A day after Credit Suisse killed the Chinese bank sector saying that the equity of virtually the entire space may be worthless if NPLs double, as they expect they will to about 10%, the Swiss bank proceeds to kill European banks next. Based on the latest farce out of Europe in the form of the third stress test, which is supposed to restore some confidence, it appears that what it will do is simply accelerate the flight out of everything bank related, but certainly out of anything RBS, Deutsche Bank, BNP, SocGen and Barclays related. To wit: "In our estimation of what could be the “new EBA stress test” there would be 66 failures, with RBS, Deutsche Bank, and BNP needing the most capital – at €19bn, €14bn and €14bn respectively. Among the banks with the highest capital shortfalls, SocGen and Barclays would need roughly €13bn with Unicredit and Commerzbank respectively at €12bn and €11bn. In the figure below we present the stated results. We note RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them, negatively impacting the results by c.80bps." Oops. Perhaps it is not too late for the EBA to back out of this latest process and say they were only kidding. And it gets even worse: "We present in this section an overview of the analysis which we published in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn." Said otherwise, we can now see why the FT reported yesterday that banks will be forced to go ahead and proceed with asset firesales: the mere thought of European banks raising new cash amounting to 75% of the entire industry's market cap, is beyond ridiculous. So good luck with those sales: just remember - he who sells first, sells best.
And the scary charts:
1. Capital Shortfalls under Stress Test part Trois (9% min. CET1 ratio)
2. The same in details:
On the €400 billion shortfall:
We present in this section an overview of the analysis which we published in our report ‘The lost decade’ – 15-Sep 2011. One of our conclusions was that the overall European banking sector is facing a €400bn capital shortfall which compares to a current market cap of €541bn.
The table below details the breakdown of our estimated capital shortfall.
Figure 6: European banks – Capital deficit in CS ‘accelerated sovereign shock
As highlighted in Figure 6, this number includes the following;
€165bn of capital necessary comply with Basel 3 requirements. We base our analysis on 2012E which might appear to be conservative given the fact that banks are expected to by compliant by 2019E including the phase-in period. We think though that higher capital requirements are actually driven by the credit market as opposed to the Basel III timeline.
Figure 7 shows both the 2012E Basel 3 fully loaded ratios for the European banks before and after our accelerated sovereign shock scenario. Our base case shows a sector average ratio of 8.6% which declines to 6.2% post losses and higher funding costs.
€213bn of losses under our “accelerated sovereign shock, including: (i) €52bn of incremental losses on credit market assets (we estimated €400bn credit market assets exposures currently at European banks); (ii) €124bn of losses on sovereign debt holding based on our “accelerated sovereign shock”; (iii) €37bn equivalent to one year of higher funding costs, which is equivalent to 26% of our 2012E estimates PBT for the sector (details by banks are shown Figure 8). We believe we are witnessing a structural change in the level of banks funding costs. Weaker sovereigns’ balance sheet means, at least partly, a removal of the ‘too-big-to-fail’ guarantee which will inevitably be reflected in funding markets.
And so on.