Against a background of 30%-plus falls in bank share prices around the world and growing fears of a severe blow to the European bank sector in the event of a sovereign debt default, Deutsche Bank has produced a lengthy tome that answers 'everything you wanted to know about the global banking sector but were afraid to ask'. A compendium of charts and tables, summarized effectively by 'Danger Maps' designed to highlight countries which face greater (or lesser) stresses for their banking systems is further extended into a country-by-country breakdown for developed and emerging markets. While their findings may not line up perfectly with our more global contagion perspective, they do create a systematic framework for judging relative investment opportunities that sees Japan, Australia, Hong Kong, and the Nordics as the least risky; US and UK about average on macro scores; while unsurprisingly (with the exception of Germany) the Eurozone countries have the highest danger scores. Transmission channels are discussed and they make a critical point on bank valuations that earnings estimates are extremely sensitive now to bad debt charges and credit quality assumptions.
While using prior crises as a basis for projection may be a faulty premise, the Deutsche team has done a good job of outlining how key drivers, factors, themes will impact/create winners and losers.
And the Danger Maps (for both developed and emerging nations) are as follows - higher number indicates more risk - which in turn is factored into their name-by-name modeling of financials.
The full document is below but the more focused Credit Strategy article this week indicates Deutsche's view (which remains similar to ours) from a trading perspective, that:
The primary market shutdown has meant that banks are not able to fund long term and given the refinancing needs for Q4 2011 (c.€183 bn) and the next 3 years (€1.5 trn until 2013) we expect term funding to remain stressed unless markets reopen and function normally. And the consequence of this challenge could be deleveraging by banks which is a negative for economic growth. We highlight the redemption schedule on a month by month basis and by security type along with the banks with the biggest redemptions inside the article.
The lack of long term funding has also put the focus on short term liquidity and the stress in the European interbank markets is now inching towards levels last seen at the start of the credit crisis – and this is despite banks actively using the ECB window to fund themselves. Active deposit seeking is a solution that banks could pursue in the mean time to alleviate this funding situation.
Given the recent stock slump and the slowdown in the economy, there are questions about how well capitalised banks are, to withstand any actual losses. The sovereign crisis is in the backdrop and if not contained could cause further losses on balance sheet for banks. This could further impair capital ratios which are already stressed. Given European bank exposures to peripherals, the loss absorbing ability of European banks will continue to remain in focus and we believe the possibility of a recapitalisation wave in case of a sovereign event is very high. The IMF has mentioned a €200bn shortfall and our equity research colleagues estimate €100bn required capital injection to withstand a sovereign event. In this situation, a European version of the TARP is not a far-fetched idea.
Overall, we believe that, although financials spreads have widened significantly and look cheap quantitatively, banks face systemic issues which could keep spreads elevated unless there is a systemic resolution from the authorities.