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Allied Irish Banks Has Officially Defaulted - ISDA

Tyler Durden's picture




 

By unanimous vote, the ISDA determinations committee (which also includes such hedge funds as DE Shaw, Citadel, BlueMountain and Goldman Sachs) has agreed that Allied Irish Banks PLC has officially experienced a Restructuring Event. CDS settlement to proceed next. And yes, thanks to daily variation margin on CDS this means absolutely nothing, and should the cash/physical settlement auction clear tight of prevailing prices depending on where CTD bonds trade, it means CDS sellers will (gasp) receive daily margin cash at the end of the day. Yes, contrary to AIG-related stigma, selling CDS on an entity does not mean an automatic default for the sellers of protection. But that won't prevent those who have no idea how the CDS market operates to spread more BS stories, especially as relates to Greek, then all other PIIGS, CDS.

From ISDA:

EMEA Determinations Committee Decision 13062011

 

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Mon, 06/13/2011 - 07:57 | 1364342 hugovanderbubble
hugovanderbubble's picture

Very important fact , specially to Law Firms and Legal & Compliance Departments.

 

CDS triggering more funds....so less funds available to accomplish to Basel III requirements.

Mon, 06/13/2011 - 08:08 | 1364351 hugovanderbubble
hugovanderbubble's picture

Tyler...

Barron´s pumping banks...look sir.

*** STOP PUMPING BANKS TILL THEY NOT RECOGNISE REAL MARK TO MARKET LOSSES IN REAL ESTATE, MBS,CMBS, Sovereign Debt Imbalances...What kind of accounting fraud constantly has been crashing the fair traders...(This war is not equal/fair/ its like fighting a Drone with a woodsword...

Please US citizens...DONT INVEST in ANY BANK till the bad stuff is eliminated, dont trust any media which says for example at friday noon, RUMOR of 2.5% reserve vs 9% estimate, previously 3%...This market is awful corrupted.

 


There's a good case to be made for investing in big U.S. financials, despite issues like regulation and mortgage woes. Of particular interest: Goldman Sachs, JPMorgan and Citigroup.

U.S. Financials: Time to Hit the Books

By ANDREW BARY 

Some of the country's most storied investment banks are trading at or below book value, and skittish investors would do well to take another look at their shares.

Prior to the mid-1980s, when big investment banks like Morgan Stanley and Goldman Sachs were lucrative private partnerships, only privileged employees were entitled to purchase their equity at book value.

Now, given the broad, recent selloff in the sector, anyone can buy shares of leading U.S. financial companies near book value or a discount from book. Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley trade below book, or shareholder equity per share, while Goldman Sachs and Wells Fargo are at small premiums to book.

It frequently pays to buy profitable financial companies at these levels, because book indicates liquidation value, meaning investors are paying little or nothing for the franchises and earnings power. There can be fluff in book value, because it often includes goodwill from acquisitions and other intangible assets. But some stocks, including Bank of America, Citigroup and Morgan Stanley, trade below tangible book, a measure that excludes the fluff.

View Full Image

Peter Hoey for Barron's

Since the financial crisis, banks have been trying to clean up their balance sheets, even as they remain under pressure from the mortgage mess's lingering effects.

A case can be made for all the big financials, based on book value and earnings, with the shares having the potential to rise 25% or more in the next year. Such a gain would leave several, including Goldman, Citi and Bank of America, about where they began 2011—hardly heroic moves. As the table below shows, the six stocks trade for eight to 10 times projected 2011 profits and for an average of just seven times estimated 2012 earnings. The big U.S. financials also are better capitalized than most European peers.

"Patient investors will be rewarded by buying these stocks," says Gerard Cassidy, an analyst with RBC Capital Markets who is bullish on both Citigroup and JPMorgan. "If you have a horizon of two to three years, you should buy Goldman Sachs stock. It has a bright outlook," says Roger Freeman, a brokerage analyst at Barclays Capital.

What's ailing the stocks? Plenty: tighter regulation, more stringent capital rules, a far-from-robust economy, weak loan growth and persistent mortgage woes. The banks lost a battle in Congress last week to ease tough rules on debit-card fees. Another concern: slower institutional trading activity could lead to disappointing second-quarter profits for firms, like Goldman, that depend on trading.

Probably the biggest issue is regulation. Under emerging international standards, big commercial and investment banks may be required to hold more capital than anticipated, given their likely status as so-called SIFIs–Systemically Important Financial Institutions. The new capital ratio could be 10% or even higher versus earlier expectations of 8%. Federal Reserve governor Daniel Tarullo rattled the markets June 3 when he said that an argument could be made that SIFI capital ratios should be as high as 14%. While bigger capital bases mean less risk, they also portend lower returns—and investors tend to punish low-return companies.

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Before the 2008 financial crisis, the big banks and investment banks often earned a return on equity, or ROE, of 20% or higher. Now the fear is that it will be tough to generate 15% returns, and that ROE may be closer to 10% if the capital ratio is set at 10%. Goldman used to target a ROE of 20% on tangible equity over a business cycle, but now won't endorse that goal, due to regulatory uncertainty. It earned a 15% return in the first quarter.

Bulls argue that the stocks already discount ROEs of 10% or less. "No matter what capital ratio they are held to, they should trade for at least book value," says Sanford Bernstein analyst John McDonald.

Cassidy notes that Citigroup shares, at 38, trade at a discount to its tangible book value of $47: "Citi is a bargain, even with a lower ROE." He carries an Outperform rating and a $52 price target. Citigroup has a low price/earnings ratio, and a strong consumer- and corporate-banking presence in high-growth Asia and Latin America. The only major U.S. bank with such a franchise, more than half of its revenue comes from abroad. Citi's annual dividend could rise to $1 in 2012. from just 4 cents now

JPMorgan emerged from the financial crisis as the country's blue-chip bank, with a lucrative international trading- and investment-banking franchise, sizable and high-return businesses like asset management and processing, as well the industry's best management team, led by CEO Jamie Dimon. Its shares, at about 41, trade below its book value of $43 and for only eight times projected 2011 profit of $4.92 a share. McDonald has an Outperform rating and a $57 price target on the stock. JPMorgan's legal costs alone were $7 billion last year, but should fall as the mortgage mess slowly is resolved.

Goldman, at 134, commands a small premium to its book value of $129, marking a rare instance since it went public in 1999 that it has traded so cheaply. While Goldman is contending with new rules on financial derivatives, restrictions on proprietary trading, uncertain capital rules and government investigations, it remains well-managed and highly profitable. Former mutual-fund star Michael Price said recently that Goldman could be worth $100 more than its current price on a sum-of-the-parts basis, based on the firm's valuable asset-management and merger-advisory franchises.

The Morgan Stanley turnaround has played out slowly, prompting a 17% drop in its stock this year to $23, a discount to its $29 book value and its $26 tangible book. There isn't a lot of confidence that CEO James Gorman can consistently achieve strong trading results while boosting margins in his large retail-brokerage business, Morgan Stanley Smith Barney, to near 20% from the current 10%. Sanford Bernstein analyst Brad Hintz wrote Friday that Morgan Stanley trades below its value if the firm liquidated its trading business while retaining retail brokerage and asset management. In that scenario the stock could be $31. While this is unlikely, it highlights the firm's value. Hintz has a $35 target.

WELLS FARGO HAS HISTORICALLY garnered the highest valuation, relative to book, among large banks, thanks to its high returns and a more understandable business focused on home-mortgage, consumer and business lending that is almost entirely domestic. Housing concerns have pushed its stock down 15% this year, to about 26, due in part to the bank's outsize home-equity portfolio of $114 billion. A bullish McDonald likes the stock, arguing that the mortgage situation is manageable and that the bank should benefit from cost savings as it fully digests its Wachovia acquisition. He carries an admittedly aggressive $40 price target.

Bank of America's stock has a low valuation, trading for 10.65, or just 80% of tangible book, largely due to its mortgage exposure. In describing CEO Brian Moynihan's presentation at a recent investor conference, McDonald wrote that he was "sober about a challenging near-term environment" but upbeat longer-term about expense reductions, its Merrill Lynch retail-brokerage business and international expansion, while stating that he doesn't believe the bank will need to raise capital to meet new rules.

At all of these banks, except perhaps BofA, recent financial results have outpaced the stocks. That's a good sign for investors. 

Decidedly Out of Favor

 

Shares of the big banks have skidded so much this year, on economic and regulatory concerns, that many of the stocks look like bargains for patient investors. Upside potential could be 25% or more.

  Recent YTD  2011 2011 2012 Price/Bk Div Stk-Mkt Company/Ticker Price* % Chg EPS (E) P/E (E) P/E (E) Value Yield Value (bil) Bank of America /BAC $10.65 -20.2 $1.06 10.1 6.2 0.50 0.4% 108 Citigroup /C 37.77 -20.1 4.21 9.0 7.0 0.65 0.1 110 Goldman Sachs /GS 133.53 -20.6 14.42 9.3 7.0 1.03 1.0 70 JPMorgan /JPM 40.98 -3.4 4.92 8.3 7.3 0.95 2.4 163 Morgan Stanley /MS 22.51 -17.3 2.23 10.1 7.6 0.77 0.9 35 Wells Fargo /WFC 26.22 -15.4 2.76 9.5 7.6 1.13 1.8 138 *Through June 9.     E=Estimate. Source: Thomson Reuters

 

E-mail: editors@barrons.com

Mon, 06/13/2011 - 08:09 | 1364356 richard in norway
richard in norway's picture

thanks but no thanks

Mon, 06/13/2011 - 08:35 | 1364408 oogs66
oogs66's picture

you lost me at 'book value'

Mon, 06/13/2011 - 08:53 | 1364449 TheProphet
TheProphet's picture

Yeah. There's a reason the street is trading these at a discount to book value. It's because they don't believe the book value. Period.

 

Mon, 06/13/2011 - 15:40 | 1365617 Ripped Chunk
Ripped Chunk's picture

Indeed Sir!

Assets are marked to fantasy

Unicorn round up coming soon

Mon, 06/13/2011 - 09:00 | 1364467 Lionhead
Lionhead's picture

Last, best chance for distribution of the shares held by the big holders & funds. The public pumping is a sign of desperation & fear. Trouble is, there won't be buyers other than the FED. Suck it up Bernank, they're your banks.

Mon, 06/13/2011 - 14:12 | 1365348 Problem Is
Problem Is's picture

If you want to use up 22" of column space...

Ask Tyler to guest post...

Mon, 06/13/2011 - 08:54 | 1364439 THE DORK OF CORK
THE DORK OF CORK's picture

I am very sceptical of people who speak Financial Latin , perhaps because I am just a dumb paddy but such is life.

My idea of money is Gold/Silver , Goverment money , credit money.

CDS paper are mere betting slips accepted as chips on the gambling table in this moment in time given the almost complete absence of law.

These exotic dancers may have synthetic value which artificially may keep interest rates lower then what they truely are but they are just betting slips in the final analysis.

Just my dim view.

Mon, 06/13/2011 - 08:57 | 1364452 Smiddywesson
Smiddywesson's picture

The easy money has already been earned in front of the steamroller, and the steamroller is picking up steam.  A clever argument can always be made to do something stupid.  No thanks.

Mon, 06/13/2011 - 09:26 | 1364533 Wolferl
Wolferl's picture

Anglo Irish bank was recapitalized by the Irish government. So this credit event isn´t a big deal. But who recapitalizes Greece before they default?

Mon, 06/13/2011 - 09:39 | 1364584 DogSlime
DogSlime's picture

If recent revelations are anything to go by, won't it be the FED?

Mon, 06/13/2011 - 10:04 | 1364623 CrashisOptimistic
CrashisOptimistic's picture

Exactly.  Some folks understand things and some don't.

The EU and ECB certainly are concerned.  Only the Germans, recently divested of their swap risk, have lost their concern.  Or . . . maybe the German banks took the other side of the trade and now would like to see some defaults, and have informed Merkel of that.

Mon, 06/13/2011 - 10:08 | 1364639 Iam_Silverman
Iam_Silverman's picture

"Yes, contrary to AIG-related stigma, selling CDS on an entity does not mean an automatic default for the sellers of protection."

True, in theory.  Are the names of any of those entities that sold CDS coverage public knowledge?  If so, it would be interesting to watch and see if this statement holds true for all who issued the CDS in this event.  I'm betting that the counterparties are also holding their breath.

When a largely unregulated "insurance" sector sees turmoil, that is where hindsight will prevail and there will be more calls for daylight and margin expansion.  Besides, AIG didn't default, did they?  All counterparties were made whole - not a haircut to be seen.  Thanks goes out to the New York Fed and Crony Capitalism.

Mon, 06/13/2011 - 10:19 | 1364645 Iam_Silverman
Iam_Silverman's picture

Ooops!  Excuse my miltiple posts please, it said service unavailable and I just assumed my missive had been eaten by cyberpolice bullies.

Mon, 06/13/2011 - 10:20 | 1364655 Iam_Silverman
Iam_Silverman's picture

.

Mon, 06/13/2011 - 10:17 | 1364662 DNB-sore
DNB-sore's picture

thanks for bad products, CDS on bad products and every naked body on earth paying for CDS that shouldn't have exisisted in the first place.

Make a bet and take the profit when the bet is right. Suffer when it goes bad. It's simple

By this time CDS will have the world economy covered not only by 100%

Mon, 06/13/2011 - 10:30 | 1364708 Mallenet
Mallenet's picture

That 'swap' word is what gets me: most 'swaps' exchange an asset (or the rights to it) for cash (credit or similar), I believe.  If I give you the rights to property (tangible or otherwise) in return for cash it is called a 'sale', even if this is partial (i.e.50%).  I am still confussed as to when a sale becomes a swap because the last time I swapped anything I was in a playground!

Mon, 06/13/2011 - 10:53 | 1364765 Eanach1
Eanach1's picture

Can someone explain in simple language what has just happened with AIB. Specifically, what brought about this default? :/

Mon, 06/13/2011 - 10:52 | 1364774 Eanach1
Eanach1's picture

Can someone explain in simple language what has just happened with AIB. Specifically, what brought about this default? :/

Mon, 06/13/2011 - 12:01 | 1364948 JLee2027
JLee2027's picture

One down, innummerable scumbags to go.

Mon, 06/13/2011 - 12:38 | 1365075 MrTrader
MrTrader's picture

I see a lot of lemmings moving int the trap....

Mon, 06/13/2011 - 13:11 | 1365153 mikemcsaudi
mikemcsaudi's picture

Motley Fool pumped this dog for a number of years ... I bought in to it  (pre 2008)... lost a little bit and got out ... glad I did.    My complaint with Motley Fool was like many other of the stock pitchers out there  ... and even more so today ...

They looked at companies INDIVIDUALLY without looking at the sector, the economy or any other factors that could effect the stock.   In my letter of cancellation to them I likened this scenario to them telling the passengers in the back of the Titanic not to worry as it was only the front of the ship that got hit and had to worry.  

Mon, 06/13/2011 - 14:09 | 1365333 jmc8888
jmc8888's picture

Of course some will get their money, but when it snowballs, it will take another 'bailout' to get paid off with CDS.  We're not there yet, but we aren't far off.  CDS are essentially worthless when it comes down to it.  In small stretches, without big avalanches, of course they can get paid off.  But that well will go dry or we'll have more bailouts or both.  I'll leave others to figure out what that means.  When the TBTF DO fail, since they cannot keep TBTF from failing forever, the CDS's written by them, will become worthless.

Glass-Steagall will also make many of these swaps worthless as well.  Especially when banks won't be able to write insurance. 

CDS's are only worth something until they aren't, and that day is surely coming.

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