Citi Analyst fights back: Beware the “uber leveraged” trio Barclays, RBS and Deutsche

Discussion in 'Wall St. News' started by ASusilovic, Nov 7, 2007.

  1. Here’s a graph ranking European banks according to their core capital. It has been published by Citi, who note that investors are now using much tighter (and conservative) measures when assessing banks’ capital adequacy.

    Research by Citi’s Simon Samuels suggests that, depending on the measure used, Europe’s banks need to fix capital deficits that run as high as 20 per cent - on average!

    The analyst reckons the recent sell off in the sector has created “value traps” and warns that growing concerns over capital strength might encourage the sort of bear market seen in the UK insurance sector in 2003. Which was quite terrifying at the time.


    Here’s what Samuels has to say:

    It used to be much simpler — Gone are the days when capital adequacy at European banks was easily measured by their reported Tier 1 ratio. Confidence in both the numerator (capital) and denominator (the risk weighting of assets) appears to have evaporated, with the result that a wider suite of capital adequacy measures are being monitored by investors, rating agencies and regulators as never before.

    So many measures, but still little confidence — Jostling for investors’ attention are a labyrinth of capital measures, ranging from the old fashioned tangible equity to asset ratio, through leverage ratios and equity Tier 1 ratios. But which ones matter?

    Ask the audience — At present the ultra-conservative tangible equity to asset ratio is the most correlated with valuation measures. By contrast, Tier 1 ratios are almost being ignored when it comes to individual bank valuations.

    Sizing the deficit — Whatever the measure, however, European banks have a problem. Our analysis shows that relative to banks elsewhere in the world, Europe’s banks have significant capital deficits that would require sector recapitalisation ranging from 5% of market capitalisation (on an Equity Tier 1 basis) to c20% on both a leverage ratio and a tangible equity/asset ratio test.

    Value traps — There are several banks that superficially look cheap on both a PE and price-to-book basis, yet are actually expensive once adjusted for their weak capital positions. These include Dexia, Danske, Credit Agricole, and Deutsche Postbank, where capital deficits range from 25% to 45% (of market cap). Most strikingly, however, are Europe’s “uber leveraged” trio — Barclays, RBS and Deutsche Bank — where capital deficits range from 60% to 80% of market cap.

    Expensive, yet attractive — By contrast, several superficially expensive banks look very attractive on a capital-adjusted basis, including most of the CEE sector, KBC Group, NBG, HSBC, Intesa Sanpaolo and Hellenic Bank.

    Sector view remains bearish — While the recent sell-off offers up some valuation opportunities, we view many of these as value traps (see above). With confidence in banks’ balance sheets shaken — and growing concerns over capital strength — we see echoes of the 2001-2003 insurance sector bear market developing.”-trio-—-barclays-rbs-and-deutsche/
  2. Bank analysts have to exercise restraint in wanting to downgrade their industry and avoid another wave of "crisis selling".
  3. Opposed to CIBC´s Meredith Whitney...


    Take a look at her

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    Rank: 74
    Score: 11

    All trades 3.6 % Target reached 57.1 %
    Open positions 15.4 % Stopped out 37.1 %
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  4. October 7-8 was August 15-16 Redux.

    The paper for these mostly Investment Grade players...
    And their US counterparts...
    Crashed through the August lows...
    To NEW multi-year lows today.

    The divergence between Investment Grade Financial and US Bonds...
    Is BY FAR the most dramatic I've seen in 15 years of trading.

    I love the volatility...
    This market is nirvana for me...

    You will see a 2nd wave of hedge fund blow ups announced soon.
    And the funds that took a hit in August...
    And then tried to get cute and hang on for "mean reversion" to bail them out...
    Got totally crushed this week.