There has been an informational overload this morning, when as we reported previously, one after another bank scrambled to issue reports, some full of typos and clearly unvetted by compliance, calming the market and desperate to see all important confidence return to the peripheral market. Most of these notes have been nothing short of outright propaganda and disinformation, or a confirmation the analysts had zero idea what they were doing (case in point Goldman which had the stock at a Buy rating until this morning, even as the stock was virtually wiped out in recent weeks).
Some, surprisingly, have done the work. Below we provide some of the less then insightful reports, as conveniently summarized by Bloomberg, and we conclude with perhaps the best piece so far - one written by Bank of America's Richard Thomas who alone among the sell-side penguin circus, was as close as he could be, to predicting this week's outcome.
First, the penguins, via Bloomberg, all of which are prayingf that the powers that be will simply step in and bail out the bank in case they are, as usual, wrong:
- BES is “money-good” at senior and LT2 level, but confidence on T2 has to be lower than senior
- Expect the authorities to concentrate hard on avoiding the failure of a systemic bank
- Base case, with 70% probability, is BES writes down EU1.2b worth of loans and intra-group exposures, leading to a fully loaded CET1 dropping to 8.75% from 10.5%; manageable
- Investors who are long BES and concurring with our base case shouldn’t sell [ZH: and hence, those who don't concur, should sell]
- Investors seeking a buying opportunity should take a closer look; don’t expect a quick snap back
- Expect Portuguese authorities to intervene and protect senior BES bondholders if bank’s situation becomes systemic
- Situation at Banco Espirito Santo isn’t comparable with SNS in the Netherlands, or Austria’s Hypo Alpe
- Senior BES credit spreads in the 500bps-700bps area start to look interesting for long risk opportunities, based on known information
- Senior bonds remain protected by most regulators in Europe; losses at BES unlikely to exceed the layer of the capital structure sitting below senior bonds
- Given BES’ systemic importance, believe that the bank will be kept as a going concern
- Fate of subordinated bonds likely to be determined by the magnitude of its parent losses and whether the Portuguese govt and/or the ESM are required to rescue the institution
- Estimates there’s a 70% chance of an ESFG orderly resolution and 20% for a forced liquidation; in both cases the subordinated debt would be completely written off
- 10% chance of a “going concern” scenario with intervention of cash-rich investors
- Weakened family control and a clearer separation between the BES and the group is positive for BES; should help reduce contagion from the group’s problem
- Trading desk strategists remain negative on BES
- ESI and Rioforte have been funding themselves with large placements of CP, which they are looking increasingly unlikely to be able to repay
- With Portugal under a 3-yr troika program until two months ago, investors wonder why this wasn’t detected and dealt with earlier; this event casts some doubt about other latent problems in the system
- Portuguese banks are relatively well positioned for AQR
- Sees limited systemic implications for the Portuguese sovereign and the rest of the periphery
- More negative news on European banks likely in the coming mos as the ECB presents the results of its comprehensive assessment in Oct.
- Portugal is wake-up call for mkts as asset pricing and positioning are vulnerable to negative shocks, especially in fundamentally weak countries
- Developments in Portugal shouldn’t cause L-T risk aversion; country may apply for a similar support program that Spain had for its banking sector
Finally, here is Bank of America with a piece that actually deserves a read:
Higher group exposure. Still UW30%
Some more information on group exposure
Our negative view on BES bonds has always been predicated on the information asymmetries relating to exposure to the Espirito Santo Group. The bank has now disclosed its direct credit exposure to the Group (see Table 1). The total credit exposure is €1.2bn which represents a substantial risk to a bank with core Tier 1 capital of about €7bn (we estimate following the recent capital increase) or 17% of core capital. New management has committed to not increase this exposure. The bank highlights that it has a buffer of €2.1bn above an 8% minimum common equity Tier 1 ratio. In our view, the exposure to the Group is likely to result in significant additional losses for a bank that was already on average providing for an annualized 2.2% of its €47bn loan book each quarter and already has a loan book impaired at a rate of 20.6%.
Indirect exposure still a potential contingency
Retail clients of the BES Group also own €853m of ES Group debt. ESFG has provided a guarantee of €700m but we continue to expect this amount will substantially prove to be a contingent liability for the bank. Institutional clients hold about €2bn in Group paper which also may prove to be a contingency for the bank, we believe, irrespective of these investors’ qualified status. See Table 2.
What’s not there
No details are given on BES’s exposure to its Angolan subsidiary, BESA. The Portuguese press (Negocios) had reported on Thursday morning that Angola was considering creating a development bank by combining BESA with two other banks. This provides an uncertain backdrop for the Group’s investment in BESA and for any investment or credit lines that the bank may have made available to BESA, on which concrete details appear to be lacking. We also have no details of any loans made to third parties then on-lent to the Group, the implications potentially being that there aren’t any. This may only be clarified when we finally see the losses from the ES Group restructuring plan apportioned and it comes through in higher impairments at the bank.
No worst outcomes now but no need to rush to buy
Though BES’s direct exposure to the ES Group is substantially more than previous disclosures, we are clearly not moving at this point towards the worst outcomes for senior and subordinated bondholders for BES which may be seen as a relief (though the more lurid scenarios were never our base case). However, in spite of the recent capital increase, recent events have underlined that capital remains weak at BES, in our view. For example, net of reserves, impairments are still equivalent to post-rights equity even before we factor in a cushion for dealing with the direct and indirect exposures to the stressed ES Group. All of which suggests a potentially harsh outcome from the AQR, we think. Bonds have recovered somewhat this morning but we maintain our Underweight-30% rating.
And now, feel free to BTFD on hopes the ECB will bail out the bank, or at least the BIS will provide a supporting bid in BES stock for at least the next few hours, when the Basel bank's trading desk attention is once again redirected to smashing gold at regular intervals.
Source: Bloomberg, BofA