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JP Morgan Pours More Cold Water On Stress Test Credibility, Sees Anything Less Than 25% Haircut On Greek Bonds As A Joke

Tyler Durden's picture




 

Just as Europe was happily gloating that it managed to push markets up with the second stress test rumor of a Greek debt haircut of 16-17%, here comes JPM's Francesca Tondi dashing European bank regulators' hope, and stating that anything below 30% on Greek bonds, 20% on Portugal, 15% on Spain, and 10% on Italy, Ireland and Hungary (in the base case scenario), is a joke. Below is the sensitivity table that serves as the framework for JPM's stress test. As can be seen, even the optimistic scenario is far more draconian than what Europe is planning on using, thereby discrediting the test, whose assumptions are now likely going to be revised yet again to be seen as anything remotely credible.

Below are JPM's haircut levels on debt by country:

Here is JPM's stress test summary:

With heightened debate over a stress test exercise in Europe, which regulators could publish by the end of the month, for illustrative purposes, we model a stress scenario for our universe of 36 listed European commercial banks, which include a stress test of higher credit losses consistent with a recession scenario, as well as an additional charge for "haircuts" on the banks’ sovereign bond holdings. Our analysis does not include the unlisted banking sector.

Ultimately, the scope of the exercise, which at the European level is "orchestrated" by CEBS, is for regulators (but also market participants when published) to obtain reassurance that banks have sufficient capital buffers to withstand a stress; such a minimal “watermark” capital level has not been publicly defined but we assume that it is a core Equity Tier 1 ratio of 6%. In our view, the methodology used will be as relevant as the actual conclusions. Based on our illustrative scenarios, we draw the following conclusions:

1) -Modeling a macro recession over the next 18 months, would increase LLP and erode earnings, but would not “tip the sector over the edge” as 25 banks out of 36 would pass the test. Our universe would “only” require €30bln of additional capital (Core ratio from 8.8% to 7.3%); concentrated in “only” 11 banks (largely based in Germany, Ireland, Greece), which however, in our view, have a capital shortfall of c. €15-20bln even before a stress test.

2) -We also flag that even under a recession scenario 10 European banks not only do not need further capital, but also still report a profit: among the large banks, these include SAN, Stan Chart, BBVA, DBNor, HSBC, BNP, Nordea and ISP.

3) -We add to our analysis also some scenarios of "haircuts" on the banks’ sovereign bond holdings, which market participants have
requested for some time, although regulators are still debating whether to include in the actual stress test. Having applied a haircut (of 6% on avg, with ranges from 5% to 30%) to the banks’ sovereign bond portfolio, our modelling indicates that our universe of banks may need an additional €24bln of capital, bringing the total potential capital need to €54bln, spread over 21 banks. Note that to date, European banks have already received, and still can use as a buffer, €35bln in the form of government support, which at least goes some way towards providing a cushion, should the stress materialise.

4) -Putting a “stress capital need” into context highlights that the market has already largely discounted a stress scenario -  Ultimately, even the €57bln capital requirement in our more comprehensive scenarios (of macro recession and sovereign haircut), represents c. 8% of our universe market cap, vs the c. 16% value "destruction" suffered by our universe in the last 3 months (admittedly partly due to liquidity issues). Trading on P/NAV of 1.0-1.5x even after NAV erosion and recapitalization, we find the sector valuation to be sufficiently discounted, but especially flag as attractive BNP, ISP, DBNor, Soc Gen, UCG and HSBC (1.9x P/NAV) based on a combination of attractive valuation, recent (in our view) ’unjustified’ market performance and resilience
to the stress test.

Full JPM report

 

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Wed, 07/07/2010 - 11:38 | 456658 Hondo
Hondo's picture

What about US debt..what kind of haircut should that come in at??

Wed, 07/07/2010 - 12:54 | 456769 SheepDog-One
SheepDog-One's picture

US debt? Apparently there is no such thing. Damn the torpedos, printing presses full speed ahead!

Wed, 07/07/2010 - 14:34 | 456942 MarketTruth
MarketTruth's picture

They can not and MUST NOT mark the devalued paper to reality as the Federal Reserve illegally purchased over $1000 billion of Fred/Fann. As such, if any real mark down happens then the Federal Reserve's massive fraud will have to appear on their balance sheets. This is why the US government is playing games with fred/Fann not being IMPLICITLY guaranteed by the full faith yet they keep saying the devalued paper is good and yet it MUST NEVER appear on the national debt.

It is accounting fraud pure and simple by the US government forced by the criminal treasonous private central bank US Federal Reserve.

Wed, 07/07/2010 - 11:43 | 456666 unwashedmass
unwashedmass's picture

 

you have to laugh......so harsh so mean...about the Greeks...our debt, of course, is pure gold.

Wed, 07/07/2010 - 11:52 | 456684 Cognitive Dissonance
Cognitive Dissonance's picture

"...our debt, of course, is pure gold."

Yup, and our shit don't stink, our woman are all virgins and our men are all (obviously virgin) studs. :>)

Wed, 07/07/2010 - 15:56 | 457069 Problem Is
Problem Is's picture

"Our shit is worth GOLD.... your shit is worth shit..."

Wed, 07/07/2010 - 11:43 | 456669 Traianus Augustus
Traianus Augustus's picture

Euro bank bogus stress test haircuts - 30%

US bank bogus stress test haircuts - 40%

A complete western financial collapse - PRICELESS

Wed, 07/07/2010 - 11:52 | 456683 VK
VK's picture

+1!

JPM should be marked to bankruptcy. Hey JPM how's the 78 Trillion in derivatives treating you? Oh and since the US is so on the recovery track, would you kindly mark all your assets to reality, so that everyone can see just how damn useless and insolvent you are.

Wed, 07/07/2010 - 11:45 | 456672 Traianus Augustus
Traianus Augustus's picture

Sarcasm button now off.

Wed, 07/07/2010 - 11:48 | 456675 sheeple
sheeple's picture

super catch! thanks

Wed, 07/07/2010 - 11:51 | 456681 Robslob
Robslob's picture

JPM must have not had a chance to put in their "buy" orders before this info was released...

How dare the ECB release this without consulting JP Morgan Chase first!

Wed, 07/07/2010 - 11:55 | 456687 bugs_
bugs_'s picture

"A Greek Haircut"

 

Wed, 07/07/2010 - 12:03 | 456698 Clayton Bigsby
Clayton Bigsby's picture

That's like doing crash-testing on a car, but saying "well, we don't need to test head-on crashes"

Wed, 07/07/2010 - 12:20 | 456715 Dr. No
Dr. No's picture

Just apply the formula: Take the number of Banks in the field, A.  Multiply it by the probable rate of [Bank] failure, B. Multiply the result by the average out-of-court settlement to bond holders C.  A x B x C=X, If X is less than the cost of a Bailout, we don't do one.

Wed, 07/07/2010 - 12:56 | 456771 Jeff Lebowski
Jeff Lebowski's picture

Well played, Dr. No.  Well played, indeed.

Wed, 07/07/2010 - 16:01 | 457089 Problem Is
Problem Is's picture

"Are there a lot of these kinds of bank accidents?"

"Which central bank do you work for?" 

Wed, 07/07/2010 - 12:28 | 456728 carbonmutant
carbonmutant's picture

The credibility of a stress test is directly related to the number of people who accept it.

No doubt the end of the month press release will need to be tweeked with a few investor opinion surveys.

Wed, 07/07/2010 - 12:42 | 456753 George Costanza
George Costanza's picture

There are green shoots sprouting all over Europe.

Wed, 07/07/2010 - 12:42 | 456754 LeBalance
LeBalance's picture

Let's try numbers more like:

OPT / BASE / PESS

Greece: -35% / -50% / -80%

Spain: -25% / -35% / -55%

UK: -20% / -30% / -50%

(the opt on UK being 0%): let's put the index down our throat!

And these numbers are in Chocolate Happy Land, where fiat is Unicorn Skittles.

Wed, 07/07/2010 - 12:59 | 456775 SheepDog-One
SheepDog-One's picture

Why are UK bonds suggested at a 0% haircut? I thought a few weeks ago the big story was about how Greek debt was nothing compared to UK debt problems? And when will their all seeing eye of Horus shift its gaze to US debt which is basicaly not even calculable? I know I probably just made up a word, but so what? At least I dont have a couple quadrillion in debt!

Risk OFF!

Wed, 07/07/2010 - 13:14 | 456800 ElvisDog
ElvisDog's picture

Completely ridiculous. The whole point of a stress test should be to test for *all* possibilities including a sovereign default. Even if it's a 5-sigma event or whatever BS probability they may want to assign to it, wouldn't you want to see what the consequences would be if it did happen? It would be like analyzing a levee for Cat 4 hurricanes but not Cat 5 because Cat 5's are unlikely to occur. Oh, wait, isn't that what we did before Katrina.

Wed, 07/07/2010 - 13:26 | 456817 carbonmutant
carbonmutant's picture

The whole point of a stress test is to provide the illusion of credibility.

Wed, 07/07/2010 - 13:28 | 456818 firstdivision
firstdivision's picture

+googleplex to the person above

 

The levees were only built to sustain a Cat3 hurricane, and Katrina was actually a Cat4 when it hit NO.

 

Wed, 07/07/2010 - 14:30 | 456927 Cognitive Dissonance
Cognitive Dissonance's picture

I got a laugh this morning as I listened to CNBC while readying for work. Becky, Joe and Carl were talking about the "stress test" and Becky and Joe both agreed that regardless of whether it was a "real" test or just a marketing ploy, as long as it worked (meaning as a marketing ploy) it was good.

Even the artificial sugar is being accepted as "real" as long as the sweet tooth is satisfied.

BTW there was a quick shot of Carl rolling his eyes. I wonder if Carl was thinking about his very young twin girls and what kind of future is in store for them.

Wed, 07/07/2010 - 15:54 | 457062 Problem Is
Problem Is's picture

"shot of Carl rolling his eyes..."

Becky or Joe probably farted... or went off teleprompter (mental fart)...

Wed, 07/07/2010 - 13:17 | 456804 GlassHammer
GlassHammer's picture

Those in glass banks shouldn't throw sensitivity tables.

 

Wed, 07/07/2010 - 15:51 | 457056 Problem Is
Problem Is's picture

"JP Morgan Pours More Cold Water On Stress Test Credibility..."

Dimon... bitchez... THE Name in Hypocrisy
JPM, the biggest beneficiary of Tiny Timmay's worthless, cheese dick stress tests...

Says what?????

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herry's picture

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