The key debate at our conference was intense balance
sheet, macro, funding & deleveraging concerns set
against more resilient Q1 profitability and the growing
coherence of policy response. Notwithstanding fragility
of system, this creates a few potential opportunities.
First, we think some of the retail banks with resilient and
strong pre-provision profits that currently look like they
can out-earn provision build do provide some
opportunities. BBVA, Nordea and CASA rank well.
BBVA is currently making ~328bps in pre-provision
profit and we forecast 2009 provisions of ~138bps
(200bps pre-generic release) and in our bear case
190bps (254bps). A number of European banks also
suggested provisions were walking up rather than
spiking up in Q1, giving them longer to address core
balance sheet issues. IMF action also seeks to cut off
fat tail risks in CEE, even if the base case is still
unappealing. To be clear, we are concerned about the
risks of rising provisions/ falling commissions and
liability compression, so our picks are selective.
Second, the i-banks highlighted revenues up 60-100%
in FX, rates and credit from pre-crisis levels. The nub of
the debate is the sustainability of i-banks out-earning
write-downs in monolines and legacy assets. As we
argued in our joint report with Oliver Wyman (March 30),
the repricing of risk and some firms growing share does
create upside potential. Our top pick has been and still
is CSG, although it is nearing our price target, but we
recently added Deutsche Boerse to our model portfolio
as a balance sheet-light way to play the constructive
trends. To be clear, we are still concerned that a
number of wholesale banks are far less beneficiaries,
and pro-cyclicality and deleveraging continue to bite: we
forecast Q1 losses at CBK (UW), DPB (UW) and a FY
loss at UBS i-bank (EW). Also UW LSE.
We remain neutral banks vs index. Key risks are loss of
momentum or poor execution of policy response, high
balance sheet leverage (Euro banks have 2.6% TCE/
TA, 6.5% core T1), weak credit markets, real economy
feedback loops and major corporate insolvency.