSBC was already above 10% and
Lloyds was at 9.6% fully loaded B3CET1.
Italian Banks: Capital is already well above the minimumrequirements, in 2Q13
the fully loaded B3 CET1 was at 9.7% for UCG and 11% for ISP. For UCG we
expect the ratio to reach 10.6% by 2015, while for ISP we expect it to remain
almost flat at the very high level of 11.1% in 2015E. We consider that Italian
banks will maintain a high level of capitalization in order to be able to face the
possibility of extraordinary loan loss provisions as part of the Asset quality
review.
Erste Bank - post the recent capital increase (660mn) and full repayment of
participation capital (1,764mn), Erstes fully loaded Basel 3 equity ratio would
stand at 10.3% at the end of 2013 (a year earlier vs. managements intention to
maintain 10% fully loaded ratio from 2014 onwards). This includes 40bps
negative impact from implementation of B3 and 40bps from IRB implementation
in Romania resulting in higher RWAs (to be implemented in 2015). Given the
improving profitability and limited asset growth, we see B3 core equity levels
further improving to 10.7% by 2014E and 11.0% by 2015E with c.1bn capital
buffer over 10% levels (15E).
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Key differences in EU implementation vs. Basel 3
We note however that EU implementation of Basel 3 can differ from the original
Basel 3 document as well as within EU countries. We highlight below the key
differences in implementation:
Insurance capital treatment under CRD IV: CRD IV has introduced a key
difference with the original Basel 3 rules on the treatment of insurance capital.
Under Basel 3, insurance capital is to be fully deducted from common equity,
once the 10% threshold for stakes in financial institutions has been fully used,
however, CRD IV will likely allow EU banks to risk weight their insurance
capital at 370% instead, effectively introducing a less punitive treatment for
insurance capital. This CRD IV capital treatment, also called the "Danish
Compromise, will be used by French banks mostly. There could be a risk that
the Single Supervisory Mechanism puts an end to such treatment, although we
see little risk of changes by end 2015. CASA would be the most exposed to the
potential removal of the Danish compromise, as detailed in our note "Credit
Agricole: High cost of equity on Basel leverage uncertainties" on 29 July 2013.
Credit Valuation Adjustment charges under CRD IV: The EU directive could
introduce exemptions from CVA capital charges for corporates and sovereigns.
This would lead to 5bn to 25bn of RWAs relief for EU banks in our estimates.
The US is not contemplating similar exemptions at this point.
AFS: In CRD IV, national regulators have the flexibility to set a 5-year
grandfathering from 2013 for unrealized gain/loss adjustments. Under Basel 3,
unrealized gains/losses are adjusted in Common Equity Tier I from the date of
Basel 3 implementation (2013).
DTAs: The CRD IV directive gives European Banks a longer phasing period for
DTA deductions from common equity (10 years rather than 5 years under Basel
3). Whilst this would have no impact on Basel 3 fully loaded Core Tier I ratios,
this would provide European Banks more capital flexibility in the short/medium
term vs. US peers. In addition, there are also national differences within the EU,
e.g. the Italian government passed a law that converts into tax credits the DTA
connected with the recognition of loan loss provisions and goodwill impairment
4
,
thereby reducing Basel 3 capital deductions from DTAs.
Risk weight harmonization Credit RWAs
Risk-weighted assets (RWAs) for European banks have been trending down as a %
of total assets over the past 5 years, whilst the opposite could have been expected
given the negative credit migration we have witnessed since the beginning of the
financial crisis in 2008. In our view this is one reason why risk weights have come
under increased focus, with market participants questioning the consistency of the
banks risk-weighted assets and internal models across jurisdictions.

4
In Italy, losses on loan loss provisions and goodwill impairment can be deducted in the year
they are recognised only for 30bp of the nominal value, with the rest of the amount becoming
a Deferred Tax Asset.
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Figure 10: European banks'* average RWA to total assets, 2009-2012
%
Source: Company reports and J.P. Morgan estimates. *includes European banks covered by JPM.
With capital being one of the most important metrics to assess a banks solvency and
strength, large differences in risk weights across banks is not helping the confidence
in reported RWAs.
The banks across Europe have differences in risk weights for the banking book
exposures. While the difference in risk weights can be partly explained by the
procyclicality and the riskiness of the portfolios, it still undermines the comparability
of capital ratios across geographies. The table below shows the average risk weights
used by the banks across Europe.
Table 93: Banking book risk weights under Basel II
Mortgages* Corporate loans
Belgium 9% 45%
Denmark 14% 36%
Estonia 20% 90%
Finland 8% 37%
France 15% 50%
Germany 18% 31%
Greece 35% 100%
Hungary 41%
Italy** 15% 52%
Italy (Standard Model) 20% 75%
Latvia 51% 97%
Lithuania 30% 93%
Netherlands 14%
Norway 12% 55%
Slovakia 50%
Spain 35% 66%
Sweden 15% 42%
UK 20% 65%
Source: J.P. Morgan estimates, Company data. Swedish Central Bank's financial stability report, May 2012; Advanced Model Source
Pillar 3 June 2011 - TAB 7.4 - ISP, BMPS, UCG, Corporate loans are calculated using company averages for that country
The following table shows the comparison between risk weights of 55 banks across
Europe compiled by Basel.
36%
35%
34%
32%
2009 2010 2011 2012
European banks RWA/Total Assets
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Figure 11: Comparison between advanced* and foundation** IRB for banks, average vs. range between minimum and maximum risk weight
%
Source: BIS. * data from 55 banks on average was used in the sample. **data from 29 banks on average was used in the sample.
Nordics: In Sweden the regulator has implemented a risk weight floor of 15% for
Swedish mortgages (vs. ~5% previously) within Pillar 2 to ensure that banks
preserve own funds which cover the risks in the Swedish mortgage books. The IMF
has recommended that mortgage risk weights should be raised to 35% over time in
Sweden to prevent a housing bubble and consumer debt spiraling out of control.
Norway is planning to follow Sweden by hiking mortgage risk weights to 20-35%
(DNB has 11% as of 2Q13), potentially already in 2013. In Denmark the regulator
considered Danskes corporate risk weights too low and requested the bank to
increase them by 10% to ~42% on average. These measures have been proposed to
make banks more resilient and improve longer-term financial stability. We believe
there could be more similar measures introduced in Europe over the coming years.
Risk weight harmonization Market RWAs
We have discussed the issue of non-comparability of market RWAs across IBs
for some time now, in our notes, Global Investment Banks: Basel 4: Market RWAs
convergence - capital at risk analysis published 4th September, 2012 and Global
Investment Banks: Market RWA consistency questioned: DB downgrade to UW,
upgrade GS to OW published 6th July 2010.
The Basel Committees Standards Implementation Group (SIG) trading book
subgroup in its publication, Regulatory consistency assessment programme
(RCAP) Analysis of risk-weighted assets for market risk, also presented the
preliminary results of its analysis of RWA outcomes for banks trading books assets
while indicating that a similar analysis was underway for the banking book.
31%
45%
3%
18%
33%
56%
2%
16%
0%
20%
40%
60%
80%
100%
120%
Advanced All Corporate Sovereign Bank Foundation All Corporate Sovereign Bank
Range between min and max risk weight Average risk weight
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Why regulators are focused on RWA harmonization:
1. As shown in Table 94Table 92, Market RWA numbers for different banks vary
significantly even post Basel 3, with GS reporting Market RWAs of $184bn in
Q2 13 while DB reported Q2 13 Market RWAs of $73bn (55bn) under Basel
2.5 while UBS which is substantially restructuring its FICC businesses reported
Q2 13 Basel 2.5 Market RWAs of $21bn (SF19bn).
We do not think MS takes three times more risk than CSG, as is reflected in its
market RWAs, which are 3.1x those of CSG and 2.0x those of DBK.
The extent of proportionate use of Internal models and Standardised
approaches to calculate market RWAs varies considerably across banks,
which in turn leads to additional uncertainty in market RWA reported
across banks in our view as we believe the Internal models are not comparable
across banks/jurisdictions. Based on 2012 Pillar 3 disclosures, 98% of UBS
market RWAs are internal model based, while SG and BNPP based on 2012
Pillar 3 disclosure are at 82-89% internal models based. For US IBs GS and MS
based on Q2 13 regulatory capital disclosures, an average 46% of Market RWAs
is based on Internal models and the rest is Standardised.
Table 95: Last reported Basel 2.5 Market RWA split (%)
2012/Q2 13
Internal model approach Standardized approach
GS* 44% 56%
MS* 49% 51%
SG 82% 18%
CSG 85% 15%
DBK* 86% 14%
BNP 89% 11%
UBS 98% 2%
Source: J.P. Morgan estimates, Company data. *Q2 13.
2. Similarly, FICC RWAs across IBs also do not look comparable to us, with
MS having Basel 3 RWAs of $239bn in FICC at the end of Q2 13, compared to
CSG at $112bn. DBK is targeting <200bn (<$257bn) in CB&S RWAs by 2015.
3. We also take a look at the reported diversification benefits by different
banks and concur with the Basel Committees view that diversification
benefits for the banks using internal models approach have been on the
higher side. This is despite the fact that we do not include the diversification
benefits within each of the broad market risk categories in our comparison as
these are not reported by banks and it is not possible for us to compare this
across banks, due to lack of data.
We would welcome rationalisation of diversification benefits between the
Standardised and Internal Models based approaches to make at least VaR-based
Market RWAs more comparable.
Table 94: Market RWAs pre and
post JPMe market RWA
convergence 2015E
$ billions
Pre Post (%)
GS 184 184 0%
MS 143 143 0%
DBK 73 126 72%
CSG 46 78 69%
BNP 45 69 53%
SG 35 49 41%
UBS 21 40 96%
Source: Company reports and J.P. Morgan
estimates. Note: $ conversion using current
exchange rates.
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Table 96: Global Banks: large variation in diversification benefits as % of VaR in 2011 and 2012
Local ccy, millions
Average
VaR FY
2011
Diversification
benefit 2011
%
diversification
benefit 2011
Average
VaR FY
2012
Diversification
benefit 2012
%
diversification
benefit 2012 Comment
BofA 167 163 49% 75 117 61% Group
BNP 144 178 55%
42 52 55%
Group , BNP Paribas scope excluding Fortis,
average of quarterly averages in 2012
UBS 76 55 42% 33 38 54% Group
DB* 50 64 56%
56 63 53%
CIB, trading market risk outside of CIB is immaterial,
9M average VAR for 2012
MS 102 63 38% 64 55 46% Group , Primary risk categories only
SG 38 61 62% 31 21 41% Group , taking average of quarterly averages
CS 75 44 37% 55 39 41% IB
Citi 213 162 43% 122 82 40% Group , Total Trading VAR
Source: Company Reports, J.P. Morgan estimates.
In our estimates, post our market RWA convergence exercise, market RWAs
increase by average 58% for European IBs by moving towards a more US IBs type
50:50 split of market RWAs under Standardised and Internal models method
respectively. Post our exercise, market RWAs for the European IBs are more inline
with their US peers. For European banks where we do not have the Q2 13 split
between Internal and Standardised methods, we use the 2012 split of Internal vs.
Standardised market RWAs.
Table 97: Average 58% increase in market RWAs for continental European IBs to reach 50% split on Internal models based market RWAs
$ millions
DBK CSG UBS BNP SG GS MS
Avg. ex
U.S.
Avg.
U.S.
Period used for market RWA split Q2 13 2012 2012 2012 2012 Q2 13 Q2 13
Market risk in the trading book Q2 13 73,133 46,353 20,596 44,913 35,080 183,916 142,966
Implied Increase in Market RWAs using 50%
Standardised approach 52,986 32,067 19,772 29,152 18,208 0 0
Total Implied increase in market RWAs (net of
mc/ms adjustments) 52,986 32,067 19,772 23,632 14,276 0 0
% Implied increase in market RWAs 72% 69% 96% 53% 41% 0% 0% 58% 0%
Total market risk in the trading book (new) 126,119 78,420 40,367 68,545 49,356 183,916 142,966
% Internal model based 50% 50% 50% 50% 50% 44% 49% 50% 46%
% Standardised 50% 50% 50% 50% 50% 56% 51% 50% 54%
Risk weights vs. un-risk weighted: given the large variation in risk weights across
banks, regulators are now also looking to introduce a simple leverage ratio that is
independent from the risk weight that we discuss in more detail in the leverage ratio
section of this report (pg 102).
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Curve Ball Securitisation Proposal Impact on RWAs
The Basel Committee has performed a broader review of the securitization
framework, and in its consultation paper, is seeking to make capital requirements
more prudent and risk sensitive: a) mitigate mechanistic reliance on external credit
ratings, b) address the issue of too low risk weights for highly rated securitization
exposures and too high risk weights for low rated senior securitisation exposures, and c)
reduce cliff effects following deterioration in credit quality in the underlying pool.
The Basel proposals could result in much higher capital requirements for
securitizations in our worst case scenario, in particular for high quality senior
tranches in our view.
The main change in our view is the closer alignment of the Standardised
Approach (SA) and Internal Ratings-Based (IRB) approaches, with both SA and
IRB approaches using the same risk weights and look-up table for long-term ratings,
to avoid arbitrage opportunities. As illustrated in Table 98 below, risk weights have
been increased significantly for higher rated securitization exposures, and the risk
weight floor has been increased to 20% vs. 7% previously for senior tranches under
the current Ratings Based Approach.
Table 98: Illustrative Revised Ratings Based Approach (RBA) risk weights under Alternative A vs. current RBA risk weights (in brackets)
%
Ratings
Senior
Non senior
Thin Thickness = 0.10 Thickness = 0.25 Thickness = 0.50
1 yr 5 yr 1 yr 5 yr 1 yr 5 yr 1 yr 5 yr 1 yr 5 yr
AAA 20 (7) 58 (7) 20 (12) 175 (12) 20 (12) 128 (12) 20 (12) 94 (12) 20 (12) 68 (12)
AA+ 32 (8) 75 (8) 32 (15) 228 (15) 32 (15) 169 (15) 32 (15) 126 (15) 32 (15) 94 (15)
AA 51 (8) 97 (8) 67 (15) 306 (15) 67 (15) 233 (15) 64 (15) 174 (15) 57 (15) 122 (15)
AA- 61 (8) 110 (8) 103 (15) 344 (15) 103 (15) 271 (15) 93 (15) 198 (15) 78 (15) 136 (15)
A+ 71 (10) 124 (10) 153 (18) 388 (18) 153 (18) 317 (18) 128 (18) 223 (18) 101 (18) 150 (18)
A 81 (12) 141 (12) 220 (20) 433 (20) 212 (20) 360 (20) 168 (20) 250 (20) 124 (20) 166 (20)
A- 94 (20) 162 (20) 326 (35) 478 (35) 291 (35) 417 (35) 213 (35) 296 (35) 147 (35) 197 (35)
BBB+ 106 (35) 183 (35) 458 (50) 574 (50) 385 (50) 482 (50) 269 (50) 337 (50) 179 (50) 225 (50)
BBB 118 (60) 203 (60) 609 (75) 707 (75) 476 (75) 553 (75) 330 (75) 383 (75) 218 (75) 253 (75)
BBB- 136 (100) 235 (100) 851 (100) 980 (100) 598 (100) 689 (100) 414 (100) 477 (100) 273 (100) 315 (100)
BB+ 153 (250) 265 (250) 1036 (250) 1195 (250) 729 (250) 840 (250) 504 (250) 581 (250) 333 (250) 384 (250)
BB 170 (425) 294 (425) 1181 (425) 1250 (425) 889 (425) 1024 (425) 601 (425) 693 (425) 391 (425) 450 (425)
BB- 210 (650) 363 (650) 1230 (650) 1250 (650) 1028 (650) 1185 (650) 683 (650) 787 (650) 438 (650) 505 (650)
B+ 262 (1250) 442 (1250) 1247 (1250) 1250 (1250) 1167 (1250) 1250 (1250) 773 (1250) 875 (1250) 494 (1250) 560 (1250)
B 321 (1250) 485 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 883 (1250) 913 (1250) 565 (1250) 584 (1250)
B- 389 (1250) 502 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 915 (1250) 915 (1250) 586 (1250) 586 (1250)
CCC 472 (1250) 568 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 971 (1250) 971 (1250) 621 (1250) 621 (1250)
Below
CCC-
1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250) 1250 (1250)
Source: BIS, J.P. Morgan. Note: Tranche thickness is essentially the size of the tranche relative to the entire securitization transaction. For example, a securitization of $100 pool of loans might be
tranched into a $1 first loss position, a $2 mezzanine position and a $97 senior tranche. The $2 mezzanine position would have a tranche thickness of 2%.
Requirements to use the revised RBA have also been tightened: at least two
eligible credit ratings would be needed to use the revised RBA for a securitization
exposure; and similarly to the current framework, a bank would use the second best
credit rating, regardless of how many eligible credit ratings were available. This calls
into question the treatment for all those securitisations that have been issued with
only one rating. Strict interpretation of the proposed rules would imply that a large
part of the securitization exposures currently calculated using the exiting RBA would
have to switch to more punitive risk weights under the Backstop Concentration Ratio
Approach (BCRA)
5
.

5
For definition, see section below from page 5.
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The enhanced approaches also differentiate for additional risk drivers:
Thickness of non-senior tranches: Tranche thickness is essentially the size of
the tranche relative to the entire securitization transaction. For example, a
securitization of a $100 pool of loans might be tranched into a $1 first loss
position, a $2 mezzanine position and a $97 senior tranche. The $2 mezzanine
position would have a tranche thickness of 2%. Under the current securitization
frameworks ratings-based approaches, tranche thickness is not fully taken into
account.
Maturity of the tranche: Tranche maturity would be based on the weighted-
average maturity of the contractual cash flows of the tranche. Instead of
calculating the weighted-average maturity, a bank would be allowed to choose
simply to use the final legal maturity. As under the wholesale IRB framework,
tranche maturity would have a 5-year cap and a 1-year floor. For intra-year
maturities, the formula would generate the risk weights or a simple linear
interpolation is used.
In addition, the Backstop Concentration Ratio Approach (BCRA) would be the
only possible treatment for all resecuritisation exposures. In other words,
resecuritisation exposures would not be subject to either of the two hierarchies
proposed by Basel.
This means that for re-securitization exposures, the capital requirement would be a
function of the detachment point of the tranche and the Standardised Approach risk
weights for the underlying pool of exposures. In our view, this would lead to
significant increases in risk weights.
Due to the lack of granularity on disclosures for securitization tranches (senior vs.
non senior, maturity, thickness of the tranches, ratings etc.), estimating the impact
from proposed changes remains challenging.
We have however run two sensitivity scenarios based on available Pillar 3 data,
and detail our methodology below.
It is important to note that:
Our best case and worst case scenarios are extreme, however, the actual impact
from Basel proposals are likely to be closer to our worst case scenarios in our
view, as virtually all ABS will be 5-year maturity and hence attract the higher
risk weights.
We have not made estimates for a) the standardized approach which accounts for
a more limited portion of RWAs for European banks which rely more heavily on
IRB approaches, and b) re-securitization exposures which capital requirements
would have to be calculated using the Backstop Concentration Ratio Approach
(BCRA), with even more significant increases in RWAs in our view.
We have not made estimates for US Investment Banks GS and MS as disclosure
is even poorer with no Pillar 3 data and there would be some double counting
with our estimates for US Basel 2.5 requirements for securitizations, as set by the
latest market risk framework (US Risk-Based Capital Guidelines: Market Risk
from June 2012) - $88bn for GS and $35bn for MS. For more detailed analysis,
please refer to our note Global Investment Banks: US Basel 2.5 NPR2 capital at
risk analysis on 25 Jan 2012.
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In our best case sensitivity scenario, the impact would be significantly more
manageable, with RWAs for IRB securitization exposures only multiplied by up
to 1.7x on average in our estimates.
We estimate additional securitisation RWAs of only 4.4bn for SG, 4.8bn for
BNPP, 5.6bn for DB, and SF0.2bn for CS.
Table 99: European Banks Securitisation RWA Sensitivity to changes in Basel securitization framework Best case scenario for IRB
securitization exposures
Local currency in million, end 2012
EAD for IRB
securitisations Current RW
Current RWA
for IRB
securitisations
New RW
best case
New RWA
best case
Increase (x) -
best case
Additional
RWAs
best case
SG 14,128 47% 6,700 79% 11,098 1.7 4,398
BNPP 24,916 26% 6,420 45% 11,221 1.7 4,801
CASA 53,895 29% 15,744 50% 26,765 1.7 11,021
DB 55,519 41% 22,513 52% 28,825 1.3 5,618
CS 22,552 24% 5,411 25% 5,637 1.0 226
UBS n.a. - 12,050 - 12,050 1.0 0
Source: J.P. Morgan estimates, Company data. NB: re-securitisation exposures are excluded from the analysis.
In our best case scenario, Basel securitization proposals would have limited
negative impact up to 25bp on Basel 3 Core Tier I for CASA - and could even
have a neutral impact on overall capital UBS, as lower rated senior securitisations
would attract lower risk weights than the blunt 1250% in the current framework.
Table 100: European Banks 2014e Basel 3 Core Tier I sensitivity to Basel securitisation proposals Best case scenario
million
Current RWA for
securitisations Basel 3 Core Tier I
Additional RWAs
best case
New RWA for
securitizations
best case
Basel 3 Core Tier I
best case
Impact
best case
SG 6,700 10.7% 4,398 11,098 10.6% -0.13%
BNPP 6,420 11.0% 4,801 11,221 10.9% -0.08%
CASA 15,744 8.3% 11,021 26,765 8.1% -0.25%
DB 22,513 10.5% 5,618 28,825 10.4% -0.15%
CS 5,411 10.8% 226 5,637 10.8% -0.01%
UBS 12,050 14.7% 0 12,050 14.7% 0.00%
Our best case sensitivity scenario is based on the following assumptions:
For RBA exposures: we assume that banks would be able to use the revised
RBA, with risk weights increasing for higher rated tranches but decreasing for
lower rated tranches. As we have limited data on the securitization tranches
(maturity, thickness of the tranche etc) apart from the average risk weight under
current RBA, we assume the best case scenario under the revised RBA, e.g. if the
average risk weight is 20% under current RBA, we assume that the new risk
weight under the revised RBA would be 94% implied for a A minus-rated senior
tranche with maturity of 1 year.
For IAA exposures: We simplistically assume that the average risk weight for
the total IAA exposures would increase to the best case scenario in the revised
RBA/IAA look up table. For example, BNPP has EAD of 719m and RWA of
2,114m under IAA, the average risk weight is hence 16%. We assume under
revised IAA/RBA that the new risk weight is 32%.
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For SFA exposures: we simplistically assume that the RWAs would double for
securitization exposures.
In our worst case scenario however, we estimate potentially significant impact
from the Basel proposals for securitization capital requirements, with RWAs for
IRB securitization exposures multiplied by 2x to 6x for European Banks in our
estimates.
DB would be the most impacted in our worst case sensitivity scenario, driven by
large increases in RWAs for higher rated tranches. We estimate additional
securitisation of 68bn for DB. French banks would also be significantly affected,
with RWAs increases of 23bn for SG, 35bn for BNPP, 47bn for CASA. This
compares to only SF6bn for CS and SF24bn for UBS.
Table 101: European Banks Securitisation RWA Sensitivity to changes in Basel securitization framework Worst case scenario for IRB
securitization exposures
Local currency in million, end 2012
EAD for IRB
securitisations Current RW
Current RWA
for IRB
securitisations
New RW
worst case
New RWA
worst case
Increase (x) -
worst case
Additional
RWAs worst
case
SG 14,128 47% 6,700 208% 29,415 4.4 22,715
BNPP 24,916 26% 6,420 166% 41,461 6.5 35,041
CASA 53,895 29% 15,744 117% 62,976 4.0 47,232
DB 55,519 41% 22,513 178% 98,939 4.4 68,020
CS 22,552 24% 5,411 51% 11,576 2.1 6,165
UBS n.a. - 12,050 - 36,150 3.0 24,100
Source: J.P. Morgan estimates, Company data. NB: re-securitisation exposures are excluded from the analysis.
In our worst case scenario however, Basel securitization proposals would have a
material negative impact, reducing Basel 3 Core Tier by 23bp for CS to 160bp for
DB in our estimates. DB would be the most impacted, with Basel 3 Core Tier I
decreasing 160bp to 8.9% end 2014e. Under that scenario, we assume that risk
weights on lower rated securitizations would remain high at close to 1,250% as in the
current framework, and high rated securitizations would attract significantly higher
risk weights.
Table 102: European Banks 2014e Basel 3 Core Tier I sensitivity to Basel securitisation proposals Worst case scenario
million
Current RWA for
securitisations
Basel 3 Core
Tier I
Additional RWAs
worst case
New RWA for securitizations
worst case
Basel 3 Core Tier I
worst case
Impact
worst case
SG 6,700 10.7% 22,715 29,415 10.0% -0.64%
BNPP 6,420 11.0% 35,041 41,461 10.4% -0.58%
CASA 15,744 8.3% 47,232 62,976 7.3% -0.99%
DB 22,513 10.5% 68,020 98,939 8.9% -1.60%
CS 5,411 10.8% 6,165 11,576 10.6% -0.23%
UBS 12,050 14.7% 24,100 36,150 13.2% -1.46%
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Our worst case sensitivity scenario is based on the following assumptions:
For RBA exposures: we assume that banks would be able to use the revised
RBA, with risk weights increasing significantly. As we have limited data on the
securitization tranches (maturity, thickness of the tranche etc) apart from the
average risk weight under current RBA, we assume the worst case scenario under
the revised RBA, e.g. if the average risk weight is 20% under current RBA, we
assume that the new risk weight under the revised RBA would be 433% implied
for a thin non senior tranche with maturity of 5 years.
For IAA exposures: disclosures are more limited in Pillar 3 reports, and we have
no granularity on EAD/RWA per ratings or risk weights bands. We simplistically
assume that the average risk weight for the total IAA exposures would increase to
the worst case scenario in the revised RBA/IAA look up table. For example,
BNPP has EAD of 719m and RWA of 2114m under IAA, the average risk
weight is hence 16%. We assume under revised IAA/RBA that the new risk
weight is 344%.
For SFA exposures: we simplistically assume that the RWAs would triple for
securitization exposures.
156
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Valuation and Earnings strips
BNP Paribas
Neutral
Company Data
Price () 50.74
Date Of Price 10 Sep 13
Price Target () 49.00
Price Target End Date 31-Dec-14
52-week Range () 51.04-36.57
Market Cap ( bn) 60.58
Shares O/S (mn) 1,194
BNP Paribas (BNPP.PA;BNP FP)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY () 5.19 4.25 4.70 5.30
Headline EPS FY () 5.36 4.29 4.29 5.13
NAV/Sh FY () 48.68 51.18 53.77 56.90
BV/Sh FY () 60.12 61.68 64.24 67.37
Adj.P/E FY 9.8 12.0 10.8 9.6
P/NAV FY 1.0 1.0 0.9 0.9
DPS FY () 1.52 1.50 1.70 2.00
Dividend Yield FY 3.0% 3.0% 3.4% 3.9%
Source: Company data, Bloomberg, J.P. Morgan estimates.
BBVA
Underweight
Company Data
Price () 7.75
52-week Range () 7.86-5.82
BBVA (BBVA.MC;BBVA SM)
FYE Dec 2011A 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
Adj.EPS FY () 0.61 0.30 0.37 0.66 0.46 0.53 0.57 0.64
Adj.P/E FY 12.8 26.2 17.6 11.7 14.1 14.8 11.4 12.1
Dividend (Net) FY () 0.42 0.42 0.41 0.42 0.41 0.24 0.41 0.30
NAV/Sh FY () 6.06 5.66 6.3 6.05 6.0 6.16 5.8 6.32
P/BV FY 1.0 1.0 0.8 1.0 0.8 1.0 0.9 1.0
RoNAV FY 11.1% 5.7% 6.30% 11.7% 7.70% 8.7% 9.9% 10.4%
Core Tier 1 Ratio FY 10.3% 11.5% 12.5% 12.1% 12.5% 12.5% 12.70% 13.0%
CaixaBank
Overweight
Company Data
Price () 2.96
52-week Range () 3.22-2.32
CaixaBank (CABK.MC;CABK SM)
FYE Dec 2011A 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
Adj.EPS FY () 0.26 0.04 (0.01) 0.05 0.16 0.20 0.24 0.29
Dividend (Net) FY () 0.00 2.84 0.23 3.70 0.23 3.70 0.23 3.70
NAV/Sh FY () 5.09 4.46 3.6 4.44 3.9 4.73 3.9 4.72
P/BV FY 0.5 0.6 0.6 0.6 0.5 0.6 0.5 0.6
P/NAV FY 0.6 0.7 0.7 0.7 0.6 0.6 0.6 0.6
RoNAV FY 51.3% 52.9% - 71.0% - 53.4% - 50.1%
Adj.P/E FY 11.6 72.3 NM 62.6 15.1 14.7 9.7 10.2
157
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Credit Agricole
Neutral
Company Data
Price () 8.19
52-week Range () 8.38-5.26
Credit Agricole (CAGR.PA;ACA FP)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY () 1.18 0.83 1.05 1.27
Headline EPS FY () (2.60) 0.87 1.05 1.27
NAV/Sh FY () 9.12 9.78 10.84 12.11
BV/Sh FY () 15.96 16.53 17.66 18.93
Dividend (Net) FY () 0.00 0.00 0.00 0.00
Adjusted P/E FY 7.0 9.9 7.8 6.5
P/NAV FY 0.9 0.8 0.8 0.7
RoNAV FY 13.0% 8.7% 10.2% 11.0%
UniCredit
Overweight
Company Data
Price () 4.55
52-week Range () 4.88-3.16
UniCredit (CRDI.MI;UCG IM)
FYE Dec 2012A 2013E
(Prev)
2013E
(Curr)
2014E
(Prev)
2014E
(Curr)
2015E
(Prev)
2015E
(Curr)
Adj.EPS FY () 0.28 0.24 0.22 0.34 0.33 0.50 0.53
P/E (x) FY 20.3 30.4 35.5 16.8 17.4 10.6 9.9
NAV/Sh FY () 7.93 8.09 8.07 8.24 8.21 8.49 8.49
P/NAV FY 0.6 0.6 0.6 0.6 0.6 0.5 0.5
ROE FY 2.9% 2.2% 2.0% 3.1% 3.1% 4.5% 4.8%
ROA FY 0.2% 0.1% 0.1% 0.2% 0.2% 0.3% 0.3%
Net Income Attributable to
Ordinary Shareholders FY
( mn)
865 865 741 1,571 1,509 2,484 2,670
Dividend Yield FY 1.9% 1.3% 1.3% 2.0% 2.0% 2.0% 2.0%
RoNAV FY 4.0% 3.0% 2.7% 4.2% 4.1% 6.0% 6.4%
UBS
Overweight
Company Data
Price (SF) 19.19
Price Target (SF) 21.00
52-week Range (SF) 19.47-11.29
Market Cap (SF bn) 71.94
UBS (UBSN.VX;UBSN VX)
FYE Dec 2010A 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY (SF) 1.73 0.54 0.90 1.40 1.70 1.90
Adj.P/E FY 11.1 35.5 21.4 13.8 11.3 10.1
Headline EPS FY (SF) 1.99 1.10 (0.72) 1.03 1.25 1.76
NAV/Sh FY (SF) 9.65 11.64 10.29 10.82 11.46 12.25
P/NAV FY 2.0 1.6 1.9 1.8 1.7 1.6
Tier 1 Ratio FY 17.8% 15.9% 21.3% 12.2% 13.9% 15.6%
Dividend (Net) FY (SF) 0.00 0.10 0.15 0.30 0.60 0.95
RoNAV FY 22.4% 10.2% (6.6%) 9.5% 11.0% 14.6%
158
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Swedbank
Neutral
Company Data
Price (Skr) 155.00
Price Target (Skr) 165
52-week Range (Skr) 169.70-
115.80
Market Cap (Skr bn) 170.16
Swedbank (SWEDa.ST;SWEDA SS)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (Skr) 13.05 13.48 14.42 15.23
P/E (x) FY 13.6 13.1 10.7 10.2
NAV/Sh FY (Skr) 81.64 81.04 84.64 88.45
P/NAV FY 1.9 1.9 1.8 1.8
ROE FY 14.2% 14.4% 15.2% 15.4%
ROA FY 0.8% 0.8% 0.8% 0.8%
Net Attributable Income FY
(Skr mn)
14,304 12,962 15,827 16,717
Gross Yield FY 6.4% 6.5% 7.0% 7.4%
RoNAV FY 16.5% 16.6% 17.4% 17.6%
Standard Chartered
Neutral
Company Data
Price (p) 1,511
Price Target (p) 1,800
52-week Range (p) 1,861-1,377
Fiscal Year End Dec
Standard Chartered (STAN.L;STAN LN)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY ($) 2.17 2.14 2.36 2.56
Adj.P/E FY 10.9 11.1 10.0 9.3
Headline EPS FY ($) 1.99 1.94 2.39 2.59
Adjusted PBT FY ($ mn) 7,518 7,783 8,371 9,153
NAV/Sh FY ($) 15.15 16.10 17.85 19.52
RoNAV FY 14% 12% 14% 14%
Core Tier 1 Ratio FY 11.7% 11.3% 11.5% 11.6%
DPS FY ($) 0.84 0.90 0.98 1.06
Source: Company data, Bloomberg, J.P. Morgan estimates. Priced intraday at 9.16am
Socit Gnrale
Overweight
Company Data
Price () 36.75
52-week Range () 37.00-22.00
Shares O/S (mn) 760
Socit Gnrale (SOGN.PA;GLE FP)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY () 3.46 3.40 3.90 4.45
NAV/Sh FY () 45.99 47.15 49.19 51.27
DPS FY () 0.45 0.95 1.50 1.75
Adj.P/E FY 10.6 10.8 9.4 8.2
P/NAV FY 0.8 0.8 0.7 0.7
Headline EPS FY () 1.02 2.92 3.86 4.39
BV/Sh FY () 65.32 64.99 67.27 69.12
159
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Commerzbank
Neutral
Company Data
Price () 9.08
52-week Range () 13.08-5.56
Commerzbank (CBKG.DE;CBK GR)
FYE Dec 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY () 2.71 0.23 0.61 0.54 0.76
Adj.P/E FY 3.4 39.2 14.9 16.8 11.9
Headline EPS FY () 0.93 (0.05) (0.19) 0.54 0.76
NAV/Sh FY () (4.44) 25.68 19.57 20.11 20.87
P/NAV FY NM 0.4 0.5 0.5 0.4
RoNAV FY (352800.0%) 0.9% (0.9%) 2.7% 3.7%
Core Tier 1 Ratio FY 10.1% 12.3% 11.4% 12.0% 12.6%
Bloomberg EPS FY () 2.71 0.85 0.35 0.80 1.22
Credit Suisse Group
Overweight
Company Data
Price (SF) 28.71
Price Target (SF) 34.00
52-week Range (SF) 29.32-19.06
Market Cap (SF bn) 37.11
Credit Suisse Group (CSGN.VX;CSGN VX)
FYE Dec 2010A 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY (SF) 4.09 1.62 3.02 2.80 3.15 3.40
Adj.P/E FY 7.0 17.7 9.5 10.3 9.1 8.4
Headline EPS FY (SF) 4.34 1.60 1.04 2.52 3.10 3.47
NAV/Sh FY (SF) 20.77 20.32 20.77 22.02 24.37 26.85
Dividend (Net) FY (SF) 1.30 0.75 0.75 0.75 0.75 1.00
P/NAV FY 1.4 1.4 1.4 1.3 1.2 1.1
Tier 1 Ratio FY 17.2% 15.2% 19.4% 16.8% 18.2% 19.6%
RoNAV FY 20.5% 8.2% 15.2% 14.5% 13.7% 13.4%
Danske Bank
Overweight
Company Data
Price (Dkr) 118.80
Price Target (Dkr) 140
52-week Range (Dkr) 118.90-89.55
Market Cap (Dkr bn) 110.12
Shares O/S (mn) 927
Danske Bank (DANSKE.CO;DANSKE DC)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (Dkr) 5.38 8.97 12.76 14.91
Adj.P/E FY 22.1 13.2 9.3 8.0
NAV/Sh FY (Dkr) 119.84 124.85 132.51 141.45
P/NAV FY 1.0 1.0 0.9 0.8
ROE FY 4.0% 6.3% 8.5% 9.5%
ROA FY 0.2% 0.3% 0.4% 0.4%
Net Attributed Income FY
(Dkr mn)
4,725 8,746 12,768 14,922
Gross Yield FY 0.0% 1.5% 4.3% 5.0%
RoNAV FY 4.8% 7.4% 9.9% 10.9%
160
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Deutsche Bank
Overweight
Company Data
Price () 34.71
52-week Range () 38.73-29.28
Deutsche Bank (DBKGn.DE;DBK GR)
FYE Dec 2010A 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY () 2.72 4.35 3.89 4.20 5.05 5.85
Headline EPS FY () 3.18 5.18 0.17 2.78 4.14 5.73
Adj.P/E FY 12.8 8.0 8.9 8.3 6.9 5.9
P/NAV FY 1.0 0.9 0.9 0.8 0.8 0.7
Divident (Net) FY () 0.75 0.75 0.75 0.75 0.75 0.75
NAV/Sh FY () 33.91 38.79 40.51 41.82 45.18 50.11
Tier 1 Ratio FY 12.3% 12.9% 15.1% 15.0% 15.5% 16.0%
RoNAV FY 8.0% 12.0% 9.8% 10.2% 11.6% 12.3%
DnB ASA
Neutral
Company Data
Price (Nkr) 97.80
Price Target (Nkr) 100
52-week Range (Nkr) 102.80-67.40
Market Cap (Nkr bn) 159.30
Fiscal Year End Dec
DnB ASA (DNB.OL;DNB NO)
FYE Dec 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY (Nkr) 8.00 8.31 9.03 10.34 11.51
P/E (x) FY 12.2 11.8 10.8 9.5 8.5
NAV/Sh FY (Nkr) 68.03 74.48 80.31 88.07 96.70
P/NAV FY 1.4 1.3 1.2 1.1 1.0
ROE FY 11.4% 11.0% 11.1% 11.7% 11.9%
ROA FY 0.7% 0.6% 0.6% 0.7% 0.7%
(Nkr mn)
13,024 13,529 14,703 16,849 18,747
Gross Yield FY 2.0% 2.1% 2.3% 2.6% 2.9%
RoNAV FY 12.1% 11.7% 11.7% 12.3% 12.5%
Erste Bank
Overweight
Company Data
Price () 25.06
52-week Range () 26.85-16.90
Shares O/S (mn) 430
Erste Bank (ERST.VI;EBS AV)
FYE Dec 2012A 2013E 2014E 2015E 2016E
Adj.EPS FY () 1.25 1.13 2.81 3.84 4.32
Adj.P/E FY 20.0 22.2 8.9 6.5 5.8
NAV/Sh FY () 20.77 21.64 22.49 24.92 27.64
P/NAV FY 1.2 1.2 1.1 1.0 0.9
ROA FY 0.2% 0.2% 0.6% 0.8% 0.8%
RoNAV FY 6.6% 5.4% 13.0% 16.2% 16.4%
( mn)
484 570 1,209 1,650 1,857
161
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Handelsbanken
Underweight
Company Data
Price (Skr) 289.80
52-week Range (Skr) 308.80-
224.30
Shares O/S (mn) 648
Svenska Handelsbanken (SHBa.ST;SHBA SS)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (Skr) 22.18 22.02 22.35 23.31
P/E (x) FY 13.1 13.2 13.0 12.4
NAV/Sh FY (Skr) 149.09 151.22 161.90 173.03
P/NAV FY 1.9 1.9 1.8 1.7
ROE FY 14.1% 13.4% 13.0% 12.7%
ROA FY 0.6% 0.6% 0.6% 0.6%
(Skr mn)
14,019 13,993 14,203 14,814
Gross Yield FY 3.7% 3.8% 4.0% 4.1%
RoNAV FY 15.2% 14.4% 14.0% 13.7%
KBC Group
Overweight
Company Data
Price () 36.11
52-week Range () 36.28-17.58
Shares O/S (mn) 417
KBC Group (KBC.BR;KBC BB)
FYE Dec 2012A 2013E 2014E 2015E 2016E
Adj.EPS FY () 2.65 3.29 3.07 4.03 4.64
Adj.P/E FY 13.6 11.0 11.8 9.0 7.8
NAV/Sh FY () 21.58 22.96 25.44 28.54 31.03
P/NAV FY 1.7 1.6 1.4 1.3 1.2
RoNAV FY 10.6% 14.8% 12.7% 14.9% 15.6%
Gross Yield FY 2.8% 0.0% 2.9% 3.7% 6.9%
( mn)
1,496 1,372 1,479 1,849 2,076
Lloyds Banking Group
Neutral
Company Data
Price (p) 78
Price Target (p) 77
52-week Range (p) 79-36
Lloyds Banking Group Plc (LLOY.L;LLOY LN)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (p) 1.06 5.23 6.89 7.69
Adj.P/E FY 73.4 14.9 11.3 10.1
NAV/Sh FY (p) 54.9 56.7 60.9 64.7
P/NAV FY 1.4 1.4 1.3 1.2
RoNAV FY (3.6%) 7.4% 9.4% 11.8%
DPS FY (p) 0.00 1.10 3.40 4.50
Headline EPS FY (p) (2.04) 4.11 5.54 7.38
162
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Santander
Neutral
Company Data
Price () 5.67
52-week Range () 6.68-4.79
Santander (SAN.MC;SAN SM)
FYE Dec 2011A 2012A 2013E 2014E 2015E
Adj.EPS FY () 0.51 0.23 0.38 0.46 0.53
Adj.P/E FY 11.2 24.4 14.8 12.3 10.7
Dividend (Gross) FY () 0.61 0.62 0.60 0.60 0.60
NAV/Sh FY () 5.35 4.46 4.02 3.97 3.99
P/BV FY 0.6 0.7 0.8 0.8 0.8
P/NAV FY 1.1 1.3 1.4 1.4 1.4
RoNAV FY 10.0% 4.9% 9.1% 11.6% 13.3%
SEB
Neutral
Company Data
Price (Skr) 71.10
52-week Range (Skr) 74.15-50.30
Skandinaviska Enskilda Banken AB (SEBa.ST;SEBA SS)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (Skr) 5.46 6.09 6.33 6.68
P/E (x) FY 13.4 11.5 11.1 10.5
NAV/Sh FY (Skr) 43.90 45.24 48.46 51.85
P/NAV FY 1.6 1.6 1.5 1.4
ROE FY 11.3% 12.2% 12.1% 12.1%
ROA FY 0.5% 0.5% 0.5% 0.5%
(Skr mn)
11,607 13,548 14,100 14,876
Gross Yield FY 3.9% 3.9% 4.5% 4.8%
RoNAV FY 13.0% 13.9% 13.7% 13.5%
Royal Bank of Scotland
Neutral
Company Data
Price (p) 356
Price Target (p) 335
Fiscal Year End Dec
Royal Bank of Scotland Group Plc (RBS.L;RBS LN)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY (p) (3.41) 10.15 23.64 28.77
Adj.P/E FY NM 35.1 15.1 12.4
NAV/Sh FY (p) 452 450 451 473
P/NAV FY 0.8 0.8 0.8 0.8
RoNAV FY (11.6%) 1.5% 4.1% 5.5%
( mn)
(5,971) 773 2,088 2,909
DPS FY (p) 0.00 0.00 0.00 6.00
163
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Nordea Bank AB
Overweight
Company Data
Price (Skr) 80.45
52-week Range (Skr) 85.00-57.50
Market Cap ($ bn) 49.67
Nordea Bank AB (NDA.ST;NDA SS)
FYE Dec 2012A 2013E 2014E 2015E
Adj.EPS FY () 0.77 0.84 0.93 1.00
Adj.P/E FY 12.0 11.0 9.9 9.3
NAV/Sh FY () 6.12 6.20 6.52 6.86
ROE FY 11.4% 11.9% 12.9% 13.1%
ROA FY 0.4% 0.5% 0.6% 0.6%
Divident (Net) FY () 0.34 0.53 0.59 0.64
( mn)
3,078 3,319 3,705 3,963
RoNAV FY 13.0% 13.5% 14.5% 14.8%
IntesaSanpaolo
Neutral
Company Data
Price () 1.60
52-week Range () 1.62-1.09
IntesaSanpaolo (ISP.MI;ISP IM)
FYE Dec 2012A 2013E 2014E 2015E
(Prev)
2015E
(Curr)
Adj.EPS FY () 0.12 0.09 0.12 0.15 0.16
P/E (x) FY 16.3 24.6 16.4 12.0 11.4
NAV/Sh FY () 2.12 2.08 2.12 2.20 2.20
P/NAV FY 0.8 0.8 0.8 0.7 0.7
ROE FY 4.2% 2.9% 3.9% 4.9% 5.1%
ROA FY 0.3% 0.2% 0.3% 0.4% 0.4%
( mn)
1,605 1,066 1,599 2,192 2,298
Dividend Yield FY 3.1% 3.1% 3.8% 3.8% 3.8%
RoNAV FY 6.5% 4.1% 5.5% 7.0% 7.3%
HSBC Holdings plc
Neutral
Company Data
Price (p) 706
Price Target (p) 800
Fiscal Year End Dec
HSBC Holdings plc (HSBA.L;HSBA LN)
FYE Dec 2012A 2013E 2014E 2015E
Headline EPS FY ($) 0.74 0.95 0.97 1.08
Adj.EPS FY ($) 0.80 0.91 0.97 1.07
Adj.P/E FY 13.8 12.2 11.5 10.4
($ mn)
13,454 17,659 18,290 20,415
NAV/Sh FY ($) 7.88 8.03 8.41 8.84
P/NAV FY 1.4 1.4 1.3 1.3
RoNAV FY 10.8% 11.5% 11.9% 12.5%
164
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Banco Popular
Underweight
Company Data
Price () 4.00
52-week Range () 5.22-2.32
Banco Popular (POP.MC;POP SM)
FYE Dec 2011A 2012E 2013E 2014E 2015E
Adj.EPS FY () 1.27 (1.22) 0.01 0.20 0.86
Adj.P/E FY 3.2 NM 637.1 19.6 4.6
Dividend (Net) FY () 0.00 0.00 0.00 0.00 0.00
Headline EPS FY () 1.71 (1.46) 0.01 0.24 1.02
NAV/Sh FY () 30.13 35.37 6.24 5.95 6.46
P/BV FY 0.1 0.1 0.6 0.6 0.6
P/NAV FY 0.1 0.1 0.6 0.7 0.6
RoNAV FY 0.0% (30.5%) (2.5%) 4.8% 9.0%
165
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Investment Thesis, Valuation and Risks
BNP Paribas (Neutral; Price Target: 49.00)
Investment Thesis
We remain Neutral on BNP Paribas on a relative basis. The bank trades at 10.6x our
2014e earnings and 0.9x NAV 2014e for a RoNAV of 8.5% ex own debt, vs SG at
8.9x PE, 0.7x NAV for RoNAV of 7.8%. We note BNP Paribas is better positioned
from a capital and leverage perspective, and should be able to comply with new
Basel 3 requirements quicker and at a lower cost. However, we believe this is already
reflected in the valuation with the stock trading at a premium to French peers.
Valuation
Our sum-of-the-parts-based Dec-2014e price target for BNP Paribas is 49.
Our SOP multiples are differentiated by business, e.g. 5-7x for CIB, 7.5x for French
retail, 5-9x for EM, as well as franchise quality. Our valuation accounts for 1) the
impact from Basel 3 capital requirements with 82bn increase in RWAs, and 2)
additional market RWAs from potential market RWA convergence, in our scenario
analysis, offset by additional RWA mitigation/legacy asset reduction beyond 2015e.
BNP Paribas Valuation Dec-14e SOP-based
million
2015
Earnings P/E Capital P/BV
AuM
(bn)
% of
AuM
Value/
share
% of
total Valuation ROE
French Retail Banking 1,374 7.5 6,664 1.5 8.3 17% 10,306 21%
Personal Finance and Int. Retail Banking 1,881 7.3 12,020 1.1 11.1 23% 13,808 16%
Personal Finance 963 7.0 4,176 1.6 5.4 11% 6,739 23%
BancWest 598 7.0 4,260 1.0 3.4 7% 4,187 14%
Europe Mediterranean 320 9.0 3,584 0.8 2.3 5% 2,883 9%
Other Domestic markets 588 7.0 3,101 1.3 3.3 7% 4,113 19%
Investment Solutions 1,766 8.0 9,929 1.4 888.0 1.6% 11.4 23% 14,173 nm
Wealth & Asset Management 618 9.0 3,329 1.7 718.0 0.8% 4.5 9% 5,564 19%
Insurance 878 7.5 6,000 1.1 170.0 3.9% 5.3 11% 6,583 15%
Securities Services 270 7.5 600 3.4 1.6 3% 2,026 45%
Corporate & Investment Banking 1,553 7.0 22,525 0.5 8.7 18% 10,872 7%
BNL bc 335 6.5 5,840 0.4 1.8 4% 2,178 6%
Belgian retail banking 393 7.5 3,101 0.9 2.4 5% 2,946 13%
Other central revenues/costs -1,475 6.5 4,213 -4.3 -9% -5,374
Other capital 175 11,579 1.0 9.3 19% 11,579
Group 6,590 9.2 78,974 0.8 49 100% 60,488 8%
Nb shares (m) 1,244
Target price () 49
Risks to Rating and Price Target
Key risks to achieving our rating and price target include:
The performance of the capital markets, in particular with respect to demand for
equity derivatives, and derivatives trading profits in the environment of
increasing correlation and falling dividend expectations impacting the CIB
division, as well as structured credit pricing leading to potential asset writedowns
both at BNP Paribas and Fortis Bank.
Asset quality, and the performance of the Italian, Emerging Markets, US
operations in BancWest as well as its US commercial real estate book, which, in
our view, requires potentially further writedowns.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
The French retail banking environment, and the net interest margin trends in this
market, equity markets performances, macro-economic conditions as well as the
impact of the interest rate environment and changes to the shape of the yield
curve.
Downside risks also include:
Potential additional sovereign debt writedowns/mark-to-market on the group's
15bn of banking exposures to Greece, Ireland, Portugal, Italy and Spain.
Negative capital and funding implications from the ongoing uncertainties on the
sovereign risk. Deterioration in the funding outlook for Italy in a scenario with
weaker economic conditions and further ratings downgrades.
Headwind from French politics: earnings risk from the implementation of the
French banking law.
Upside risks also include:
More positive outcome on proposed regulations, whether in the US or Europe.
Large business disposals at above 1x book value. At this point, strategic focus is on
growth. However, longer term, there could be more changes to the business model,
including business disposals.
BBVA (Underweight; Price Target: 6.54)
Investment Thesis :
We maintain our UW recommendation on BBVA, with 5.61 TP following the latest
asset disposals, removal of floors in Spain and downturn in Emerging Markets. We
still see BBVA as one of the Spanish banks, with Santander, set to benefit most from
the restructuring of the domestic financial system. The banks foreign exposure is a
significant advantage relative to other domestic players, although we consider its
Spanish exposure will determine the ultimate direction of the stocks performance in
the near term, as we see it trading expensive relative to other European peers. We
still see BBVA lagging Santander in terms of losses recognition in Spain, a vital item
for us.
Valuation
We derive our UW recommendation on BBVA with a 2014 SOTP PER-based PT of
5.61 from 1) 2014E adjusted earnings of 2.7bn, 2) our assumptions about the
sustainable RoTBV per division, 3) average cost of equity of 12.2% and 4)
sustainable growth rate of 2.5%.
Risks to our rating and PT are the following: 1) Further deterioration in Spanish
corporate and mortgage asset quality would lead to credit losses beyond those
calculated, as regulatory risk on provisioning and capital is still very high. On the
positive side: (1) an improvement in funding costs would lower funding costs for
BBVA and its peers; 2) improvement of the Spanish economic and property markets
would lower expected credit losses; 3) easing of the deposits war would help
preserve margins; 4) strong growth in Latam economies could be sustained.
167
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
CaixaBank (Overweight; Price Target: 3.40)
Investment Thesis
We upgrade our recommendation on Caixabank from Neutral to OW, as we expect
the bank will benefit from lower funding costs in Spain and a favourable DTA
resolution will improve its capital position allowing for further cleanup in the loan
book. The bank still has a very low profitability in its domestic business where we
expect there is ample room to cut costs and become more efficient after the
integration of Banco de Valencia and Banca Civica. Our main concerns are around
its large real estate portfolio, potential surprises in the acquired institutions and the
M&A overhang dragging the stock.
Caixabank becomes our top pick amongst Spanish domestic banks, as we expect it to
benefit from its scale and weaker competitors in retreat. The weak macro outlook and
valuation are the main challenges it will have to face, in our view.
Valuation
Our Dec 15 SOTP PER-based PT of 3.40 is the result of a 1) 1% growth rate, 2)
10.5% cost of equity, 3) a sustainable RoTBV of 7% and 4) 8% required Core Tier 1
capital
Risks to our rating and price target are 1) further deterioration of the sovereign
turmoil would increase pressure on margins; 2) falling interest rates would lower the
profitability of its loan book; 3) further asset quality deterioration would increase
potential losses; 4) early implementation of Basel III would be punitive; 5) LTRO
redemption would lower deposits yields across the system; and 6) a freeze of the
wholesale market would be a negative.
Credit Agricole (Neutral; Price Target: 8.50)
Investment Thesis
We remain Neutral on Credit Agricole due to the uncertainty on Basel leverage.
Earnings visibility has improved at CASA post Emporiki disposal and the CIB
deleverage, with a more stable business mix, and sentiment should also improve as:
a) concerns on the groups gearing to French macro are overdone in our view given
CASA's low NPL of 2.4% and high NPL coverage ratios; b) the Investor Day will
provide full clarity on CASA Basel 3 capital plans. However, question marks on the
capital treatment of insurance (Danish compromise) will likely continue to weigh on
the stock, and the debate will shift from capital to leverage in our view. Although
Credit Agricole Group Basel leverage is above the 3% minimum in our 2015e
estimates, investors focus on CASA's low 1.7% Basel leverage will likely remain the
main hurdle to a full re-rating and we expect share performance to be capped by the
uncertainty and execution risk on the potential mitigation initiatives.
Valuation
Our sum-of-the-parts-based Dec-2014E price target for Credit Agricole is 8.5.
Our SOTP multiples are differentiated by business, e.g. 5-7x for CIB, 7-8x for
French retail, 5-8x for EM, as well as franchise quality. Our valuation accounts for
the impact from Basel 3 capital requirements with 54bn increase in RWAs.
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
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[email protected]
Credit Agricole SOP Valuation (Dec-14e)
million
2015e
Earnings
P/E Capital P/BV AuM
(bn)
% of
AuM
Value/
share
% of
total
Valuation ROE
Total Retail Banking 2,096 7.4 17,489 0.9 6.2 73% 15,474 12%
Credit Lyonnais - French Retail 627 7.5 3,409 1.4 1.9 22% 4,699 18%
Regional Banks - French Retail 980 7.5 5,132 1.4 3.0 35% 7,349 19%
Specialised Financial Services (SFS) 232 7.0 4,779 0.3 0.7 8% 1,624 5%
International Retail Banking 257 7.0 4,170 0.4 0.7 8% 1,802 6%
Asset Gathering 1,785 7.9 4,973 2.8 5.7 67% 14,122 36%
Asset management 660 8.0 750.8 0.7% 2.1 25% 5,279
Private Banking 163 10.0 132.2 1.2% 0.7 8% 1,630
Insurance 962 7.5 3,164 2.3 231.5 3.1% 2.9 34% 7,213 30%
Corporate & Investment Banking 1,047 5.0 12,856 0.4 2.1 25% 5,235 8%
Other revenues and costs -1,722 7.1 1,994 -4.1 -48% -10,176
Other capital -48 -3,421 1.0 -1.4 -16% -3,421
Group 3,158 6.7 33,891 0.6 8.5 100% 21,234 9%
Target Price 8.5
Key risks to achieving our rating and price target include:
Asset quality in the groups main markets: France, Italy and Emerging Markets
(North Africa mainly).
The performance of the capital markets, and its impact on both Corporate &
Investment Banking and Asset Gathering revenues.
The French retail banking environment, and the net interest margin trends in this
market, equity markets performances, macro-economic conditions as well as the
impact of the interest rate environment and changes to the shape of the yield
curve.
Downside risks also include:
Potential additional sovereign debt writedowns/mark-to-market on the
group's 4.9bn of banking exposures to Ireland, Portugal, Italy and Spain.
Negative capital and funding implications from the ongoing uncertainties on the
sovereign risk. Deterioration in the funding outlook for Italy in a scenario with
weaker economic conditions and further ratings downgrades.
Headwind from French politics: earnings risk from the implementation of the
French banking law.
Upside risks also include:
More positive outcome on proposed regulations, whether in the US or Europe.
Large business disposals at above 1x book value. At this point, strategic focus is
on growth. However, longer term, there could be more changes to the business
model, including business disposals.
169
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UniCredit (Overweight; Price Target: 5.51)
Investment Thesis
We like UCGs business mix and revenues diversification, and we think that
Unicredit has a relative advantage in a low interest rates environment, due to the
relatively higher proportion of time deposits funding. We see potential upside in case
of further substantial declines in Italian sovereign spreads and improvement of the
asset quality.
Valuation
We upgrade UCG to Overweight from Neutral on relative valuation. We increase our
Dec 14 TP to 5.51 (previously 4.00) on a 2015E SOTP valuation. We maintain
our SOTP valuation on geographical segmentation. We assign capital
requirements in terms of core tier 1 at 8% Commercial banking, 10% for CIB, and
11% for international operations, and an average group CoE of c.11%. The price
target change is due to 1) Removing the provision shortfall (to reach 50% coverage)
from SOP valuation: as economic outlook improves slightly, we consider that the
47% coverage should be enough and the regulator will not push for a 50% coverage.
2) c. 5bps of cost of risk moved from 2015 to 2013 and 2014: AQR may increase
provision levels earlier rather than later. 3) We raise sustainable ROE for the Italian
business to 8% from 6%, consistent with P/BV of 0.8x for the business. 4)We raise
sustainable ROE for CIB at 10%.
UCG SOTP valuation
We believe the key risks that could keep our rating and target price from being
achieved include the following:
On the downside: 1) UCGs profitability could still be subject to volatility due to
sovereign risks affecting Italy, which could further impact the bank's cost of funding
and LLP levels. 2) CEE contributes a significant portion to UCG's earnings;
consequently a deterioration of the macro environment in the region and currency
movements could adversely impact UCG earnings. 3) Upcoming AQR and stress test
could impair profitability due to higher provisions
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UBS (Overweight; Price Target: SF21.00)
Investment Thesis
UBS is trading at 10.0x P/E, 1.5x P/NAV and RoNAV ex own debt of 15.9% in
2015E with Basel 3 CET1 ratio of 16.4% on a fully loaded basis, assuming the
exercise of the SNB StabFund option in 2013. UBS is our top global IB pick
considering its business mix of asset gathering gearing through the largest private
bank in the world and material capital release potential.
Valuation
Our Dec-14 SOP based Price Target for UBS is SF21; we value the Wealth
Management division of UBS at 13x 2015E P/E, in line with our cashflow model
implied value. Our SOP multiples are differentiated by business and franchise
quality, and the IB multiple accounts for regulatory uncertainty. Taking these factors
into account, we value Investment Bank on a 6.0x 2015E P/E, Wealth Management
and Retail & Corporate on a 13x and 7.0x P/E respectively, Global Asset
Management on a 6.0x P/E and Wealth Management Americas on 10.0x P/E. Our
price target implies a 10.8x P/E on overall 2015E earnings.
Risks that could prevent the stock from achieving our target price and OW rating
include:
The performance of the capital markets, impacting both the investment banking
capital markets business as well as the performance of UBS assets under
management.
Potential risk of further markdowns in remaining legacy credit assets, and
potential risk of further balance sheet assets becoming impaired, although greatly
reduced post transaction with SNB.
The US, as well as global, economies could experience a sharper slowdown with
a corresponding deterioration in credit quality and weaker revenues.
Legal risk in part from the structured credit and financial market crisis, could
become an issue in particular for banks with material capital markets activities as
well as within asset and wealth management.
Recent developments around retrocessions could impact gross margins in Wealth
Management in the short-term.
Swedbank (Neutral; Price Target: Skr165.00)
Investment thesis
Our rating for Swedbank is Neutral. Whilst we continue to favor Swedbank for its: i)
highly profitable mortgage business (2015e RoNAV of 31%); ii) improving top line
revenue growth in the Baltics (JPMe: ~4% income growth in 14-15e; 2015e RoNAV
of 12%); iii) good cost management with a 43% cost-income ratio in 2015e; and iv)
strong capital position with JPMe 2015e B3 ET1 of 16.6%, we believe i) Swedbank
has reached fair value, trading at 1.7x 2015e P/NAV, ii) we see slower NII growth
going forward (~57% of income), as front book mortgage margins are ~10-15bps
below the back book margins, iii) Baltic recoveries fading, which should translate
into higher group losses in a stable asset quality environment (JPMe: 5bps of losses
in 2013e rising to 9bps in 2014-2015e) and iv) regulatory uncertainty as even higher
mortgage risk weights or a countercyclical buffer could be introduced in Sweden.
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Valuation
Our Dec-2015e PT is SEK165. We value Swedbank at 1.9x P/NAV and 10.8x P/E
for a RoNAV of 17.6%in 15e.
The key risks to our rating and PT being achieved include:
Upside risk from better than expected NII progression and mortgage margins.
Upside risk from stronger than expected recovery in the Baltics.
Upside risk from potential buybacks.
Downside risk from slowdown in Swedish retail activity given Swedbanks
proportionately larger exposure here, with a 26% market share in Swedish mortgages.
Downside risk from higher than expected funding costs and/or weaker than expected
success in defending lending margins.
Downside risk from weaker than expected cost management.
Downside risk from higher than expected loan losses in Sweden.
Downside risk from higher mortgage risk weights.
Standard Chartered (Neutral; Price Target: 1,800p)
Investment Thesis
While StanCharts H113 trading statement reassured concerns over near term earnings
in our view with an improved performance in Q2 after a weak Q1; we expect the focus
to shift from Q2 towards the outlook for earnings in H2 and 2014, which may be more
challenging. Given that we remain cautious on EM/Asian bank valuations in the
current environment, we see limited re-rating in the absence of earnings upgrades. We
prefer Standard Chartered to HSBC on valuation.
Valuation
Our sum of the parts based Dec 2014E price target for Standard Chartered of 1800p
is calculated using the Gordon Growth model using cost of equity of 10% and
sustainable returns and allocated equity fully adjusted for Basel 3.
The key upside and downside risks that could prevent our rating and price target
from being achieved include the following:
Macro economic risks (both upside and downside): Being an EM focused bank,
StanChart is exposed to general macro economic variables in EM such as
slowdown or quicker than expected recovery in GDP growth, inflationary
pressures, depreciation of EM currencies & cross border & political risks.
Pickup in growth (upside): Standard Chartered remains geared to growth in Asia
and a faster than expected pickup in growth in Asia poses upside risk to our
estimates.
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Regulation (downside): Group estimates annual regulatory costs well north of
$500mn excluding the impact of the PLAC buffer which could potentially add a
further $400m-$600m.
Socit Gnrale (Overweight; Price Target: 39.00)
Investment Thesis
SG risk/reward is attractive at current prices, in our view. The capital debate appears
to be over, with the end of the deleveraging plan and Basel 3 Core Tier I
strengthened by c.250bp to 10% end 2013e. Legacy assets are no longer an issue, in
our view, and funding/liquidity has also improved with LCR above 100% in Q1 13
already. Whilst 2013 remains a challenging year for profitability, longer term, SG
offers double-digit earnings progression with cashflow generation of c.70bp p.a. by
our estimates. We estimate 3.6bn of net profits in 2015e, vs. 3.3bn underlying in
2012; long term, we see potential upside to our estimates with additional 0.5bn
profits to 4bn and EPS of close to 5.00 implying PE of 7.0x, 10% RoNAV vs.
8.6% in our 2015e base case, driven by cost savings and turnaround in international
retail. At 0.7x NAV, valuation appears attractive vs. 1.0x for the sector.
Valuation
Our sum-of-the-parts-based Dec-2014E price target for Socit Gnrale is 39.
Note that our SoP multiples are differentiated by business (e.g. 5-7x for CIB, 7-8x
for French retail, 5-8x for Emerging Markets, 10x for Private Banking, 6-9x for
Asset Management & Securities Services) and franchise quality, e.g. we value SG
CIB at 6x vs. 7x for IB Tier I players. We have also accounted for an additional
40bn in RWAs as a result of Basel 3 rules, and an additional market RWAs from
potential market RWA convergence in our scenario analysis, net of additional RWA
mitigation/legacy asset reduction.
Socit Gnrale - SOP valuation Dec-2014e
million
2015e
Earnings P/E Capital P/B
AuM
(bn)
% of
AuM
Value/
share
% of
total Valuation ROE
Retail banking in France 1,282 7.5 8,127 1.2 12 31% 9,618 16%
Specialised financial services (SFS) 726 6.5 4,590 1.0 6 15% 4,719 16%
Retail international 455 8.0 6,888 0.5 5 12% 3,638 7%
Global Investment & Management Services 325 8.5 1,622 1.7 87.5 3.2% 4 9% 2,774 20%
Asset management 130 8.0 450 2.3 1 3% 1,040 29%
Private Banking 133 10.0 683 2.0 87.5 1.5% 2 4% 1,332 20%
Securities Services & Online services 62 6.5 489 0.8 1 1% 401 13%
Total Corporate & Investment Banking 1,530 6.0 12,748 0.7 12 30% 9,179 12%
Central revenues/costs -847 6.9 253 -7 -18% -5,618
Unallocated capital 99 6,293 1.0 8 21% 6,293
Group 3,570 8.6 40,521 0.8 39 100% 30,603 9%
Nb shares 782
2013E Target price 39
We believe the key risks that could keep our rating and price target from being
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Asset quality trends in CEE/EM, in Romania, in particular, and its impact on
International Retail performance. Emerging market macro risks related to FX as
well as the political environment are also key.
Potential additional sovereign debt writedowns on the group's 1.6bn of net
banking book exposures to Ireland, Italy and Spain. Negative capital and funding
implications from the ongoing uncertainties on the sovereign risk.
Performance of the capital markets, and its impact on both Corporate &
Investment Banking and Asset Gathering revenues. Equity derivatives revenues
are particularly sensitive to the demand for structured products, volatility and
correlation levels as well as dividend expectations.
Provision and mark-to-market risk in SG's legacy assets, US residential
mortgage-backed securities in particular as well as monoline exposures.
The French retail banking environment and the net interest margin trends in this
market, as well as the impact of the interest rate environment and changes to the
shape of the yield curve.
Headwind from French politics: earnings risk from the implementation of the French
banking law.
Commerzbank (Neutral; Price Target: 8.87)
Investment Thesis
We maintain our Neutral recommendation and adjust our TP to 8.87 (8.74) as we
see Commerzbank fairly valued considering its ongoing restructuring and asset
disposal overhang the stock still has. The bank will benefit from good wholesale
market access but the low rates environment and potential losses in its Non Core
Assets portfolio will continue to drive the share price, in our view, where we have no
strong view to the upside.
Valuation
Our Dec-14 target price of 8.87 is based on a sum-of-the-parts valuation, using our
2014 earnings and an expected ROTE14E of 4%. This is not close to the current
share price and lack of clarity on further credit losses justify our Neutral
recommendation. Multiples assigned are in line with those we use to value other
banks in the region.
The key risks that we believe could prevent our rating and target price from being
achieved include the following. On the positive side, a faster than expected
adjustment in its Non Core Assets portfolio would lead to lower expected losses in
the long run, while rising interest rates would also benefit the stock's margins in its
core businesses. A healthier economic recovery in Europe would also help lower the
potential losses in its CRE portfolio.
On the negative side 1) Further sovereign deterioration across European countries, as
well as deterioration in the prices of retail and commercial real estate and
deterioration in the ship finance business; 2) pressure on deposit rates in Germany
due to savings banks, which could be a headwind to achieving our estimated
earnings. 3) a stronger/weaker-than-expected economic environment, which would
lower/increase our provision estimates, especially in the NCA division, which we
currently value at -0.6x BV.
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Credit Suisse Group (Overweight; Price Target: SF34.00)
Investment Thesis
CSs valuation looks attractive to us, trading at 1.1x P/NAV for RONAV ex own
debt of 13.4% in 2015E with about 66% of group net income from private banking
and wealth management. CSG has made good progress on cost reductions
particularly in the IB with additional SF1.7bn in Group costs savings to come over
the remaining period of 2013E and 2014-15E. In addition, the capital position has
improved materially post the announced actions in July-12, with CSG reaching a
strong Basel 3 common equity Tier 1 ratio of 12.2% on a fully loaded basis by
2015E.
Valuation
Our Dec-14 SOP-based price target for CSG is SF34; we value the WMC division of
CS at 13x 2015E P/E, inline with our cashflow model implied value. Our SOP
multiples are differentiated by business and for franchise quality. Taking these
factors into account, we value Wealth Management clients on a 2015E P/E of 13.0x
and Corporate and Institutional Clients on 7.5x for a total Private Banking 2015 P/E
of 11.6x. We value Asset Management at a 8.0x P/E. Our PT implies a 10.1x P/E on
overall 2015E earnings.
We believe the key risks that could keep our OW rating and target price from being
capital markets business and the performance of Credit Suisses assets under
management.
Growth in new private banking money and the development of private banking
transaction margins. Impact of legislation and regulatory issues surrounding
Swiss banking secrecy and customer confidentiality.
The US, as well as other major economies, could experience a slowdown with a
corresponding deterioration in credit quality and weaker revenues. In addition,
widening credit spreads could affect funding costs.
Legal risk, in part from the structured credit and financial market crisis, could
become an issue, particularly for banks with material capital markets activities as
well as within asset and wealth management.
Danske Bank (Overweight; Price Target: Dkr140.00)
Investment Thesis
We maintain our rating for Danske at Overweight. We like the asset recovery story in
Danske and believe the worst is behind us in Denmark and Ireland (gross NPLs fell -
1% qoq/-8% yoy in 2Q13 and coverage is at 42%). We see group losses falling from
65bps in 2012e to 23bps in 2014e and 19bps in 2015e. With management focusing
on improving earnings (by +DKK5-6bn by 2015e) and cost efficiency (2015e cost
income target of 46%), we believe Danske will reach at least a 10.9% RoNAV in
2015e. Whilst Danske has disappointed in the past, expectations are low and we see
limited risk for consensus earnings downgrades. With a JPMe B3 ET1 of 12.0% at
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
2Q13 (adjusted for DKK100bn higher RWAs), we believe Danske could pay a
20%/40%/40% dividend in 13/14/15e.
Valuation
We use a SOTP valuation methodology to value Danske Bank. Our Dec-15e PT is
DKK140, which represents 0.9x 2015e P/NAV for 10.9% RoNAV.
The key risks to our rating and PT being achieved include the following:
Downside risk from further macro deterioration in Denmark and/or Ireland
Downside risk from higher shipping, agricultural and SME losses
Downside risk from falling house prices in Denmark and weaker than expected
asset quality.
Downside risk from repricing and cost cutting efforts not materializing
according to plan.
Downside risk from higher mortgage risk weights.
Short-term downside risk from lower insurance revenues if rates rise (long-term
positive).
Deutsche Bank (Overweight; Price Target: 40.00)
Investment Thesis
We are OW due to the perfect mix of i) worst large cap bank share price performance
YTD, ii) cheapest Eurobank on 5.8x PE 2015E, iii) discounting our bear case 9bn
capital raise scenario with exit PE 8.6x 2015E below Eurobanks at 9.6x, and iv) new
management now almost one year post Investor Day under pressure to create S/H value.
Valuation
Our new Dec-14 SOP earnings based Price Target for DB is 40. Please note our
SOP multiples are differentiated by business and franchise quality. We value DBs
Tier 1 CB&S division at 6x P/E. We value the AWM division at a discount to Swiss
peers, owing to the better Private Banking franchise of both Swiss peers. We also
include estimated 40bn increase in market RWAs from potential RWA convergence
in our SOP.
We believe the key downside risks that could keep our OWrating and target price
capital markets business (particularly Fixed Income) as well as the performance
of Deutsche Banks asssets under management.
Downside risks include a decline in capital market and trading activity, with DB
highly geared to the trading environment through its CB&S division.
Provision and mark-to-market risk in DBs riskier assets such as monoline
exposures, leverage finance, RMBS, CMBS, CDOs and other structured credit.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
The US, as well as global, economies could experience slowdown with a
corresponding deterioration in credit quality and weaker revenues. In addition,
widening credit spreads could affect DBs profitability.
Legal risk in part from the structured credit and financial market crisis could be
worse than our estimates, and become an issue in particular for banks with
material capital markets activities such as DB.
IB regulatory landscape toughens further from current levels, impacting earnings
materially compared to our estimates.
DnB ASA (Neutral; Price Target: Nkr100.00)
Investment Thesis
We maintain our Neutral rating on DNB. Whilst we like the earnings potential in
DNB, we believe regulatory headwinds in Norway should not be ignored. The
Norwegian regulator is expected to increase Norwegian mortgage risk weights to
~20-35%, introduce a min B3 ET1 of up to 14.5% (12% min + up to 2.5%
countercyclical buffer) by Jul 2016 and potentially limit covered bond and wholesale
funding. Although higher mortgage risk weights offer an opportunity to reprice, we
believe this is to some extent offset by the tough capital requirements, lower volume
growth and potential covered bond funding restrictions/higher liquidity requirements.
In our view DNB is a good macro hedge against the more resilient Norwegian
economy (~80% of revenues from Norway with GDP growth of ~2.7% p.a. 14-
15e), and we see solid top line revenue progression (+6% core revenue growth in
14e/15e), as well as upside potential on the cost line as management targets a 45%
cost-income ratio in 2015e. However, we believe capital is still tight, especially if the
Norwegian regulator sets the B3 ET1 min capital requirement at 14.5% (12% min +
up to 2.5% countercyclical buffer) as of in Jul16 vs. DNBs JPMe B3 ET1 of 12.8%
in 2015e including 25% mortgage risk weights. Trading at 1.0x P/NAV for a 12.5%
RoNAV in 2015e we believe DNB is trading at fair value for now.
Valuation
Our target price is based on our sum-of-the-parts valuation analysis, considering
historical P/E multiples reflecting the relative quality of earnings for each division
and relative stronghold to peers. Our Dec 2015 price target is Nkr100.00, which
reflects 1.0x 2015e P/NAV for 12.5%RoNAV.
Upside risk from repricing potential on the back of higher mortgage risk weights.
Upside risk from lower than expected mortgage risk weights and capital
requirements.
Downside risk on capital from higher mortgage risk weights (~20-35% vs. 11.4%
as of 2Q13) and tough minimum capital requirements (potentially B3 ET1 of
14.5%).
Downside risk from sentiment pressures with volatile/negative oil prices and
shipping indices given DNBs ~7% shipping exposure in its loan book.
Downside risk from a correction in the Norwegian house prices leading to weaker
than expected asset quality.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Downside risk from Norwegian growth and cost cutting efforts not materializing
according to plan.
Erste Bank (Overweight; Price Target: 35.00)
Investment Thesis
Erste has a strong retail franchise within CEEMEA with a top 3 market position in
Czech, Romania, Slovakia and Austria; with c.17mn clients and >3000 branches. While
the stock has rerated to close to 1x NAV, it still trades at 30-40% discount to single
country EM banks. We expect this discount to narrow (normalizing provisions improve
bottom line and capital concerns now abated) and provide the next leg of re-rating.
Valuation
Our Dec-14 price target (incorporating 2015 estimates), based on Gordon growth, SOP,
PE and NAV multiples, and is set at 35. Our Gordon growth model incorporates a
long term growth rate of 3%, 11% cost of equity and a 16% normalized RoNAV.
Change vs. previous target stems from i) earnings revisions ii) rolling over PT to
incorporate 2015 estimates (vs. 2014 before hand) iii) removing capital shortfall from
our sum-of-parts valuation (given Erste is reaching c.10.9% B3 equity tier 1 by 2015
on our estimates).
Erste group valuation methodology (Dec 14 PT 35)
Gordon Growth
LT growth rate, g 3%
Hurdle rate, ke 11%
Normal RoNAV 16%
Fair value, EUR 37
PE multiple
EPS 15E forecast 3.84
Fair value earnings multiple 9
Fair value, EUR 35
NAV 25
Discount to NAV (premium) -40%
Fair value, EUR 35
Sum of parts
Fair value, EUR 36
Price target, EUR 35
Erste Sum of Parts valuation methodology
Net income As % of P/E Implied Value
(15E) Group Assigned mn
CEE 1,195 72% 10.0 11,951
Austria 261 16% 9.0 2,348
GCIB 106 6% 6.0 635
Group Markets 219 13% 5.0 1,093
Group Center -130 -8% 5.0 -652
Total 1,650 100% 15,375
Capital shortfall
Group value 15,375
Shares 430
Fair value 36
1. Lower than expected growth in CEE countries- if the Euro sovereign crisis
escalates, growth of CEE countries could be hampered (being correlated to Euro
area growth), which would be negative for the revenues.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
2. Currency depreciation in Hungary and Romania would put further strain on FX
portfolios. Also the risk of Hungarian government implementing policies which
are not in favor of banking system is also present.
3. Rise in funding costs - which would be negative for the margins.
4. Higher than expected asset quality deterioration in Austria and CEE.
5. Acquisition risk- management has been vocal about expanding presence in
Poland and Serbia.
Handelsbanken (Underweight; Price Target: Skr270.00)
Investment thesis
We maintain our U/W rating for Handelsbanken reflecting:
Valuation: we continue to view Handelsbanken as relatively expensive and
believe the other Nordic banks offer better upside potential. Whilst
Handelsbanken offers growth, patience is needed as growth is very slow (after 15
years in the UK, UK accounts for ~7% of group revenues and the UK market
share is ~0.3%).
Reliance on market funding: Handelsbanken is in our view too market funding
geared with a 265% loan/deposit ratio and short-term (<1yr) market funding
accounting for 50% of total market funding, although we recognize that this is
part of Handelsbankens strategy.
Low funding costs could be impacted by the proposed bail-in rules. The EU
Council is proposing that a min of 8% of total liabilities must be bailed-in before
resolution funds can be used. Whilst bail-in debt can be used as part of the 8%
min, we think Handelsbanken may want to cover this with regulatory capital (T1
+ T2) to ensure that its funding costs remain among the lowest in Europe
(Handelsbankens wholesale funding comprise ~53% of total funding), which in
our view could hold them back from repatriating capital in the short-term.
Capital. Despite leverage (equity/total assets) of 3.9%, we view Handelsbankens
capital position as solid with a JPM B3 2015e ET1 of 17.1% (adjusted for higher
mortgage risk weights, 15% assumed for Sweden).
Valuation
We use a SOTP methodology to value Handelsbanken by applying P/Es of 7.0-10.0x
reflecting earnings volatility, RoNAV and the nature of the business; our Dec 2015
price target is SKr270.00, and implies 1.6x 2015e NAV for a 13.7% RoNAV.
Risks to Our View
The key risks to our rating and PT being achieved include the following
Upside risk from stronger than expected Swedish growth.
Upside risk from stronger than expected delivery from the growing UK and
international businesses.
Upside risk from a special dividend or buybacks given Handelsbankens strong
capital position with a 2Q13 B3 ET1 of 17.8%.
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
KBC Group (Overweight; Price Target: 45.00)
Investment Thesis
KBC is moving steadily towards normalization, after having undergone a
restructuring process since 2008. Disposal of non-core and volatile assets would turn
KBC's earnings stream into a more cleaner and sustainable one, underpinned by the
strong profitability of its Belgium and Czech operations. We expect share re-rating to
continue, driven by improving profitability and organic capital rebuild.
Valuation
Our PT (Dec-14) is based on sum of parts methodology, incorporating 2015
estimates. We incorporate shortfall against 10% fully loaded Basel 3 equity ratio into
our sum of part valuation to arrive at our price target. Please note that we calculate
the shortfall based on capital levels which exclude the full amount of AFS reserves
and penalty on remaining government capital. Change vs. previous price target stems
from earnings revision.
KBC- sum of part valuation
2015E Earnings 2015E RWA Capital required Capital PE Value P/B RoE
Belgium 1,500 52,264 10% 5,226 10.0 14,996 2.9 29%
Czech 547 16,020 10% 1,602 10.0 5,473 3.4 34%
IM 46 17,632 10% 1,763 6.0 279 0.2 3%
Group Center -244 9,758 10% 976 6.0 -1,466 -1.5 -25%
Total value 19,282
Capital shortfall -710
Group Value 18,572
NOSH 417
Target price, 45
JPM capital allocation and shortfall against 10% B3 equity ratio, excluding govt capital and AFS
reserves and including penalties on remaining govt capital
mn,% 2015E RWA Capital required Capital
Belgium 52,264 10% 5,226
Czech 16,020 10% 1,602
IM 17,632 10% 1,763
Group Center 9,758 10% 976
RWA inflation 9,900 10% 990
Total Basel 3 105,574 10.0% 10,557
Current estimate 9.3% 9,847
Shortfall 710
Risks to Our Rating and Price Target
Downside risks:
Deteriorating macro in KBC's core geographies- thereby slowing growth/recovery
and leading to lower revenues and higher cost of risk.
Worse than expected recovery in Ireland, and pickup in NPL levels (higher than
expectations) - leading to further writedowns.
Unfavourable policies being implemented in Hungary- causing further stress
within the banking sector.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Interference by the Central bank or regulator- similar to the conditionality
imposed on repayment of Flemish government capital.
Upside risks:
Writebacks on CDO portfolio- could boost capital position and limit the capital
shortfall (on clean basis)
Further re-financing of shareholder loans- would have a positive impact on capital
levels
Lloyds Banking Group (Neutral; Price Target: 77p)
Investment Thesis
Lloyds continues to make good progress on balance sheet restructuring and remains
on track to achieve the non core reductions target of <70bn TPAs by FY13E. The
group remains geared to the prospects of a UK economic recovery and a better bank
earnings outlook in the UK is likely to benefit Lloyds the most in our view.
Following the strong Q2 results, we continue to see Lloyds as well placed to resume
dividend payments given its now strong capital ratios (9.6% B3 CT1) and estimate
that the shares are yielding 4.6% and 6% based on our 14 & 15 DPS forecasts.
Further upside may depend on the regulators allowance for buybacks, given our
15E CT1 of 13.0%. We continue to prefer Lloyds over RBS
Valuation
Our sum of the parts based Dec-2014E price target for Lloyds Banking Group of 77p
is calculated using weighted blend of Gordon Growth and P/E valuation with
sustainable returns and allocated equity fully adjusted for Basel III.
UK economy (upside and downside): Lloyds Banking Group is significantly
geared to the UK economy through its exposure to mortgages and CRE and a
slowdown or faster than expected UK recovery poses risks to our investment
thesis.
Interest rates (upside): With SVR mortgages constituting almost 60% of the
Lloyds mortgage book, the Group remains significantly geared to interest rate
environment in the UK. An earlier than expected increase in the interest rates
poses an upside risk to our rating and PT.
Redress costs (downside): If the PPI costs continue to remain elevated in the UK,
it poses a downside risk to our earnings estimates and investment thesis.
Non core (upside): With outlook for UK asset prices turning positive, noncore
reduction may continue to be capital accretive which poses upside risks to our
estimates
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Santander (Neutral; Price Target: 5.86)
Investment Thesis
We upgrade our recommendation on Santander from UW to Neutral, adjusting our
target price to a Dec-14 SOTP-based PT of 5.86 (from previous 4.36) as we adjust
our numbers to lower funding costs in Spain and assume a favourable resolution of
Spanish DTAs before year end. On valuation, the upside on current market price is
very small making SAN fairly valued in our view, as it appears expensive relative to
other EU Peers and our estimates are still around 12% below Consensus
(Bloomberg). The upcoming ECBs Asset Quality Review and economic downturn
in Emerging Markets (mainly Latam) are the main reasons why were not OW on the
stock yet, as well as the banks current dividend policy.
Valuation
We derive our PT of 5.86 using a SOTP-based valuation from 1) 2014E earnings of
5.5bn, 2) average cost of equity of 11.6%, 3) sustainable growth rate of 3%.
Risks to our rating and PT are the following: 1) resolution of the European sovereign
turmoil would lower funding costs dramatically; 2) improvement or deterioration of
the economy and property market in Spain; 3) stronger/weaker than expected growth
in Latam economies would have a positive or negative impact on earnings; 4)
regulations such as Basel III or liquidity rules in the UK could be delayed which
would be positive for the bank
SEB (Neutral; Price Target: Skr75.00)
Investment Thesis
We maintain our Neutral recommendation for SEB. Whilst we recognize SEBs fee
generating potential, growing low risk Swedish mortgage business (~30% of the
group revenues) and solid capital position, we believe SEBs large merchant banking
franchise could continue to see low single digit revenue growth.
Whilst Merchant Banking revenues were up 19% qoq in 2Q13, 1H13 MB
revenues were -3% yoy, 1H13 Transaction Banking revenues were -21% yoy, 3Q
is generally a seasonally weaker quarter and GDP growth in 13e remains slow at
~1.4% (BBG consensus estimates). This, combined with intensifying competition
for capital light products could, in our view, put pressure on SEBs corporate
revenue progression in the short-term. With GDP growth of ~2.5% in 14-15e
(BBG cons), we see Merchant Banking revenues growing by ~3% yoy in 14-
15e.
We view positively SEBs cost cap of SEK22.5bn in 13e & 14e and believe
management will meet this target.
We believe SEB is very well positioned to meet the tougher capital rules in
Sweden (min B3 ET1of 12% by Jan 2015) with a B3 ET1 of 14.2% already in
2Q13. However, with the 15% mortgage risk weights reducing ET1 by 50bps,
uncertainty around future regulation (risk weights, recovery & resolution etc) and
potentially a countercyclical buffer being introduced in Sweden, we think SEBs
payout ratio could be ~45% in 13e and ~50% in 14-15e.
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Valuation
We use a SOTP methodology to value SEB. Our Dec. 2015 price target of Skr75.00
stands at a 2015e target valuation of 1.4x P/NAV for a 13.5% RoNAV.
Key risks to our rating and PT being achieved include the following:
Downside risk from uncertainty in the sustainability of performance in Trading and
Capital markets (30%-40% FX, 25%-40% equities, 25%-35% Capital Markets,
around 5% Structured derivatives etc).
Downside risk if there is no recovery in corporate loan growth or if corporate loan
losses are higher than expected, this would proportionately impact SEB more than
the peers, as approx 35% of the group's value is in Merchant Banking.
Upside risk from stronger than expected margin progression in the retail book.
Upside risk from stronger than expected earnings from wealth management.
Upside risk from better than expected delivery on costs and/or losses.
Royal Bank of Scotland (Neutral; Price Target: 335p)
Investment Thesis
RBS has made the most significant balance sheet progress in the UK Banks sector
since 2008 in our view and, while the valuation appears cheap for LT value investors,
we now believe that the groups earnings recovery make take longer than expected
given the challenges facing the Markets division. We remain Neutral prefer Lloyds
over RBS.
Valuation
Our sum of the parts based Dec 2014E price target for RBS of 335p is calculated
using a weighted blend of Gordon Growth and P/E valuations. We use cost of equity
of 10%and 11.5% for the Group ex Markets and Markets respectively, and
sustainable returns and allocated equity fully adjusted for Basel 3.
Regulatory risks (downside): The key regulatory risk in our view is ICB
recommendation implementations, including the structure of bail-in debt and
PLAC. The other regulatory risks include proposed changes in Basel rules and
financial reform in OTC derivatives.
Capital Markets Performance (both upside and downside): The Group is geared
to fixed income cycle through markets division and a slowdown or better than
expected recovery in volumes poses risk to our investment thesis.
UK economy (both upside and downside): RBS is significantly geared to UK
economy and credit cycle through its exposure to UK CRE and a slowdown or
faster than expected UK recovery poses risks to our investment thesis.
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Non core (upside): With outlook for UK asset prices turning positive, noncore
reduction may continue to be capital accretive which poses upside risks to our
estimates.
Litigation (downside): We believe that the potential litigation costs for RBS
could run into several billions of pounds over time and poses risks to the potential
capital return scenarios.
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Nordea Bank AB (Overweight; Price Target: Skr97.00)
Investment Thesis
We maintain our Overweight rating for Nordea unchanged reflecting upside potential
from improved profitability stemming from better pricing and product mix, enhanced
efficiency, improving asset quality and a higher dividend payout. Overall we expect
Nordea to outperform the market.
Given Nordeas market stronghold in the Nordics combined with stable GDP
growth, we see lending growth remaining ~3% p.a. in 2014-2015e. Whilst
recognizing margin pressure from the low interest rate environment, we believe
there is additional repricing potential in Norway, Finland and Denmark. Overall we
see on average ~4% NII growth in 2014-2015e.
We see a -1% annual decline in costs in 2013-2015e reflecting the Polish exit as
well 450mm of underlying gross cost saves (management is guiding for flat costs
pre the Polish announcement).
With NPL growth contraction (-2% qoq in 2Q13), we think the worst could be
behind it and see LLP/gross loans of 21bp in 13e and 16bps in 15e.
We believe Nordeas 2015 13% ROE target in the current rate environment is
ambitious, but achievable. We see a ROE of 13.1% and RoNAV of 14.6% in
2015e.
Nordeas capital position is sound with a 2Q13 B3 ET1 of 13.1%, 50bps capital
improvement coming from exiting Poland and 35bn of RWA reductions in the
pipeline.
Valuation
Our Dec-15 price target is SEK97. We use a SOTP valuation methodology to value
Nordea by applying P/Es of 7.0-11.0x reflecting earnings volatility, RoNAV and the
nature of the business. Our Dec 2015 PT of SEK97 yields 1.6x 2014e P/NAV for a
14.6% RoNAV.
The key risks to our rating and PT being achieved include:
Downside risk from repricing and cost cutting efforts not materializing according
to plan.
Downside risk from 35bn of scheduled RWA reductions not materializing
according to plan.
Downside/upside risk from weaker/better than expected asset quality.
Downside risk from the sale of the Polish business falling through.
Downside risk from the Swedish government selling its remaining ~7%
shareholding.
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11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
IntesaSanpaolo (Neutral; Price Target: 1.65)
Investment Thesis
We consider ISP a superior name in an Italian context in terms of profitability.
However, 90% of the business is driven by Italian economic performance. We
acknowledge the solid capital position, and upgrade our recommendation on the
stock to Neutral from Underweight on valuation grounds, as the stock appears cheap
in a European context, although not as cheap when compared to Unicredit.
We note that the excess capital reflects ongoing uncertainty due to the upcoming
Asset Quality review and stress test, which is pushing ISP to maintain a safety
buffer. This is, in our view, one reason why ISP looks so good on an EV/EBITDA
comparative valuation. In terms of earning estimates, we are changing our numbers
marginally: EPS 2015E increased from 0.13 to 0.14. Our forecast for ISP includes
coverage going up from c. 44% to c. 47% by 2015e, with provisions now slightly
more concentrated in 2013e and 2014e.
The increase in price target for ISP banks comes from the removal of the provision
shortfall to reach 50% coverage by 2015e. As the macro situation appears less
worrying, we assume that there is less risk that Italian banks will be asked to reach
such a high level of coverage and assume that the increase to 47% already in our
forecast will be enough.
Valuation
We Increase our Dec 2014 TP to 1.65 (vs. 1.19 before) for ISP using a 2015E
earnings-based SOTP valuation. We assign capital requirements in terms of core tier
1 at 8% for retail, 10% for CIB, 10% for asset management and 11% for international
operations, and an average group CoE of c.11%. The higher price target is due to: 1)
Removing the provision shortfall (to reach 50% coverage) from SOP valuation: as
economic outlook improves slightly, we consider that the 46% coverage should be
enough and the regulator will not push for a 50% coverage. 2) c. 5bps of cost of risk
moved from 2015 to 2013 and 2014: AQR may increase provision levels earlier
rather than later. 3) We raise sustainable ROE for the Italian business to 10% from
8% , consistent with P/BV of 1.0x for the business. 4)We raise sustainable ROE for
CIB to 8%.
ISP SOTP Valuation
We see several risks on the upside that could prevent the stock from achieving our
target price and rating, including: 1) accelerated cost efforts, 2) a better-than-
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
expected credit quality trend due to a more benign economic environment, 3) faster
or more significant declines in Italian sovereign spread, which would positively
impact cost of funding.
The risks on the downside are connected with: 1) asset quality deterioration requiring
more provisioning than what already penciled in. 2) Lower growth in loan volumes.
3)Less capacity of repricing on the asset side.
HSBC Holdings plc (Neutral; Price Target: 800p)
Investment Thesis
With an improving economic outlook for UK economy and our cautious stance on
Emerging Markets (EM), we downgrade HSBC to Neutral in the context of UK
Banks sector. HSBC has outperformed StanChart by 15% YTD and now trades at a
14% PE premium to StanChart (10.3x 2015 P/E vs 9x 2015 P/E JPMe) and we
believe that HSBCs positive attributes and DM tailwinds are now discounted from
the perspective of European bank investors who can invest in pure play
recovery/value stocks and StanChart at a cheaper valuation.
Valuation
Our sum of the parts based Dec 2014E price target for HSBC of 800p is calculated
using weighted blend of Gordon Growth & P/E valuations on our 2015E estimates.
We use cost of equity of 10% for Group & sustainable returns & allocated equity
fully adjusted for Basel 3.
Macro economic risks (both upside and downside): Being a Global bank, HSBC
is exposed to general macro economic variables such as slowdown or quicker
than expected recovery in GDP growth, inflationary pressures, FX & cross
border & political risks.
US consumer asset quality (upside): Group is significantly exposed to US
consumer asset quality through HFC run off portfolio. A better than expected
improvement in the US house prices and consumer asset quality poses upside
risk to our estimates.
EM provisions (downside): An increase in EM provision remains the key
downside risk for HSBC given the current Asian provisions remain low at
12bps annualised in H113. With slower economic growth, weakness in local FX
and tighter monetary policy across some EM economies, we believe the outlook
for impairments could get increasingly challenging over the next 12 months.
Banco Popular (Underweight; Price Target: 2.41)
Investment Thesis
Our Underweight recommendation for Popular can be explained mainly by the
expected weak evolution of revenues and still deteriorating asset quality that will
remain an ongoing theme for Popular (and the sector in general). We expect to see
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
more clarity and tangible evidence of Popular overcoming its provisions/capital
shortfall before adopting a more positive stance on the stock.
Valuation
Our target price of 2.41 (Dec-14 SOTP-PER based) vs. previous 2.05 was
calculated using a 1) 1% growth rate, 2) 11% cost of equity, 3) a sustainable RoE of
8% and 4) 8% required Core Tier 1 capital.
Risks to our rating and price target are 1) resolution of the European sovereign
turmoil would lower funding costs dramatically 2) increasing interest rates would
benefit the banks margins 3) improvement in the economic prospects would lower
credit losses 4) easing of the deposits costs following regulatory action would benefit
margins 5) more favourable regulations or a delay of Basel III Implementation would
lower pressure on capital.
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(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
BNP Paribas: Summary of Financials
Profit and Loss Statement Ratio Analysis
in millions, year end Dec FY11A FY12A FY13E FY14E FY15E in millions, year end Dec FY11A FY12A FY13E FY14E FY15E
Per Share Data
Net interest income 23,981 21,489 19,540 19,024 19,285 EPS Reported 5.05 5.36 4.29 4.29 5.13
% Change Y/Y (0.3%) (10.4%) (9.1%) (2.6%) 1.4% EPSAdjusted 6.83 5.19 4.25 4.70 5.30
Non-interest income 18,403 17,583 18,958 19,736 20,547 % Change Y/Y 3.3% (24.0%) (18.2%) 10.8% 12.6%
Fees & commissions 8,419 7,577 - - - DPS 1.20 1.52 1.50 1.70 2.00
% change Y/Y (0.8%) (10.0%) - - - % Change Y/Y (43.4%) 27.3% (1.4%) 13.3% 17.6%
Trading revenues 3,733 3,360 - - - Dividend yield 2.4% 3.0% 3.0% 3.4% 3.9%
% change Y/Y (26.9%) (10.0%) - - - Payout ratio 23.7% 28.4% 34.9% 39.6% 39.0%
Other Income 18,403 17,583 18,958 19,736 20,547 BV per share 56.80 60.12 61.68 64.24 67.37
Total operating revenues 42,384 39,072 38,498 38,760 39,832 NAV per share 44.48 48.68 51.18 53.77 56.90
% change Y/Y (3.4%) (7.8%) (1.5%) 0.7% 2.8% Shares outstanding 1,194 1,241 1,244 1,244 1,244
Total expenses (26,126) (26,550) (25,712) (26,215) (25,940)
% change Y/Y (1.5%) 1.6% (3.2%) 2.0% (1.0%) Return ratios
Pre-provision operating profit 16,258 12,522 12,785 12,545 13,892 RoRWA 1.3% 1.1% 1.0% 1.1% 1.2%
% change Y/Y (6.4%) (23.0%) 2.1% (1.9%) 10.7% Pre-tax ROE 18.7% 13.9% 11.0% 11.9% 12.7%
Loan loss provisions (6,797) (3,941) (4,442) (3,986) (3,670) ROE 12.2% 8.7% 6.6% 7.1% 7.6%
Other provisions - - - - - RoNAV 15.7% 11.0% 8.5% 9.0% 9.6%
Earnings before tax 9,651 10,372 8,824 9,050 10,730
% change Y/Y (25.9%) 7.5% (14.9%) 2.6% 18.6% Revenues
Tax (charge) (2,757) (3,059) (2,697) (2,851) (3,434) NIM (NII / RWA) 3.9% 3.7% 3.6% 3.5% 3.5%
% Tax rate 28.6% 29.5% 30.6% 31.5% 32.0% Non-IR / average assets 0.9% 0.9% 1.0% 1.0% 1.0%
Minorities (844) (760) (786) (860) (910) Total rev / average assets 2.1% 2.0% 2.0% 2.0% 2.0%
Net Income (Reported) 6,050 6,553 5,341 5,339 6,386 NII / Total revenues 56.6% 55.0% 50.8% 49.1% 48.4%
Fees / Total revenues 19.9% 19.4% - - -
Trading / Total revenues 8.8% 8.6% - - -
Balance sheet
ASSETS Cost ratios
Net customer loans 665,834 630,520 630,520 636,825 643,193 Cost / income 61.6% 68.0% 66.8% 67.6% 65.1%
% change Y/Y (2.8%) (5.3%) 0.0% 1.0% 1.0% Cost / assets 1.3% 1.4% 1.3% 1.3% 1.3%
Loan loss reserves - - - - - Staff numbers - - - - -
Investments 4,060 5,836 6,082 6,426 6,781
Other interest earning assets - - - - - Balance Sheet Gearing
% change Y/Y - - - - - Loan / deposit 121.9% 117.5% 117.5% 118.7% 119.9%
Average interest earnings assets 1,833,128 1,785,830 1,732,551 1,680,602 1,634,592 Investments / assets - - - - -
Goodwill 11,406 10,591 10,488 10,488 10,488 Loan / assets 34.1% 33.5% 32.5% 32.2% 32.5%
Other assets - - - - - Customer deposits / liabilities 29.0% 28.5% 28.5% 28.6% 28.6%
Total assets 1,965,283 1,907,290 1,970,290 1,970,290 1,970,290 LT Debt / liabilities 9.8% 8.8% 9.2% 9.2% 9.2%
LIABILITIES Asset Quality / Capital
Customer deposits 546,284 536,513 536,513 536,513 536,513 Loan loss reserves / loans - - - - -
% change Y/Y (6.0%) (1.8%) 0.0% 0.0% 0.0% NPLs / loans - - - - -
Long term funding 157,786 173,198 173,198 173,198 173,198 LLP / RWA (1.1%) (0.7%) (0.8%) (0.7%) (0.7%)
Interbank funding - - - - - Loan loss reserves / NPLs - - - - -
Average interest bearing liabs 929,289 856,170 838,201 838,201 838,201 Growth in NPLs (7.0%) 4.2% 4.3% 2.8% 0.0%
Other liabilities 1,005,519 1,037,667 1,035,424 1,031,951 1,027,681 RWAs 614,000 552,000 540,410 546,674 555,325
Retirement benefit liabilities - - - - - % YoY change 2.1% (10.1%) (2.1%) 1.2% 1.6%
Shareholders' equity 68,102 78,645 80,900 84,373 88,643 Core Tier 1 9.6% 11.8% 12.9% 13.3% 13.8%
Minorities 10,256 8,536 8,536 8,536 8,536 Total Tier 1 11.6% 13.6% 14.7% 15.1% 15.6%
Total liabilities & Shareholders Equity 1,965,283 1,970,290 1,970,290 1,970,290 1,970,290
Source: Company reports and J.P. Morgan estimates.
189
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
BBVA: Summary of Financials
in millions, year end Dec FY12A FY13E FY14E FY15E FY16E in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
Per Share Data
Net interest income 15,122 14,615 15,106 15,556 - EPS Reported 0.30 0.66 0.53 0.64 -
% Change Y/Y 15.0% (3.4%) 3.4% 3.0% - EPSAdjusted 0.30 0.66 0.53 0.64 -
Non-interest income 7,319 6,932 6,929 7,178 - % Change Y/Y (51.4%) 124.6% (20.8%) 22.2% -
Fees & commissions 4,353 4,453 4,361 4,492 - DPS 0.42 0.42 0.24 0.30 -
% change Y/Y 8.0% 2.3% (2.1%) 3.0% - % Change Y/Y 0.0% 0.4% (42.2%) 22.2% -
Trading revenues 1,767 2,248 2,171 2,243 - Dividend yield 5.4% 5.4% 3.1% 3.8% -
% change Y/Y 19.3% 27.2% (3.4%) 3.3% - Payout ratio 142.2% 63.6% 46.4% 46.4% -
Other Income 7,319 6,932 6,929 7,178 - BV per share 7.60 7.88 7.93 8.04 -
Total operating revenues 22,441 21,547 22,034 22,734 - NAV per share 5.66 6.05 6.16 6.32 -
% change Y/Y 12.1% (4.0%) 2.3% 3.2% - Shares outstanding 5,449 5,796 5,978 6,166 -
Total expenses (10,786) (11,288) (11,462) (11,794) -
% change Y/Y 10.8% 4.6% 1.5% 2.9% - Return ratios
Pre-provision operating profit 11,655 10,259 10,572 10,940 - RoRWA 0.5% 1.2% 0.9% 1.2% -
% change Y/Y 13.3% (12.0%) 3.0% 3.5% - Pre-tax ROE 4.2% 9.2% 10.0% 11.9% -
Loan loss provisions (7,980) (5,382) (5,150) (4,718) - ROE 4.2% 8.8% 6.7% 8.2% -
Other provisions (651) (1,036) (785) (433) - RoNAV 5.7% 11.7% 8.7% 10.4% -
Earnings before tax 1,659 4,012 4,638 5,789 -
% change Y/Y (51.9%) 141.8% 15.6% 24.8% - Revenues
Tax (charge) 276 (937) (985) (1,303) - NIM (NII / RWA) 4.6% 4.4% 4.5% 4.5% -
% Tax rate 16.6% 23.4% 21.2% 22.5% - Non-IR / average assets 1.2% 1.1% 1.1% 1.1% -
Minorities (651) (622) (514) (528) - Total rev / average assets 3.6% 3.4% 3.4% 3.5% -
Net Income (Reported) 1,676 3,845 3,139 3,957 - NII / Total revenues 67.4% 67.8% 68.6% 68.4% -
Fees / Total revenues 19.4% 20.7% 19.8% 19.8% -
Trading / Total revenues 7.9% 10.4% 9.9% 9.9% -
Balance sheet
ASSETS Cost ratios
Net customer loans 383,410 396,347 406,222 414,202 - Cost / income 48.1% 52.4% 52.0% 51.9% -
% change Y/Y (0.8%) 3.4% 2.5% 2.0% - Cost / assets 1.7% 1.8% 1.8% 1.8% -
Loan loss reserves (10,945) (11,010) (11,032) (11,263) - Staff numbers - - - - -
Investments 10,162 10,212 10,264 10,315 -
% change Y/Y - - - - - Loan / deposit 120.6% 112.6% 114.1% 115.6% -
Average interest earnings assets - - - - - Investments / assets 1.7% 1.6% 1.6% 1.6% 1.6%
Goodwill 8,912 8,912 8,912 8,912 - Loan / assets 61.9% 60.8% 61.7% 62.4% 62.6%
Other assets - - - - - Customer deposits / liabilities 49.3% 52.0% 54.2% 54.4% -
Total assets 637,785 645,235 654,616 661,188 - LT Debt / liabilities 17.1% 15.8% 15.3% 15.6% 15.6%
A
Customer deposits 292,716 320,427 326,173 330,404 - Loan loss reserves / loans (2.8%) (2.7%) (2.6%) (2.6%) -
% change Y/Y 3.7% 9.5% 1.8% 1.3% - NPLs / loans 4.2% 4.3% 4.2% 4.2% 4.2%
Long term funding 99,043 92,609 93,705 94,892 - LLP / RWA (2.4%) (1.6%) (1.5%) (1.4%) -
Interbank funding 106,511 77,613 61,210 64,291 - Loan loss reserves / NPLs 62.1% 63.0% 63.0% 63.0% 63.0%
Average interest bearing liabs - - - - - Growth in NPLs 9.5% 0.6% 0.2% 2.1% -
Other liabilities 28,237 61,335 55,967 52,550 - RWAs 329,033 335,522 340,400 343,818 -
Retirement benefit liabilities - - - - - % YoY change (0.5%) 2.0% 1.5% 1.0% -
Shareholders' equity 41,430 45,666 47,393 49,570 - Core Tier 1 11.5% 12.1% 12.5% 13.0% -
Minorities 2,372 2,205 2,205 2,205 - Total Tier 1 11.5% 12.1% 12.5% 13.0% -
Total liabilities & Shareholders Equity 637,785 663,929 651,160 658,851 -
190
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
CaixaBank: Summary of Financials
Per Share Data
Non-interest income 2,865 2,890 2,938 3,009 - % Change Y/Y (84.0%) 15.6% 326.8% 44.2% -
% change Y/Y 8.9% 5.5% 5.9% 0.8% - % Change Y/Y - 30.4% 0.0% 0.0% -
Trading revenues 455 541 300 300 - Dividend yield 95.8% 124.9% 124.9% 124.9% -
Total expenses (3,566) (4,780) (3,705) (3,606) -
% change Y/Y 6.7% 34.0% (22.5%) (2.7%) - Return ratios
Pre-provision operating profit 3,171 1,950 3,231 3,597 - RoRWA - - - - -
% change Y/Y 0.1% (38.5%) 65.7% 11.3% - Pre-tax ROE (0.3%) (1.1%) 5.1% 7.9% -
Loan loss provisions (3,942) (4,323) (1,498) (742) - ROE 1.1% 1.1% 4.4% 6.4% -
Other provisions - - - - - RoNAV 52.9% 71.0% 53.4% 50.1% -
Earnings before tax (62) (248) 1,271 2,147 -
% change Y/Y (105.3%) 300.5% (611.8%) 69.0% - Revenues
Tax (charge) 291 513 (160) (406) - NIM (NII / RWA) - - - - -
% Tax rate (469.4%) (206.7%) 12.6% 18.9% - Non-IR / average assets 0.9% 0.8% 0.8% 0.8% -
Net Income (Reported) 228 252 1,098 1,728 - NII / Total revenues 57.5% 57.1% 57.6% 58.2% -
Balance sheet
ASSETS Cost ratios
% change Y/Y 18.4% 7.0% (1.0%) (1.0%) - Cost / assets 1.2% 1.3% 1.0% 1.0% -
Investments 8,940 8,940 8,940 8,940 -
A
Customer deposits 160,833 162,710 164,618 166,560 - Loan loss reserves / loans - - - - -
Long term funding 52,564 52,980 52,980 52,980 - LLP / RWA - - - - -
Interbank funding 51,311 57,707 57,707 57,707 - Loan loss reserves / NPLs - - - - -
Average interest bearing liabs - - - - - Growth in NPLs - 2.1% 0.0% 0.0% -
Other liabilities 11,269 21,203 15,405 9,189 - RWAs 0 0 0 0 -
Retirement benefit liabilities - - - - - % YoY change - - - - -
Shareholders' equity 22,711 24,113 26,033 28,368 - Core Tier 1 - - - - -
Minorities 0 0 0 0 - Total Tier 1 - - - - -
191
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Credit Agricole: Summary of Financials
Per Share Data
Net interest income 15,169 14,730 8,883 9,663 9,020 EPS Reported (0.60) (2.60) 0.87 1.05 1.27
% Change Y/Y 1.8% (2.9%) (39.7%) 8.8% (6.7%) EPSAdjusted 1.03 1.18 0.83 1.05 1.27
Non-interest income 5,617 1,838 7,916 7,285 8,434 % Change Y/Y 25.6% 14.0% (29.7%) 27.5% 20.6%
Fees & commissions 4,672 2,626 2,626 2,757 2,812 DPS 0.00 0.00 0.00 0.00 0.00
% change Y/Y (4.6%) (43.8%) 0.0% 5.0% 2.0% % Change Y/Y (100.0%) - - - -
Trading revenues (3,622) 5,255 1,500 2,000 2,000 Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
% change Y/Y (166.5%) (245.1%) (71.5%) 33.3% 0.0% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0%
% change Y/Y 3.3% (20.3%) 1.4% 0.9% 3.0% Shares outstanding 2,469 2,489 2,490 2,488 2,488
Total expenses (13,613) (12,334) (11,678) (11,530) (11,555)
% change Y/Y 3.2% (9.4%) (5.3%) (1.3%) 0.2% Return ratios
Pre-provision operating profit 7,173 4,234 5,121 5,417 5,899 RoRWA - - - - -
% change Y/Y 3.3% (41.0%) 20.9% 5.8% 8.9% Pre-tax ROE 9.7% 9.1% 7.4% 9.0% 10.2%
Earnings before tax (187) (2,211) 3,107 3,832 4,623
Tax (charge) (1,027) (373) (580) (801) (1,020) NIM (NII / RWA) - - - - -
% Tax rate (549.2%) (16.9%) 18.7% 20.9% 22.1% Non-IR / average assets 0.3% 0.1% 0.4% 0.4% 0.5%
Minorities (271) 42 (351) (411) (445) Total rev / average assets 1.3% 0.9% 0.9% 0.9% 1.0%
Net Income (Reported) (1,471) (6,478) 2,178 2,620 3,158 NII / Total revenues 73.0% 88.9% 52.9% 57.0% 51.7%
Fees / Total revenues 22.5% 15.8% 15.6% 16.3% 16.1%
Trading / Total revenues (17.4%) 31.7% 8.9% 11.8% 11.5%
Balance sheet
ASSETS Cost ratios
% change Y/Y 4.3% (8.2%) (0.4%) (3.8%) 0.0% Cost / assets 0.8% 0.7% 0.6% 0.6% 0.6%
Loan loss reserves (15,979) (11,778) (8,999) (9,089) (9,180) Staff numbers - - - - -
Investments 18,300 18,600 18,900 18,900 18,900
Average interest earnings assets 1,517,477 1,634,250 1,586,955 1,479,710 1,479,710 Investments / assets 0.0% 0.0% 0.0% 0.0% 0.0%
Other assets 102,080 104,717 262,176 262,176 262,176 Customer deposits / liabilities 41.7% 35.9% 38.6% 37.2% 37.3%
Customer deposits 698,300 644,300 670,400 645,325 645,325 Loan loss reserves / loans (2.0%) (1.6%) (1.2%) (1.3%) (1.3%)
% change Y/Y 6.5% (7.7%) 4.1% (3.7%) 0.0% NPLs / loans 2.8% 2.5% 1.9% 1.6% 1.7%
Long term funding 656,606 795,532 812,057 834,343 831,185 LLP / RWA - - - - -
Interbank funding - - - - - Loan loss reserves / NPLs 67.7% 71.9% 76.6% 77.7% 77.7%
Average interest bearing liabs 836,433 820,650 858,056 920,017 917,043 Growth in NPLs 10.1% (32.4%) (25.6%) 1.0% 1.0%
Other liabilities 314,703 351,773 250,780 250,780 250,780 RWAs 333,700 293,100 326,328 326,956 329,056
Retirement benefit liabilities - - - - - % YoY change (10.2%) (12.2%) 11.3% 0.2% 0.6%
192
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UniCredit: Summary of Financials
Per Share Data
Net interest income 15,433 14,285 13,395 14,159 15,128 EPS Reported (4.83) 0.22 0.13 0.26 0.46
% Change Y/Y (3.5%) (7.4%) (6.2%) 5.7% 6.8% EPSAdjusted (0.25) 0.28 0.22 0.33 0.53
Non-interest income 9,387 10,863 10,752 10,315 10,298 % Change Y/Y (717.1%) (213.1%) (23.9%) 52.6% 60.9%
% change Y/Y (4.2%) (3.8%) 5.0% 2.0% 1.0% % Change Y/Y (100.0%) - (32.0%) 50.0% 0.0%
Trading revenues 1,119 2,808 2,300 1,700 1,600 Dividend yield 0.0% 1.9% 1.3% 2.0% 2.0%
% change Y/Y 6.3% 151.0% (18.1%) (26.1%) (5.9%) Payout ratio 0.0% 59.1% 46.9% 34.5% 19.5%
% change Y/Y (4.3%) 1.3% (4.0%) 1.4% 3.9% Shares outstanding 1,930 5,792 5,792 5,792 5,792
Total expenses (15,460) (14,979) (14,582) (13,999) (13,528)
% change Y/Y (0.1%) (3.1%) (2.7%) (4.0%) (3.4%) Return ratios
Pre-provision operating profit 9,360 10,168 9,564 10,476 11,898 RoRWA - 0.7% 0.3% 0.4% 0.7%
% change Y/Y (10.5%) 8.6% (5.9%) 9.5% 13.6% Pre-tax ROE (11.6%) 0.5% 3.6% 5.5% 8.6%
Loan loss provisions (6,025) (9,613) (7,200) (6,900) (6,300) ROE (0.8%) 2.9% 2.0% 3.1% 4.8%
Other provisions (9,396) (196) (370) (450) (400) RoNAV (1.0%) 4.0% 2.7% 4.1% 6.4%
Earnings before tax (6,728) 287 2,212 3,451 5,500
% change Y/Y (440.0%) (104.3%) 671.8% 56.0% 59.4% Revenues
Tax (charge) (1,416) 1,539 (840) (1,311) (2,090) NIM (NII / RWA) - 6.2% 3.0% 3.3% 3.4%
% Tax rate (21.0%) 537.1% 38.0% 38.0% 38.0% Non-IR / average assets 1.0% 1.2% 1.2% 1.1% 1.1%
Net Income (Reported) (9,317) 865 741 1,509 2,670 NII / Total revenues 62.2% 56.8% 55.5% 57.9% 59.5%
Trading / Total revenues 4.5% 11.2% 9.5% 6.9% 6.3%
Balance sheet
ASSETS Cost ratios
% change Y/Y 0.7% (2.2%) (3.0%) 1.1% 1.8% Cost / assets 1.7% 1.6% 1.6% 1.5% 1.5%
Loan loss reserves 559,553 547,144 530,730 536,515 546,172 Staff numbers 160,360 156,354 155,589 87,542 80,451
Investments - - - - -
Other interest earning assets 99,364 108,686 108,686 91,685 91,685 Balance Sheet Gearing
% change Y/Y 3.3% 9.4% 0.0% (15.6%) 0.0% Loan / deposit - - - - -
Average interest earnings assets 853,488 850,494 837,159 823,210 822,168 Investments / assets 10.5% 11.2% 11.8% 11.1% 10.1%
Total assets 926,768 926,838 911,168 899,983 911,220 LT Debt / liabilities 20.7% 19.4% 20.0% 20.4% 20.6%
% change Y/Y 1.3% 3.6% 0.6% 1.1% 1.7% NPLs / loans - - - - -
Long term funding 166,082 170,451 170,451 172,155 173,877 LLP / RWA - (2.1%) (1.7%) (1.6%) (1.4%)
Interbank funding 131,807 117,445 113,922 91,137 92,049 Loan loss reserves / NPLs 792.4% 726.6% 647.6% 600.4% 586.9%
Average interest bearing liabs 835,905 835,951 826,941 815,479 812,061 Growth in NPLs 6.3% 10.0% 8.6% 5.1% 2.5%
Other liabilities 21,715 22,356 12,641 17,026 16,464 RWAs 0 458,527 431,763 437,158 444,460
Retirement benefit liabilities - - - - - % YoY change - - (5.8%) 1.2% 1.7%
Shareholders' equity 51,479 61,579 61,973 62,961 65,109 Core Tier 1 - 10.4% 11.0% 10.9% 11.1%
Minorities 3,318 3,669 3,632 3,596 3,560 Total Tier 1 - 10.9% 11.6% 11.5% 11.7%
Total liabilities & Shareholders Equity 926,768 926,838 911,168 899,983 911,220
193
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
UBS: Summary of Financials
SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E SF in millions, year end Dec FY11A FY12A FY13E FY14E FY15E
Per Share Data
Net interest income 6,826 5,994 5,121 5,172 5,224 EPS Reported 1.10 (0.72) 1.03 1.25 1.76
% Change Y/Y 9.8% (12.2%) (14.6%) 1.0% 1.0% EPSAdjusted 0.54 0.90 1.40 1.70 1.90
Non-interest income 21,043 19,569 23,925 23,703 25,549 % Change Y/Y (68.8%) 65.7% 55.6% 21.5% 11.8%
% change Y/Y (11.2%) 2.5% 11.0% 5.5% 5.1% % Change Y/Y - 50.0% 100.0% 100.0% 58.3%
% change Y/Y (41.7%) (24.7%) 83.1% (24.4%) 20.3% Payout ratio 9.2% NM 29.7% 49.0% 55.1%
% change Y/Y (13.1%) (8.3%) 13.6% (0.6%) 6.6% Shares outstanding 3,768 3,748 3,768 3,768 3,768
Total expenses (22,437) (24,360) (23,871) (22,773) (22,287)
% change Y/Y (8.6%) 8.6% (2.0%) (4.6%) (2.1%) Return ratios
% change Y/Y (27.8%) (77.9%) 330.1% 17.9% 39.1% Pre-tax ROE 5.7% 10.7% 14.6% 16.8% 17.8%
Loan loss provisions (83) (118) (32) (36) (40) ROE 4.1% 6.8% 11.4% 13.2% 13.9%
Other provisions - - - - - RoNAV 10.2% (6.6%) 9.5% 11.0% 14.6%
Earnings before tax 5,349 (1,986) 5,138 6,066 8,446
% change Y/Y (28.2%) (137.1%) (358.7%) 18.1% 39.2% Revenues
Tax (charge) (923) (450) (1,065) (1,183) (1,647) NIM (NII / RWA) 3.1% 2.8% 2.4% 2.3% 2.4%
% Tax rate 17.3% (22.7%) 20.7% 19.5% 19.5% Non-IR / average assets 1.5% 1.5% 2.1% 2.4% 3.0%
Net Income (Reported) 4,158 (2,712) 3,866 4,693 6,609 NII / Total revenues 24.5% 23.4% 17.6% 17.9% 17.0%
Balance sheet
ASSETS Cost ratios
% change Y/Y 1.4% 5.0% 5.1% 1.0% 2.0% Cost / assets 1.6% 1.8% 2.1% 2.3% 2.6%
Loan loss reserves - - - - - Staff numbers 62,904 60,965 53,976 53,272 52,581
Investments 53,174 66,383 64,290 63,647 61,738
Average interest earnings assets 1,155,604 1,161,523 980,856 807,170 691,491 Investments / assets 4.7% 4.5% 5.6% 6.5% 7.4%
Total assets 1,419,161 1,259,233 1,057,043 904,280 787,306 LT Debt / liabilities 10.3% 9.5% 9.1% 9.6% 9.6%
% change Y/Y 3.0% 8.6% 2.6% 0.0% 0.0% NPLs / loans - - - - -
Average interest bearing liabs 739,354 704,181 638,406 595,734 564,844 Growth in NPLs (48.6%) 49.1% 0.0% 0.0% 0.0%
Retirement benefit liabilities - - - - - % YoY change 21.2% (20.1%) 18.5% (4.4%) (2.3%)
Total liabilities & Shareholders Equity 1,419,161 1,259,233 1,057,043 904,280 787,306
194
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Swedbank: Summary of Financials
Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Skr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
Per Share Data
% Change Y/Y 6.7% 5.5% 1.1% 3.9% - EPSAdjusted 13.05 13.48 14.42 15.23 -
Non-interest income 15,985 15,304 16,340 16,783 - % Change Y/Y 4.2% 3.3% 7.0% 5.6% -
% change Y/Y 0.2% 3.9% 3.2% 2.8% - % Change Y/Y 86.8% 2.1% 7.0% 5.6% -
% change Y/Y 94.0% (27.8%) 28.5% 2.4% - Payout ratio 86.8% 85.6% 75.0% 75.0% -
Total operating revenues 36,268 36,711 37,978 39,265 - BV per share 93.89 93.29 96.89 100.70 -
% change Y/Y 6.5% 1.2% 3.5% 3.4% - NAV per share 81.64 81.04 84.64 88.45 -
Total expenses (16,560) (16,516) (16,731) (16,997) - Shares outstanding 1,097 1,097 1,097 1,097 -
% change Y/Y (10.0%) (0.3%) 1.3% 1.6% -
Pre-provision operating profit 19,708 20,195 21,246 22,268 - Return ratios
% change Y/Y 26.0% 2.5% 5.2% 4.8% - RoRWA 2.9% 3.0% 3.1% 3.2% -
Loan loss provisions 185 (654) (1,118) (1,158) - Pre-tax ROE 19.4% 18.5% 19.0% 19.2% -
Other provisions - - - - - ROE 14.2% 14.4% 15.2% 15.4% -
Earnings before tax 19,466 18,996 19,777 20,858 - RoNAV 16.5% 16.6% 17.4% 17.6% -
% change Y/Y 26.2% (2.4%) 4.1% 5.5% -
Tax (charge) (4,157) (3,748) (3,941) (4,130) - Revenues
% Tax rate 21.4% 19.7% 19.9% 19.8% - NIM (NII / RWA) 4.1% 4.3% 4.2% 4.3% -
Minorities (8) (9) (10) (11) - Non-IR / average assets 0.9% 0.8% 0.8% 0.8% -
Net Income (Reported) 14,304 12,962 15,827 16,717 - Total rev / average assets 2.0% 2.0% 2.0% 2.0% -
NII / Total revenues 55.9% 58.3% 57.0% 57.3% -
Balance sheet
ASSETS Cost ratios
Net customer loans 1,238,864 1,258,278 1,296,027 1,334,907 - Cost / income 45.7% 45.0% 44.1% 43.3% -
% change Y/Y 2.3% 1.6% 3.0% 3.0% - Cost / assets 0.9% 0.9% 0.9% 0.9% -
Loan loss reserves (8,622) (5,337) 5,311 5,250 - Staff numbers 0 0 - - -
Cash and bank holdings 130,058 201,838 209,911 207,812 -
Other interest earning assets 215,538 274,207 283,728 280,890 - Balance Sheet Gearing
% change Y/Y (17.6%) 27.2% 3.5% (1.0%) - Loan / deposit 213.7% 185.1% 185.1% 188.7% -
Average interest earnings assets 1,612,677 1,635,308 1,692,105 1,733,237 877,024 Cash / assets 7.0% 10.6% 10.7% 10.4% -
Other assets 24,008 28,692 28,163 28,964 - Customer deposits / liabilities 33.2% 37.8% 37.8% 37.3% -
Total assets 1,846,860 1,901,448 1,958,492 2,007,454 - LT Debt / liabilities 44.2% 42.9% 42.1% 42.6% 43.0%
A
Customer deposits 579,663 679,907 700,304 707,307 - Loan loss reserves / loans (0.7%) (0.4%) 0.4% 0.4% -
Long term funding 767,454 753,565 783,708 815,056 - LLP / RWA 0.0% (0.1%) (0.2%) (0.2%) -
Average interest bearing liabs 1,492,955 1,526,569 1,593,691 1,635,986 827,050 Growth in NPLs (43.8%) (18.0%) 6.6% 6.0% -
Minorities 154 153 153 153 - Total Tier 1 18.1% 17.7% 18.2% 18.9% -
Total liabilities & Shareholders Equity 1,846,860 1,901,448 1,958,492 2,007,454 -
195
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Standard Chartered: Summary of Financials
$ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E $ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E
Per Share Data
% Change Y/Y 20% 6% 2% 6% 8% % YoY change (3%) (1%) (3%) 23% 8%
Non-interest income 7,484 8,002 8,645 9,445 10,139 EPSAdjusted 2.01 2.17 2.14 2.36 2.56
% change 9% 2% 5% 6% 6% % Change Y/Y (1%) 8% (1%) 11% 8%
Total operating revenues 17,637 18,783 19,679 21,086 22,673 DPS 0.76 0.84 0.90 0.98 1.06
% change Y/Y 10% 6% 5% 7% 8% % Change Y/Y 10% 11% 7% 9% 8%
Operating costs (9,824) (10,055) (10,569) (11,161) (11,816) BV per share 17.08 18.80 19.21 20.94 22.57
% change Y/Y 9% 2% 5% 6% 6% % YoY change 5% 10% 2% 9% 8%
PPOP 7,813 8,728 9,110 9,925 10,857 NAV per share 13.49 15.15 16.10 17.85 19.52
Loan loss provisions (908) (1,196) (1,534) (1,794) (1,968) Shares outstanding 2,384 2,413 2,442 2,453 2,491
% YoY change 3% 32% 28% 17% 10%
Other provisions (111) (196) (12) (1) (1) Returns & Margins
Associates and Exceptionals 74 182 219 241 265 RoRWA 2% 2% 2% 2% 2%
Pretax profit 6,775 6,851 7,020 8,371 9,153 ROE 12% 12% 11% 12% 12%
% change Y/Y 11% 1% 2% 19% 9% RoNAV 15% 14% 12% 14% 14%
Tax (1,842) (1,891) (2,106) (2,302) (2,517) Pre-tax ROE 17% 17% 17% 17% 17%
Minorities (84) (98) (114) (128) (144)
Net Income (Reported) 4,748 4,761 4,699 5,840 6,391 NIM (NII / RWA) 4% 4% 3% 3% 3%
% YoY change 12% 0% (1%) 24% 9% Non-IR / average assets 1% 1% 1% 1% 1%
Total rev / average assets 3% 3% 3% 3% 3%
.
Balance sheet
$ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E $ in millions, year end Dec FY11A FY12A FY13E FY14E FY15E
ASSETS BALANCE SHEET GEARING
Net customer loans 263,765 283,885 302,394 327,091 354,951 Loan / deposit 78% 76% 78% 80% 82%
% change Y/Y 10% 8% 7% 8% 9% Loan / assets 45% 44% 45% 45% 46%
Total assets 599,070 636,518 673,879 721,122 773,725 Customer deposits / liabilities 61% 64% 61% 60% 60%
% YoY change 16% 6% 6% 7% 7%
.
LIABILITIES CAPITAL
Customer deposits 342,701 377,639 380,904 403,255 427,134 RWAs 270,510 301,861 343,953 378,490 416,665
Shareholders' equity 40,714 45,362 46,917 51,374 56,240 Core Tier 1 31,833 35,339 38,923 43,380 48,246
% YoY change 7% 11% 3% 9% 9% % YoY change 10% 11% 10% 11% 11%
Minorities 661 693 590 590 590
Total liabilities 557,695 590,463 626,372 669,158 716,894 Core Tier 1 ratio 11.8% 11.7% 11.3% 11.5% 11.6%
% YoY change 17% 6% 6% 7% 7% Total Tier 1 14% 13% 13% 13% 13%
196
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Socit Gnrale: Summary of Financials
Per Share Data
% Change Y/Y 2.0% (7.3%) (7.3%) (2.2%) 0.8% EPSAdjusted 3.61 3.46 3.40 3.90 4.45
Non-interest income 13,431 11,800 12,325 13,860 14,387 % Change Y/Y (32.3%) (4.3%) (1.7%) 14.6% 14.3%
% change Y/Y (4.1%) (2.8%) (5.0%) 10.0% 5.0% % Change Y/Y (100.0%) - 111.1% 57.9% 16.7%
% change Y/Y (17.5%) (27.8%) 1.0% 10.0% 5.0% Payout ratio 0.0% 44.1% 32.4% 38.5% 39.3%
% change Y/Y (2.9%) (9.9%) (1.3%) 5.7% 2.5% Shares outstanding 756 763 775 789 813
Total expenses (17,036) (16,438) (15,868) (15,972) (16,225)
% change Y/Y 3.0% (3.5%) (3.5%) 0.7% 1.6% Return ratios
Tax (charge) (1,323) (334) (917) (1,537) (1,799) NIM (NII / RWA) 3.6% 3.4% 3.3% 3.3% 3.3%
Net Income (Reported) 2,384 776 2,261 3,048 3,570 NII / Total revenues 47.6% 48.9% 46.0% 42.5% 41.8%
Balance sheet
ASSETS Cost ratios
% change Y/Y (1.0%) (4.5%) (2.6%) 0.0% 0.0% Cost / assets 1.5% 1.4% 1.3% 1.3% 1.3%
Investments 2,014 2,119 2,060 2,060 2,060
% change Y/Y 54.6% 11.0% 20.1% 0.0% 0.0% Loan / deposit 116.7% 112.4% 105.5% 105.5% 105.5%
% change Y/Y 0.8% (0.9%) 3.8% 0.0% 0.0% NPLs / loans 5.7% 5.5% 5.3% 5.5% 5.5%
Average interest bearing liabs 559,961 579,211 596,222 593,646 590,721 Growth in NPLs 4.3% (14.9%) 4.9% 2.3% 0.0%
Retirement benefit liabilities - - - - - % YoY change 4.3% (7.2%) (3.4%) 0.7% 1.1%
197
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Commerzbank: Summary of Financials
Per Share Data
Net interest income 6,487 5,377 5,347 5,454 - EPS Reported (0.05) (0.19) 0.54 0.76 -
% Change Y/Y (3.5%) (17.1%) (0.6%) 2.0% - EPSAdjusted 0.23 0.61 0.54 0.76 -
Non-interest income 3,388 3,955 4,319 4,482 - % Change Y/Y (91.4%) 163.0% (11.2%) 41.0% -
Fees & commissions - - - - - DPS 0.00 0.00 0.00 0.00 -
% change Y/Y - - - - - % Change Y/Y - - - - -
Trading revenues - - - - - Dividend yield 0.0% 0.0% 0.0% 0.0% -
% change Y/Y - - - - - Payout ratio 0.0% 0.0% 0.0% 0.0% -
% change Y/Y (0.1%) (5.5%) 3.6% 2.8% - Shares outstanding 779 1,139 1,139 1,139 -
Total expenses (7,340) (7,436) (6,979) (7,034) -
% change Y/Y (8.2%) 1.3% (6.1%) 0.8% - Return ratios
Pre-provision operating profit 2,535 1,895 2,686 2,903 - RoRWA 0.2% - - - -
% change Y/Y 33.6% (25.2%) 41.7% 8.1% - Pre-tax ROE 3.5% (0.2%) 3.8% 5.0% -
Other provisions - - - - - RoNAV 0.9% (0.9%) 2.7% 3.7% -
Earnings before tax 875 (55) 970 1,321 -
% change Y/Y 72.6% (106.3%) (1865.5%) 36.2% - Revenues
Tax (charge) (806) (38) (242) (330) - NIM (NII / RWA) 5.5% - - - -
% Tax rate 92.1% (69.0%) 25.0% 25.0% - Non-IR / average assets 0.5% 0.6% 0.7% 0.7% -
Net Income (Reported) (34) (194) 616 868 - NII / Total revenues 65.7% 57.6% 55.3% 54.9% -
Fees / Total revenues - - - - -
Trading / Total revenues - - - - -
Balance sheet
ASSETS Cost ratios
Loan loss reserves 16,443 16,018 16,787 16,787 - Staff numbers - - - - -
Investments 89,886 89,871 88,074 86,312 -
% change Y/Y - - - - - Loan / deposit - - - - -
Goodwill - - - - - Loan / assets 44.3% 43.5% 43.4% 43.7% 43.9%
A
Customer deposits 265,842 272,946 272,946 272,946 - Loan loss reserves / loans 5.6% 5.4% 5.7% 5.7% -
Long term funding 79,332 72,994 71,534 70,103 - LLP / RWA - - - - -
Average interest bearing liabs 457,457 464,952 470,543 465,884 232,585 Growth in NPLs 17096931.0% (4.5%) 0.0% 0.0% -
Retirement benefit liabilities - - - - - % YoY change (12.0%) 11.8% (3.0%) (1.8%) -
198
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Credit Suisse Group: Summary of Financials
Per Share Data
% Change Y/Y (1.7%) 11.1% 23.2% (0.2%) (0.3%) EPSAdjusted 1.62 3.02 2.80 3.15 3.40
Non-interest income 18,996 16,457 17,768 18,031 18,351 % Change Y/Y (60.3%) 86.2% (7.5%) 12.6% 8.1%
% change Y/Y (8.0%) 1.1% 7.7% 4.0% 4.0% % Change Y/Y (42.3%) 0.0% 0.0% 0.0% 33.3%
% change Y/Y (46.2%) (76.2%) 126.0% 2.0% 1.0% Payout ratio 46.2% 24.8% 26.8% 23.8% 29.4%
% change Y/Y (17.0%) (7.2%) 12.6% 0.9% 1.1% Shares outstanding 1,220 1,294 1,601 1,601 1,601
Total expenses (21,646) (20,657) (19,693) (19,146) (18,803)
Loan loss provisions (187) (170) (143) (135) (135) ROE 6.0% 11.4% 11.3% 11.0% 11.0%
Tax (charge) (671) (589) (1,633) (1,800) (2,048) NIM (NII / RWA) 2.8% 3.1% 3.5% 3.1% 3.1%
Balance sheet
ASSETS Cost ratios
% change Y/Y 6.7% 3.8% 0.8% 0.0% 0.0% Cost / assets 2.1% 2.1% 2.2% 2.2% 2.1%
Loan loss reserves (910) (922) (909) (918) (927) Staff numbers - - - - -
% change Y/Y (5.1%) (14.8%) (11.3%) (2.0%) (1.0%) Loan / deposit 66.0% 71.4% 68.9% 68.9% 68.9%
Total assets 1,049,165 924,187 888,979 881,170 877,343 LT Debt / liabilities 16.8% 16.4% 16.4% 16.0% 16.2%
% change Y/Y 8.8% (4.0%) 4.4% 0.0% 0.0% NPLs / loans 0.8% 0.7% 0.7% 0.7% 0.7%
Average interest bearing liabs 834,761 788,138 711,559 688,861 681,232 Growth in NPLs (7.8%) 0.6% (3.2%) 0.0% 0.0%
Retirement benefit liabilities - - - - - % YoY change 10.5% (7.2%) 26.1% 0.0% 0.0%
Total liabilities & Shareholders Equity 1,049,165 924,053 889,439 881,170 877,343
199
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Danske Bank: Summary of Financials
Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
Per Share Data
% Change Y/Y (3.2%) (2.8%) 6.3% 4.2% - EPSAdjusted 5.38 8.97 12.76 14.91 -
% change Y/Y 6.7% 6.1% 5.9% 5.0% - % Change Y/Y - - 192.0% 16.9% -
% change Y/Y 5.3% (9.4%) 9.5% 4.3% - NAV per share 119.84 124.85 132.51 141.45 -
Total expenses (24,637) (23,996) (23,707) (23,423) - Shares outstanding 977 1,001 1,001 1,001 -
% change Y/Y (5.2%) (2.6%) (1.2%) (1.2%) -
% change Y/Y 20.9% (17.4%) 24.3% 10.4% - RoRWA 0.6% 1.0% 1.4% 1.6% -
Loan loss provisions (12,480) (5,584) (4,440) (3,798) - Pre-tax ROE 7.2% 8.5% 11.5% 12.7% -
% change Y/Y 103.1% 37.9% 45.6% 16.9% -
Minorities 0 0 0 0 - Non-IR / average assets 0.7% 0.6% 0.6% 0.7% -
Balance sheet
Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Dkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
ASSETS Cost ratios
Loan loss reserves (47,793) (48,188) (47,647) (46,777) - Staff numbers 0 0 0 0 -
% change Y/Y 42.2% (20.7%) (0.6%) 0.9% - Loan / deposit 209.1% 213.9% 213.8% 213.6% -
Average interest earnings assets 3,034,138 2,981,844 2,935,790 2,988,478 1,507,926 Cash / assets 2.8% 2.0% 1.9% 1.9% -
A
% change Y/Y 9.4% (2.1%) 2.0% 2.0% - NPLs / loans 5.8% 5.7% 5.4% 5.2% 5.1%
Long term funding 954,330 978,008 1,007,348 1,037,568 - LLP / RWA (1.4%) (0.6%) (0.5%) (0.4%) -
Average interest bearing liabs 2,322,734 2,386,717 2,390,220 2,446,773 1,237,701 Growth in NPLs 0.9% (1.4%) (0.5%) (0.5%) -
Retirement benefit liabilities - - - - - % YoY change (8.2%) 4.8% (0.1%) 0.4% -
200
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Deutsche Bank: Summary of Financials
Per Share Data
% Change Y/Y 11.9% (8.9%) (10.4%) 3.2% (2.9%) EPSAdjusted 4.35 3.89 4.20 5.05 5.85
Non-interest income 15,785 17,848 18,399 18,159 18,790 % Change Y/Y 59.7% (10.5%) 8.1% 20.2% 15.7%
% change Y/Y 8.2% (0.3%) 2.0% 4.0% 4.0% % Change Y/Y 0.0% 0.0% 0.0% 0.0% 0.0%
% change Y/Y (8.8%) 83.0% 9.5% 1.0% 1.0% Payout ratio 17.4% 454.3% 28.5% 18.3% 13.2%
% change Y/Y 16.3% 1.5% (3.3%) 0.7% 0.6% Shares outstanding 929 929 1,019 1,019 1,019
Total expenses (25,669) (30,427) (25,421) (25,198) (25,023)
% change Y/Y 12.2% 18.5% (16.5%) (0.9%) (0.7%) Return ratios
% change Y/Y 33.1% (56.2%) 117.8% 6.1% 4.9% Pre-tax ROE 13.0% 9.5% 12.3% 13.8% 14.7%
Earnings before tax 5,200 653 4,481 6,506 9,026
% change Y/Y 31.7% (87.4%) 586.1% 45.2% 38.7% Revenues
Tax (charge) (1,064) (495) (1,777) (2,289) (3,187) NIM (NII / RWA) 4.8% 4.4% 4.1% 4.0% 3.7%
Minorities - - - - - Total rev / average assets 1.6% 1.6% 1.7% 1.8% 1.8%
Net Income (Reported) 4,136 158 2,703 4,218 5,839 NII / Total revenues 52.5% 47.1% 43.6% 44.7% 43.1%
Balance sheet
ASSETS Cost ratios
% change Y/Y 1.2% (3.7%) (1.4%) 0.0% 0.0% Cost / assets 1.3% 1.4% 1.3% 1.3% 1.4%
Loan loss reserves 4,162 4,696 4,696 4,790 4,886 Staff numbers 102,062 98,219 97,989 97,989 97,989
Investments 3,759 3,577 3,710 3,673 3,673
Customer deposits 601,730 577,202 559,382 564,976 559,327 Loan loss reserves / loans 1.0% 1.2% 1.1% 1.1% 1.1%
% change Y/Y 12.7% (4.1%) (3.1%) 1.0% (1.0%) NPLs / loans 2.4% 2.6% 2.5% 2.4% 2.4%
Average interest bearing liabs 734,395 750,223 719,442 707,103 708,524 Growth in NPLs 34.6% (11.5%) 0.0% 0.9% 0.9%
Retirement benefit liabilities - - - - - % YoY change 10.2% (12.5%) 9.2% 2.7% 5.8%
Shareholders' equity 53,390 54,003 57,945 61,393 66,461 Core Tier 1 - - - - -
Minorities 1,270 407 256 256 256 Total Tier 1 12.9% 15.1% 15.0% 15.5% 16.0%
201
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
DnB ASA: Summary of Financials
Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
Per Share Data
% change Y/Y (49.0%) 19.9% (5.0%) 5.0% - Payout ratio 25.3% 25.0% 25.0% 25.0% -
% change Y/Y (0.9%) 9.0% 3.9% 6.0% - NAV per share 74.48 80.31 88.07 96.70 -
% change Y/Y 3.8% 3.2% (4.6%) 2.0% -
% change Y/Y (5.2%) 14.8% 11.7% 9.1% - RoRWA 1.3% 1.5% 1.6% 1.7% -
% change Y/Y (4.9%) 14.5% 14.6% 11.3% -
Balance sheet
Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E Nkr in millions, year end Dec FY12A FY13E FY14E FY15E FY16E
ASSETS Cost ratios
% change Y/Y 32.6% 45.4% (17.4%) (16.7%) - Loan / deposit 160.0% 134.8% 151.5% 165.0% -
Goodwill 0 0 0 0 - Loan / assets 58.7% 55.4% 54.8% 56.9% 57.8%
A
Customer deposits 810,959 1,006,336 930,861 888,972 - Loan loss reserves / loans (0.9%) (1.0%) (1.0%) (1.0%) -
% change Y/Y 9.6% 24.1% (7.5%) (4.5%) - NPLs / loans 2.2% 2.4% 2.6% 2.6% 2.5%
Average interest bearing liabs 1,735,197 1,909,606 2,010,553 1,990,244 993,555 Growth in NPLs 0.4% 20.2% 5.6% 1.5% -
Other liabilities 278,825 291,146 302,039 311,354 - RWAs 953,010 981,240 1,102,528 1,150,978 -
202
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Erste Bank: Summary of Financials
Per Share Data
% Change Y/Y (6.0%) (9.5%) 0.9% 5.7% 5.3% EPSAdjusted 1.25 1.13 2.81 3.84 4.32
Non-interest income 1,303 1,446 1,716 1,851 1,967 % Change Y/Y 494.9% (9.9%) 149.7% 36.5% 12.5%
% change Y/Y (3.7%) 3.5% 4.4% 5.9% 6.2% % Change Y/Y - (17.2%) 239.5% 36.5% 12.5%
Trading revenues (418) (336) (144) (118) (123) Dividend yield 1.6% 1.3% 4.5% 6.1% 6.9%
% change Y/Y (73.2%) (19.7%) (57.1%) (18.1%) 4.2% Payout ratio 32.7% 23.9% 40.0% 40.0% 40.0%
Total operating revenues 6,538 6,186 6,500 6,908 7,294 BV per share 32.58 28.48 28.89 31.19 33.78
% change Y/Y 12.8% (5.4%) 5.1% 6.3% 5.6% NAV per share 20.77 21.64 22.49 24.92 27.64
Total expenses (3,757) (3,657) (3,620) (3,710) (3,841) Shares outstanding 395 410 430 430 430
% change Y/Y (2.4%) (2.7%) (1.0%) 2.5% 3.5%
Pre-provision operating profit 2,781 2,530 2,880 3,198 3,453 Return ratios
% change Y/Y 43.0% (9.0%) 13.9% 11.0% 8.0% RoRWA 0.4% 0.4% 1.2% 1.5% 1.6%
Loan loss provisions (1,980) (1,729) (1,163) (878) (852) Pre-tax ROE 6.4% 6.5% 14.3% 18.0% 18.6%
Other provisions - - - - - ROE 4.0% 3.8% 10.0% 12.8% 13.3%
Earnings before tax 801 801 1,718 2,320 2,600 RoNAV 6.6% 5.4% 13.0% 16.2% 16.4%
% change Y/Y (348.7%) (0.1%) 114.5% 35.1% 12.1%
Tax (charge) (170) (80) (366) (517) (578) Revenues
% Tax rate 21.2% 10.0% 21.3% 22.3% 22.2% NIM (NII / RWA) 4.8% 4.6% 4.7% 4.7% 4.7%
Minorities (148) (151) (142) (153) (165) Non-IR / average assets 0.6% 0.7% 0.8% 0.8% 0.9%
Net Income (Reported) 484 570 1,209 1,650 1,857 Total rev / average assets 3.1% 2.9% 3.1% 3.2% 3.2%
NII / Total revenues 80.1% 76.6% 73.6% 73.2% 73.0%
Trading / Total revenues (6.4%) (5.4%) (2.2%) (1.7%) (1.7%)
Balance sheet
ASSETS Cost ratios
% change Y/Y (2.7%) (1.4%) 3.3% 6.1% 6.8% Cost / assets 1.8% 1.7% 1.7% 1.7% 1.7%
Investments 0 0 0 0 0
A
% change Y/Y 3.5% 1.0% 3.0% 5.0% 5.0% NPLs / loans 9.2% 10.5% 9.9% 8.8% 7.9%
Average interest bearing liabs 190,044 189,785 190,996 197,467 205,785 Growth in NPLs 6.2% 14.0% (3.5%) (5.9%) (4.7%)
203
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Handelsbanken: Summary of Financials
Per Share Data
Non-interest income 8,981 9,328 9,256 9,351 - % Change Y/Y 14.2% (0.7%) 1.5% 4.3% -
% change Y/Y (4.0%) 3.4% (0.2%) 0.8% - % Change Y/Y 10.3% 2.3% 4.5% 4.3% -
Total expenses (16,700) (17,013) (17,561) (18,134) - Shares outstanding 648 648 648 648 -
% change Y/Y 8.0% 1.9% 3.2% 3.3% -
% change Y/Y 5.9% 4.2% 3.5% 4.6% - RoRWA 2.6% 2.6% 2.4% 2.4% -
% change Y/Y 3.5% 4.5% 2.3% 4.3% -
Balance sheet
ASSETS Cost ratios
% change Y/Y (29.9%) (3.1%) 5.3% (7.9%) - Loan / deposit 246.3% 267.3% 267.7% 271.6% -
A
% change Y/Y (5.9%) (4.8%) 4.0% 3.0% - NPLs / loans 0.4% 0.4% 0.5% 0.5% 0.5%
Long term funding 1,172,593 1,253,097 1,314,795 1,379,578 - LLP / RWA (0.2%) (0.2%) (0.3%) (0.3%) -
Average interest bearing liabs 2,070,465 2,071,310 2,152,729 2,248,349 1,147,549 Growth in NPLs 6.8% 4.5% 14.6% 9.8% -
204
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
KBC Group: Summary of Financials
Per Share Data
% Change Y/Y (16.1%) (11.9%) 0.2% 4.0% 6.1% EPSAdjusted 2.65 3.29 3.07 4.03 4.64
Non-interest income 2,956 2,903 2,706 2,844 2,966 % Change Y/Y 79.2% 24.1% (6.7%) 31.2% 15.2%
% change Y/Y (13.8%) 13.5% (0.9%) 4.3% 4.0% % Change Y/Y 9892.8% (100.0%) - 25.1% 87.1%
Trading revenues 969 886 770 790 820 Dividend yield 2.8% 0.0% 2.9% 3.7% 6.9%
% change Y/Y 38.4% (8.5%) (13.1%) 2.6% 3.8% Payout ratio 37.7% 0.0% 34.6% 33.0% 53.7%
Other Income 664 515 447 501 533 BV per share 21.58 22.96 25.44 28.54 31.03
% change Y/Y (8.5%) (7.9%) (2.7%) 4.5% 5.4% Shares outstanding 417 417 417 417 417
Total expenses (4,184) (3,786) (3,780) (3,816) (3,924)
% change Y/Y (10.7%) (9.5%) (0.2%) 0.9% 2.8% Return ratios
% change Y/Y (5.5%) (5.8%) (5.8%) 9.0% 8.4% Pre-tax ROE 13.0% 13.0% 14.2% 16.9% 18.1%
Loan loss provisions (1,072) (1,104) (858) (610) (584) ROE 6.0% 9.2% 8.8% 11.0% 12.1%
Other provisions (123) (58) 0 0 0 RoNAV 10.6% 14.8% 12.7% 14.9% 15.6%
% change Y/Y 35.8% (6.2%) 6.4% 24.7% 11.4% Revenues
Tax (charge) (553) (567) (587) (728) (796) NIM (NII / RWA) 4.0% 4.1% 4.3% 4.4% 4.5%
Balance sheet
ASSETS Cost ratios
% change Y/Y (7.1%) 1.7% 2.0% 4.5% 5.5% Cost / assets 1.5% 1.5% 1.5% 1.5% 1.4%
Investments 67,295 64,940 66,238 69,550 73,028
A
% change Y/Y (4.6%) 6.0% 3.0% 3.0% 5.0% NPLs / loans 5.5% 6.0% 6.2% 5.2% 4.3%
Average interest bearing liabs 206,936 199,041 200,028 204,271 211,837 Growth in NPLs (2.5%) 10.7% 4.6% (12.6%) (12.2%)
Minorities 362 368 375 382 389 Total Tier 1 13.8% 15.8% 16.3% 16.8% 16.7%
205
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Lloyds Banking Group: Summary of Financials
in millions, year end Dec FY12A FY13E FY14E FY15E in millions, year end Dec FY12A FY13E FY14E FY15E
Per Share Data
Net interest income 10,335 10,761 11,051 11,143 EPS Reported (2.04) 4.11 5.54 7.38
% Change Y/Y (15%) 4% 3% 1% Adj Diluted EPS(p) 1.06 5.23 6.89 7.69
Non-interest income 8,051 7,596 7,615 7,718 % Change Y/Y 158% 392% 32% 12%
Other income - - - - BV per share 0.63 0.63 0.66 0.70
Total operating revenues 18,386 18,357 18,666 18,861 NAV per share 54.9 56.7 60.9 64.7
% change Y/Y (13%) (0%) 2% 1% Shares outstanding 70,343 71,431 72,202 72,974
Operating costs (10,082) (9,514) (9,105) (8,828) s
% change Y/Y (5%) (6%) (4%) (3%) Returns ratios
PPOP 8,304 8,843 9,561 10,033 RoRWA 0.2% 1.2% 1.7% 2.0%
% change Y/Y (20%) 6% 8% 5% Pre-tax ROE 5.2% 11.5% 14.6% 15.4%
Loan loss provisions (5,697) (3,740) (2,797) (2,411) ROE 1.6% 8.4% 10.7% 11.3%
Other non recurrent items (3,177) (1,077) (1,310) (300) JPM adjusted RoNAV (3.6%) 7.4% 9.4% 11.8%
Pretax profit (570) 4,026 5,454 7,322
% change Y/Y (84%) (806%) 35% 34% Revenues
Tax (773) (1,090) (1,460) (1,946) NIM 1.93% 2.10% 2.26% 2.31%
% Tax rate (136%) 27% 27% 27% Non-IR / average assets 1% 1% 1% 1%
Minorities (84) (26) (16) (16) Total rev / average assets 2% 2% 2% 2%
Net Income (Reported) (1,427) 2,910 3,978 5,360 NII / Total revenues 56% 59% 59% 59%
NII / Total revenues 56% 59% 59% 59%
. s
Balance sheet
in millions, year end Dec FY12A FY13E FY14E FY15E in millions, year end Dec FY12A FY13E FY14E FY15E
Net customer loans 517,225 499,869 483,465 489,494 Loan / deposit 121% 158% 162% 160%
% change Y/Y (9%) (3%) (3%) 1% Loan / assets 57% 57% 58% 59%
Total assets 924,552 859,833 834,038 817,358 Customer deposits / liabilities 49% 39% 38% 40%
. a
LIABILITIES CAPITAL
Customer deposits 426,912 317,016 298,395 305,817 RWAs 310,299 290,441 280,548 277,643
% change Y/Y 3% (26%) (6%) 2% % YoY change (12%) (6%) (3%) (1%)
Shareholders' equity 43,999 44,714 47,907 50,812 Core Tier 1 37,193 40,910 43,459 46,364
% change Y/Y (4%) 2% 7% 6% % YoY change (2%) 10% 6% 7%
Minorities 685 323 323 323
Total liabilities 879,868 814,796 785,809 766,222 Core Tier 1 ratio 12.0% 14.1% 15.5% 16.7%
% change Y/Y (5%) (7%) (4%) (2%) Tier 1 ratio 42,754 42,309 44,858 47,763
a
206
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Santander: Summary of Financials
Per Share Data
Non-interest income 13,483 14,145 14,045 14,595 - % Change Y/Y (54.2%) 64.6% 20.5% 14.4% -
Fees & commissions - - - - - DPS 0.62 0.60 0.60 0.60 -
% change Y/Y - - - - - % Change Y/Y 1.3% (3.6%) 0.0% 0.0% -
Trading revenues - - - - - Dividend yield 11.0% 10.6% 10.6% 10.6% -
% change Y/Y - - - - - Payout ratio 267.5% 156.7% 130.0% 113.7% -
Total expenses (19,983) (20,258) (21,033) (21,963) -
% change Y/Y 2.2% 1.4% 3.8% 4.4% - Return ratios
Pre-provision operating profit 23,422 21,032 22,942 24,503 - RoRWA 0.4% 0.8% 1.0% 1.3% -
% change Y/Y 1.0% (10.2%) 9.1% 6.8% - Pre-tax ROE 11.4% 9.5% 11.9% 13.9% -
Other provisions - - - - - RoNAV 4.9% 9.1% 11.6% 13.3% -
Earnings before tax 8,481 6,906 9,062 11,206 -
% change Y/Y (17.8%) (18.6%) 31.2% 23.7% - Revenues
Tax (charge) (2,314) (1,638) (2,185) (2,717) - NIM (NII / RWA) 5.3% 5.0% 5.7% 5.9% -
% Tax rate 27.3% 23.7% 24.1% 24.2% - Non-IR / average assets 1.1% 1.1% 1.1% 1.1% -
Minorities (895) (1,106) (1,381) (1,570) - Total rev / average assets 3.4% 3.3% 3.4% 3.5% -
Net Income (Reported) 2,295 4,148 5,496 6,919 - NII / Total revenues 68.9% 65.7% 68.1% 68.6% -
Balance sheet
ASSETS Cost ratios
% change Y/Y (2.9%) (1.9%) 3.8% 2.2% - Cost / assets 1.6% 1.6% 1.6% 1.6% -
Investments 4,453 5,014 5,014 5,014 -
A
Customer deposits 589,104 600,772 630,810 662,351 - Loan loss reserves / loans - - - - -
% change Y/Y 0.0% 2.0% 5.0% 5.0% - NPLs / loans - - - - -
Interbank funding 131,670 98,115 101,058 104,090 - Loan loss reserves / NPLs - - - - -
Average interest bearing liabs - - - - - Growth in NPLs 4.7% 4.2% 4.0% 4.0% -
Retirement benefit liabilities - - - - - % YoY change (1.6%) (5.9%) 2.2% 3.4% -
Minorities 9,415 10,643 12,024 13,593 - Total Tier 1 11.1% 12.6% 13.4% 14.2% -
207
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
SEB: Summary of Financials
Per Share Data
% change Y/Y (3.9%) 5.7% 2.5% 2.6% - % Change Y/Y 57.1% 1.8% 14.4% 5.5% -
% change Y/Y 0.6% (5.0%) 0.0% 1.4% -
% change Y/Y 7.0% 19.9% 5.4% 5.4% - RoRWA 1.7% 2.0% 2.0% 2.0% -
Loan loss provisions (931) (1,230) (1,516) (1,575) - Pre-tax ROE 13.4% 15.3% 15.2% 15.1% -
% change Y/Y (4.8%) 19.1% 4.1% 5.5% -
Balance sheet
ASSETS Cost ratios
% change Y/Y (6.2%) 11.1% 1.2% 4.6% - Loan / deposit 143.4% 142.2% 146.4% 146.4% -
A
Average interest bearing liabs 1,908,422 2,008,346 2,114,420 2,183,302 1,111,344 Growth in NPLs (23.4%) (8.4%) 5.5% 10.4% -
208
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Royal Bank of Scotland: Summary of Financials
Per Share Data
Net interest income 12,689 11,695 10,820 10,817 10,831 EPS Reported (18.46) (54.27) 6.88 18.36 25.20
% Change Y/Y (11%) (8%) (7%) (0%) 0% Adj Diluted EPS(p) (2.43) (3.41) 10.15 23.64 28.77
Non-interest income 15,020 13,441 8,744 8,658 8,505 % Change Y/Y (146%) 40% (398%) 133% 22%
Other income - - - - - BV per share 6.79 6.15 6.17 6.16 6.35
Total operating revenues 27,709 25,136 19,564 19,475 19,336 NAV per share 477 452 450 451 473
% change Y/Y (15%) (9%) (22%) (0%) (1%) Shares outstanding 11,023 11,171 11,284 11,457 11,630
Operating costs (18,746) (17,046) (12,911) (12,254) (11,796) s
% change Y/Y (13%) (9%) (24%) (5%) (4%) Returns ratios
PPOP 8,963 8,090 6,653 7,221 7,541 RoRWA (0.1%) (0.1%) 0.2% 0.6% 0.8%
% change Y/Y (19%) (10%) (18%) 9% 4% JPM adjusted RoNAV (3.7%) (11.6%) 1.5% 4.1% 5.5%
Loan loss provisions (7,439) (5,229) (4,006) (2,813) (2,188) A
PBT before g'will & integration 1,524 2,861 2,647 4,408 5,353 NIM 2.65% 2.65% 2.54% 2.61% 2.67%
Other non recurrent items (1,157) (2,190) (456) (300) (300) Non-IR / average assets 1% 1% 1% 1% 1%
Pretax profit (1,011) (5,296) 2,008 3,508 4,753 Total rev / average assets 2% 2% 2% 2% 2%
% change Y/Y 28% 424% (138%) 75% 35% NII / Total revenues 46% 47% 55% 56% 56%
Tax (1,250) (522) (916) (1,101) (1,474) NII / Total revenues 46% 47% 55% 56% 56%
% Tax rate (124%) (10%) 46% 31% 31%
Minorities (28) 123 (117) 0 0
Net Income (Reported) (1,998) (5,971) 773 2,088 2,909
. s
Balance sheet
Net customer loans 454,112 430,088 421,715 407,626 403,129 Loan / deposit 110% 99% 96% 93% 90%
% change Y/Y (10%) (5%) (2%) (3%) (1%) Loan / assets 32% 31% 34% 36% 37%
Total assets 1,506,867 1,312,295 1,181,114 1,122,080 1,088,434 Customer deposits / liabilities 29% 35% 40% 42% 44%
.
LIABILITIES CAPITAL
Customer deposits 414,143 433,239 440,644 440,641 446,054 RWAs 437,800 459,600 457,924 417,258 409,300
% change Y/Y (3%) 5% 2% (0%) 1% % YoY change (6%) 5% (0%) (9%) (2%)
Shareholders' equity 74,819 68,678 69,579 70,536 73,815 Core Tier 1 60,138 47,320 48,840 49,797 53,076
% change Y/Y (0%) (8%) 1% 1% 5% % YoY change (2%) (21%) 3% 2% 7%
Minorities 1,234 1,770 475 475 475
Total Liabilities and Shareholder Equity 1,506,867 1,312,295 1,181,065 1,122,012 1,088,352 Core Tier 1 ratio 13.7% 10.3% 10.7% 11.9% 13.0%
% change Y/Y 4% (13%) (10%) (5%) (3%) Tier 1 ratio 56,990 57,135 58,184 59,141 62,420
a
209
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Nordea Bank AB: Summary of Financials
Per Share Data
% change Y/Y (0.7%) (2.5%) (0.2%) 0.7% -
% change Y/Y 17.1% 2.8% 7.9% 5.7% - RoRWA 1.6% 1.9% 2.2% 2.4% -
Loan loss provisions (932) (724) (619) (591) - Pre-tax ROE 15.0% 15.6% 17.0% 17.3% -
% change Y/Y 15.1% 8.6% 11.6% 6.9% -
Tax (charge) (991) (1,102) (1,230) (1,316) - Revenues
Balance sheet
ASSETS Cost ratios
% change Y/Y (1.8%) (10.1%) (0.1%) 1.7% - Loan / deposit 172.5% 173.4% 168.6% 165.4% -
Average interest earnings assets 487,622 491,355 488,074 499,638 253,582 Cash / assets 5.3% 4.8% 4.8% 4.7% -
A
% change Y/Y 5.6% (0.2%) 4.0% 5.0% - NPLs / loans 1.8% 1.9% 1.9% 1.9% 2.0%
Average interest bearing liabs 440,051 447,611 456,090 476,319 243,719 Growth in NPLs 27.0% (3.3%) 3.1% 3.3% -
Retirement benefit liabilities - - - - - % YoY change (5.7%) (9.9%) (0.7%) 0.2% -
210
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
IntesaSanpaolo: Summary of Financials
Per Share Data
Net interest income 9,780 9,430 8,299 8,800 9,432 EPS Reported (0.56) 0.10 0.06 0.10 0.14
% Change Y/Y 1.3% (3.6%) (12.0%) 6.0% 7.2% EPSAdjusted 0.72 0.12 0.09 0.12 0.16
Non-interest income 7,004 8,451 8,327 8,317 8,364 % Change Y/Y 278.4% (82.6%) (30.0%) 34.2% 34.7%
Fees & commissions - - - - - DPS 0.05 0.05 0.05 0.06 0.06
% change Y/Y - - - - - % Change Y/Y (37.5%) 0.0% 0.0% 20.0% 0.0%
Trading revenues 919 2,182 1,500 1,200 1,000 Dividend yield 3.1% 3.1% 3.1% 3.8% 3.8%
% change Y/Y 98.9% 137.4% (31.3%) (20.0%) (16.7%) Payout ratio NM 51.2% 77.1% 61.6% 42.9%
% change Y/Y 2.0% 6.5% (7.0%) 2.9% 4.0% Shares outstanding 14,707 16,425 16,425 16,425 16,425
Total expenses (9,137) (8,913) (8,380) (8,213) (8,130)
% change Y/Y 5.9% 17.3% (8.1%) 8.0% 8.5% Pre-tax ROE (1.2%) 7.5% 5.6% 7.5% 9.9%
Other provisions (1,287) (527) (370) (300) (299) RoNAV 1.0% 6.5% 4.1% 5.5% 7.3%
Tax (charge) 910 (1,523) (1,305) (1,741) (2,334) NIM (NII / RWA) 2.9% 2.9% 2.6% 2.8% 3.0%
Net Income (Reported) (8,190) 1,605 1,066 1,599 2,298 NII / Total revenues 58.3% 52.7% 49.9% 51.4% 53.0%
Balance sheet
ASSETS Cost ratios
% change Y/Y (0.7%) (0.0%) (2.0%) 1.0% 1.0% Cost / assets 1.3% 1.2% 1.1% 1.1% 1.1%
Loan loss reserves (22,746) (24,145) (27,801) (29,701) (29,101) Staff numbers 100,192 100,192 101,695 - -
% change Y/Y - - - - - Loan / deposit - - - - -
% change Y/Y (10.8%) 10.6% 2.0% 2.0% 1.0% NPLs / loans 9.9% 11.4% 13.1% 14.0% 14.1%
Average interest bearing liabs 444,981 443,382 453,257 450,620 447,959 Growth in NPLs 12.2% 18.8% 9.7% 5.1% (0.2%)
Retirement benefit liabilities - - - - - % YoY change (2.1%) (5.5%) (1.0%) 0.0% 0.0%
Minorities 718 586 586 586 586 Total Tier 1 11.5% 11.7% 11.5% 11.7% 12.2%
211
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
HSBC Holdings plc: Summary of Financials
$ in millions, year end Dec FY12A FY13E FY14E FY15E $ in millions, year end Dec FY12A FY13E FY14E FY15E
Per Share Data
Net interest income 37,672 34,646 34,575 36,529 EPS Reported 0.74 0.95 0.97 1.08
% Change Y/Y (7%) (8%) (0%) 6% % YoY change (19%) 28% 3% 11%
Non-interest income 27,885 29,798 31,508 32,999 EPSAdjusted 0.80 0.91 0.97 1.07
% change (5%) (7%) 0% 2% % Change Y/Y 6% 13% 6% 11%
Fees & commissions 16,430 16,857 17,749 18,734 BV per share 9.48 9.54 9.91 10.33
% YoY change (4%) 3% 5% 6% % YoY change 7% 1% 4% 4%
Trading revenues 8,501 11,138 11,349 11,845 NAV per share 7.88 8.03 8.41 8.84
% YoY change 12% 31% 2% 4% % YoY change 11% 2% 5% 5%
Other income - - - - DPS 0.45 0.50 0.55 0.60
Total operating revenues 65,557 64,444 66,083 69,528 % Change Y/Y 10% 11% 10% 9%
% change Y/Y (4%) (2%) 3% 5% Dividend yield 4% 5% 5% 5%
Operating costs (38,603) (35,926) (36,066) (36,675) Payout ratio 61.1% 53.1% 56.9% 56.1%
% change Y/Y (5%) (7%) 0% 2% Shares outstanding 18,476 18,705 18,855 19,005
PPOP 26,954 28,519 30,017 32,853
% change Y/Y (2%) 6% 5% 9% Returns & Margins
Loan loss provisions (8,311) (6,509) (7,282) (7,672) RoRWA 1.3% 1.4% 1.4% 1.5%
% YoY change (31%) (22%) 12% 5% ROE 8.8% 9.6% 10.0% 10.7%
Income from Associates 3,557 2,417 2,700 3,022 RoNAV 10.8% 11.5% 11.9% 12.5%
Pretax profit 20,649 25,201 25,435 28,203 Pre-tax ROE 13.3% 13.8% 13.9% 14.7%
% change Y/Y (6%) 22% 1% 11%
Tax (5,315) (5,165) (5,179) (5,733)
Minorities (1,307) (1,805) (1,393) (1,482)
Net Income (Reported) 13,454 17,659 18,290 20,415 NIM - - - -
% YoY change (16%) 30% 3% 11% Non-IR / average assets 1% 1% 1% 1%
Total rev / average assets 2% 2% 2% 2%
.
Balance sheet
$ in millions, year end Dec FY12A FY13E FY14E FY15E $ in millions, year end Dec FY12A FY13E FY14E FY15E
Net customer loans 997,623 976,212 1,013,452 1,056,801 Loan / deposit 74% 72% 72% 73%
% change Y/Y 6% (2%) 4% 4% Loan / assets 37% 37% 36% 35%
Total assets 2,692,538 2,712,002 2,881,515 3,067,651 Customer deposits / liabilities 53% 53% 52% 51%
% YoY change 5% 1% 6% 6%
.
LIABILITIES CAPITAL
Customer deposits 1,340,014 1,348,618 1,398,240 1,451,879 RWAs 1,123,943 1,260,569 1,312,509 1,374,975
% change Y/Y 7% 1% 4% 4% % YoY change (7%) 12% 4% 5%
Shareholders' equity 175,242 178,529 186,906 196,385 Core Tier 1 138,789 145,349 153,726 163,205
% YoY change 10% 2% 5% 5% % YoY change 13% 5% 6% 6%
Minorities 7,887 8,291 8,291 8,291
Total liabilities 2,509,409 2,525,182 2,686,318 2,862,975 Core Tier 1 ratio 12.3% 11.5% 11.7% 11.9%
% YoY change 5% 1% 6% 7% Total Tier 1 151,048 154,601 162,978 172,457
212
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
Banco Popular: Summary of Financials
Per Share Data
Net interest income 2,087 2,719 2,550 2,737 3,001 EPS Reported 1.71 (1.46) 0.01 0.24 1.02
% Change Y/Y (14.2%) 30.3% (6.2%) 7.3% 9.6% EPSAdjusted 1.27 (1.22) 0.01 0.20 0.86
Non-interest income 910 1,059 1,142 1,187 1,244 % Change Y/Y (33.4%) (196.3%) (100.5%) 3151.3% 323.8%
Fees & commissions - - - - - DPS 0.00 0.00 0.00 0.00 0.00
% change Y/Y - - - - - % Change Y/Y - - - - -
Trading revenues - - - - - Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
% change Y/Y - - - - - Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0%
Other Income 910 1,059 1,142 1,187 1,244 BV per share 30.11 35.37 6.24 6.19 6.98
% change Y/Y (11.8%) 26.1% (2.3%) 6.3% 8.2% Shares outstanding 275 280 1,682 1,841 1,841
Total expenses (1,369) (1,761) (1,700) (1,584) (1,583)
% change Y/Y 5.1% 28.7% (3.5%) (6.8%) (0.0%) Return ratios
Pre-provision operating profit 1,627 2,016 1,991 2,340 2,661 RoRWA - - - - -
% change Y/Y (22.3%) 23.9% (1.2%) 17.5% 13.7% Pre-tax ROE 5.4% (38.4%) 0.1% 5.8% 19.0%
Loan loss provisions (1,690) (5,658) (1,866) (1,150) (115) ROE 5.8% (27.1%) 0.1% 4.1% 15.6%
Other provisions 507 150 (114) (550) (250) RoNAV 0.0% (30.5%) (2.5%) 4.8% 9.0%
Earnings before tax 444 (3,492) 11 640 2,297
% change Y/Y (43.0%) (886.2%) (100.3%) 5722.2% 258.9% Revenues
Tax (charge) 40 1,031 5 (192) (408) NIM (NII / RWA) - - - - -
% Tax rate 9.0% (29.5%) 50.0% 30.0% 17.8% Non-IR / average assets 0.7% 0.7% 0.7% 0.8% 0.8%
Net Income (Reported) 480 (2,461) 14 445 1,885 NII / Total revenues 69.6% 72.0% 69.1% 69.8% 70.7%
Balance sheet
ASSETS Cost ratios
% change Y/Y (1.3%) 13.6% (7.8%) (1.0%) (1.0%) Cost / assets 1.0% 1.2% 1.1% 1.0% 1.0%
Loan loss reserves - - - - - Staff numbers 14,062 16,501 16,206 16,206 16,206
Investments 0 976 1,219 1,219 1,219
A
% change Y/Y (13.4%) 16.1% 5.3% 1.0% 1.9% NPLs / loans - - - - -
Long term funding 2,835 2,170 2,096 1,991 1,892 LLP / RWA - - - - -
Average interest bearing liabs - - - - - Growth in NPLs - - - - -
Other liabilities 513 520 - - - RWAs 0 0 0 0 0
Retirement benefit liabilities - - - - - % YoY change - - - - -
Shareholders' equity 8,282 9,911 10,502 11,392 12,846 Core Tier 1 - - - - -
Minorities 106 44 45 45 45 Total Tier 1 - - - - -
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[email protected]
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[email protected]
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report.
Important Disclosures
Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in BNP
Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale, Commerzbank, Credit
Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander,
SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for BBVA,
CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale, Credit Suisse Group, Danske Bank,
Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland,
Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular within the past 12 months.
Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of UBS:
Kian Abouhossein.
Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of
Santander, IntesaSanpaolo.
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: BNP Paribas, BBVA,
CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale, Commerzbank, Credit Suisse Group,
Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank
of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale,
Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking
Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: BNP Paribas, BBVA, CaixaBank,
Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale, Commerzbank, Credit Suisse Group, Danske Bank,
Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland,
Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.
Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank,
Standard Chartered, Socit Gnrale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Handelsbanken,
KBC Group, Lloyds Banking Group, Santander, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco
Popular.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking BNP
Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered, Socit Gnrale, Commerzbank, Credit
Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC Group, Lloyds Banking Group, Santander,
SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco Popular.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard
Chartered, Socit Gnrale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken,
KBC Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc,
Banco Popular.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from BNP Paribas, BBVA, CaixaBank, Credit Agricole, UniCredit, UBS, Swedbank, Standard Chartered,
Socit Gnrale, Commerzbank, Credit Suisse Group, Danske Bank, Deutsche Bank, DnB ASA, Erste Bank, Handelsbanken, KBC
Group, Lloyds Banking Group, Santander, SEB, Royal Bank of Scotland, Nordea Bank AB, IntesaSanpaolo, HSBC Holdings plc, Banco
Popular.
Broker: J.P. Morgan Securities plc acts as Corporate Broker to Standard Chartered.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
J.P. Morgan is acting as financial advisor to Alpha Bank who on October 1st 2012 has entered into exclusive negotiations with Credit
Agricole S.A. on the acquisition of Emporiki Bank.
J.P. Morgan is acting as advisor to Lloyds Banking Group on its announced asset sale under the restructuring plan with the European
Commission.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing
[email protected] with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
[email protected].
Date Rating Share Price
()
Price Target
()
22-Nov-07 N 5.00 5.80
15-Sep-11 N 3.20 3.70
26-Jan-12 N 3.98 4.00
27-Mar-12 N 3.01 3.20
20-Apr-12 N 2.55 2.70
28-Nov-12 NR 2.79 --
11-Feb-13 N 2.83 2.90
01-Jul-13 N 2.46 2.17
()
Price Target
()
20-Mar-07 OW 6.05 81.00
10-May-07 OW 6.78 84.00
28-Sep-07 OW 5.36 80.00
23-Jan-08 OW 4.30 76.00
19-Mar-08 OW 3.93 70.03
04-Apr-08 OW 4.15 70.02
04-Jun-08 OW 3.87 63.63
27-Jun-08 OW 3.50 56.06
01-Aug-08 OW 3.42 56.10
20-Aug-08 OW 3.20 52.03
07-Oct-08 OW 2.57 40.74
21-Oct-08 OW 1.99 37.65
27-Nov-08 OW 1.58 24.96
17-Feb-09 OW 1.00 20.74
19-Mar-09 OW 1.02 18.98
07-May-09 OW 1.82 23.72
18-May-09 OW 1.67 20.26
05-Aug-09 OW 2.31 25.65
29-Sep-09 OW 2.72 32.96
10-Nov-09 OW 2.52 32.74
12-Nov-09 OW 2.51 32.54
14-Jan-10 OW 2.30 29.50
18-Mar-10 OW 2.15 29.51
10-Jun-10 OW 1.64 28.02
0
1
2
3
4
5
6
7
8
9
Price()
Oct
07
Jul
08
Apr
09
Jan
10
Oct
10
Jul
11
Apr
12
Jan
13
Oct
13

CaixaBank (CABK.MC, CABK SM) Price Chart
N 2.7
N 3.2 N 2.899
N 5.8 N 3.7 N 4 NR N 2.172
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Nov 28, 2012 - Feb 11, 2013.
0
1
2
3
4
5
6
7
8
9
10
11
12
Price()
Sep
06
Mar
08
Sep
09
Mar
11
Sep
12

UniCredit (CRDI.MI, UCG IM) Price Chart
OW 70.022 OW 56.102 OW 37.65 OW 18.98 OW 25.651 OW 32.542 OW 28.023 N 10.458
OW 84 OW 70.026 OW 56.058 OW 40.742 OW 20.736 OW 20.259 OW 32.744 OW 29.507 N 14.007 N 3.502 N 2.9
OW 81OW 80 OW 76 OW 63.627 OW 52.028 OW 24.963 OW 23.715 OW 32.96 OW 29.5 N 21 N 20.4N 8.021 N 2.895 N 3.31 N 4
Initiated coverage Mar 20, 2007.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
15-Dec-10 N 1.70 21.00
19-Apr-11 N 1.63 20.40
25-Jul-11 N 1.32 14.01
12-Oct-11 N 1.03 10.46
15-Nov-11 N 0.74 8.02
10-Jan-12 N 2.42 3.50
18-May-12 N 2.42 2.90
23-Aug-12 N 3.15 2.90
07-Jan-13 N 3.96 3.31
13-Aug-13 N 4.60 4.00
()
Price Target
()
26-Oct-06 N 12.57 13.90
18-Dec-06 N 13.26 14.50
23-Jan-07 N 13.20 16.30
24-Jan-07 OW 13.20 16.30
05-Mar-07 OW 12.72 16.00
15-May-07 OW 12.59 15.80
26-Jul-07 OW 12.96 16.30
25-Sep-07 OW 12.48 15.20
29-Oct-07 OW 13.64 15.50
08-Nov-07 OW 13.46 16.70
08-Feb-08 OW 10.84 15.50
10-Jun-08 OW 11.62 14.50
12-Nov-08 N 6.34 7.70
06-Feb-09 N 6.08 6.30
06-Apr-09 N 5.86 6.20
29-Apr-09 N 6.96 7.00
24-Aug-09 OW 10.60 11.90
05-Oct-09 OW 10.42 12.40
29-Oct-09 OW 10.96 12.50
22-Jan-10 OW 10.85 12.40
08-Feb-10 OW 9.24 11.80
09-Sep-10 OW 9.80 11.70
29-Oct-10 OW 9.15 10.90
21-Jul-11 N 7.24 7.60
30-Nov-11 N 5.60 6.60
23-Apr-12 OW 4.68 6.90
27-Apr-12 OW 4.92 6.50
26-Jun-12 OW 4.71 6.20
26-Jul-12 OW 4.06 5.20
21-Aug-12 N 5.72 5.00
26-Oct-12 N 5.74 4.90
11-Feb-13 N 5.91 5.80
13-Jun-13 UW 5.28 4.34
01-Jul-13 UW 4.90 4.36
0
7
14
21
28
Price()
Sep
06
Mar
08
Sep
09
Mar
11
Sep
12

Santander (SAN.MC, SAN SM) Price Chart
N 16.3 OW 15.8 OW 15.5 N 6.2OW 12.5 OW 6.2 N 4.9
N 14.5 OW 16OW 15.2 OW 15.5 N 6.3 OW 12.4 OW 11.8 OW 10.9 OW 6.5 N 5 UW 4.364
N 13.9 OW 16.3 OW 16.3 OW 16.7OW 14.5 N 7.7 N 7 OW 11.9 OW 12.4OW 11.7 N 7.6 N 6.6 OW 6.9 OW 5.2N 5.804 UW 4.338
Initiated coverage Oct 26, 2006.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
()
Price Target
()
04-Dec-06 OW 5.33 6.30
17-Apr-07 OW 5.97 6.65
20-Jun-07 OW 5.67 6.79
12-Sep-07 OW 5.29 6.78
08-Oct-07 OW 5.58 6.55
23-Jan-08 OW 4.60 6.33
09-Apr-08 N 4.76 5.75
04-Jun-08 N 4.13 5.54
20-Aug-08 N 3.55 4.90
21-Oct-08 N 3.11 4.77
27-Nov-08 OW 2.40 3.11
17-Feb-09 OW 2.10 3.00
07-May-09 OW 2.53 3.05
27-May-09 OW 2.60 3.05
10-Nov-09 OW 2.90 3.80
04-Dec-09 OW 3.00 3.80
01-Mar-10 OW 2.62 3.80
22-Mar-10 OW 2.84 3.80
10-Jun-10 OW 2.02 3.00
15-Dec-10 OW 2.21 3.00
19-Apr-11 OW 2.09 3.05
25-Jul-11 OW 1.75 2.10
16-Mar-12 N 1.56 1.70
18-May-12 N 0.99 1.60
23-Aug-12 N 1.21 1.50
07-Jan-13 UW 1.40 1.02
05-Aug-13 UW 1.41 1.19
(p)
Price Target
(p)
08-Feb-07 UW 811 1100
11-Feb-07 UW 802 850
14-Nov-07 UW 734 820
18-Jan-08 UW 663 790
03-Mar-08 UW 688 720
19-Nov-08 UW 615 675
25-Feb-09 UW 429 400
02-Mar-09 UW 428 360
06-May-09 N 518 450
04-Aug-09 OW 636 760
10-Nov-09 OW 692 900
25-Jul-11 OW 608 800
28-Oct-11 OW 555 700
10-Nov-11 OW 497 650
14-Jan-13 OW 676 725
26-Feb-13 OW 713 755
09-May-13 OW 735 800
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
0
1
2
3
4
5
6
7
8
9
10
11
Price()
Sep
06
Mar
08
Sep
09
Mar
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12

IntesaSanpaolo (ISP.MI, ISP IM) Price Chart
OW 6.783 N 5.539 OW 3.11 OW 3.05 OW 3.804 N 1.5
OW 6.793 N 5.749N 4.773 OW 3.049 OW 3.803 OW 2.999 OW 2.101 N 1.596
OW 6.3 OW 6.65 OW 6.551 OW 6.328 N 4.905 OW 2.997OW 3.802 OW 3.797 OW 3 OW 3.05 N 1.701 UW 1.02 UW 1.19
Initiated coverage Dec 04, 2006.
0
211
422
633
844
1,055
1,266
1,477
Price(p)
Sep
06
Mar
08
Sep
09
Mar
11
Sep
12

HSBC Holdings plc (HSBA.L, HSBA LN) Price Chart
UW 720p UW 360p OW 900p OW 650p OW 800p
UW 850p UW 790p UW 400p OW 760p OW 700p OW 755p
UW 1,100p UW 820p UW 675p N 450p OW 800p OW 725p
Initiated coverage Feb 08, 2007.
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[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Abouhossein, Kian: Banca Popolare di Milano (PMII.MI), Banco Popolare (BAPO.MI), Credit Suisse Group
(CSGN.VX), Deutsche Bank (DBKGn.DE), Goldman Sachs (GS), Julius Baer (BAER.VX), Morgan Stanley (MS), UBS (UBSN.VX)
J.P. Morgan Equity Research Ratings Distribution, as of June 28, 2013
Overweight
(buy)
Neutral
(hold)
Underweight
(sell)
J.P. Morgan Global Equity Research Coverage 44% 44% 12%
IB clients* 56% 50% 40%
JPMS Equity Research Coverage 42% 50% 8%
IB clients* 76% 66% 55%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email [email protected].
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,
and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.
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regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 25 Bank Street, London, E14 5JP. South
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Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and
the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial
Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P.
Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated by ASIC and is a Market, Clearing and
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010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member
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Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan
Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines
Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the Securities
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220
11 September 2013
Kian Abouhossein
(44-20) 7134-4575
[email protected]
Sofie Peterzens
(44-20) 7134-4716
[email protected]
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"Other Disclosures" last revised May 4, 2013.
Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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