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BERENBERG EQUITY RESEARCH European Banks Capital: misunderstood, misused and misplaced Nick Anderson Analyst +44 20 3207 7838 [email protected] James Chappell Analyst +44 20 3207 7844 [email protected] 12 June 2013 Banking Eleni Papoula Michelle Wilson Andrew Lowe Analyst +44 20 3465 2741 Analyst +44 20 3465 2663 Analyst +44 20 3465 2743 [email protected] [email protected] andrew.lowe @berenberg.com Eoin Mullany Iro Papadopoulou Analyst +44 20 3207 7854 Specialist Sales +44 20 3207 7924 [email protected] [email protected] What is Berenberg THOUGHT LEADERSHIP? Berenberg’s analysts are recognised by investors and by corporates for their in-depth research into the industries they cover. Our THOUGHT LEADERSHIP brand will highlight the deep-dive fundamental industry research that we feel is most important to informing our forecasts and ratings. For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document. European Banks Banking Table of contents Capital: misunderstood, misused and misplaced 5 Introduction 6 Executive summary 9 Key charts 13 What is bank capital for? 15 Determining bank capital (with added history) 17 What is wrong with Basel 28 Why equity-to-assets is better 34 What is the right number? 39 Calculating an adjusted equity-to-assets ratio 45 Capital shortfall – how large and how to make good? 50 Feedback on our views 67 Valuation 69 Company section 73 Barclays: Capital and leverage still lag peers 74 BBVA: Spain tarnishes Mexican jewel 76 BNP Paribas: Complex conglomeracy increases risks 78 Commerzbank: Capital problems unresolved 80 Crédit Agricole: Leverage and revenue the key issues 82 Credit Suisse: Model still needs to change 84 Danske Bank: Time for a revolution 86 Deutsche Bank: Capital welcome, but still too much leverage 88 DNB: Tough love from the regulator 90 EFG: Building capital 92 Erste: High credit risk 94 Handelsbanken: 20:20 vision 96 HSBC: A management that “gets it” 98 3 European Banks Banking ING: Positive actions point to brighter future 100 Intesa: Preferred Italian bank 102 Julius Baer: High execution risk 104 KBC: Good earnings momentum, but tight capital 106 Lloyds: Priced for a correction; revenues key concern 108 Nordea: “Something rotten in the state of Denmark” 110 Raiffeisen: New CEO does not alleviate concerns 112 RBS: Financially repressed 114 Santander: It is all about the capital 116 SEB: Focus on growth creates uncertainty 118 Société Générale: Too much leverage and too little revenue 120 Standard Chartered: To change or not to change 122 Swedbank: Class act: the right strategy at the right time 124 UBS: Lots of leverage, but adjusting the model 126 Unicredit: High risk, low return 128 Vontobel: Strongest capital: a blessing and a curse 130 Appendices 132 Contacts: Investment Banking 136 Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) 136 4 European Banks Banking Capital: misunderstood, misused and misplaced ● The capital debate is back. Left unresolved in the hope that it would go away, European regulators and politicians have finally reached the inevitable conclusion that procrastination is no strategy: bank balance sheets are the problem and more capital is needed. The required ratios are higher than the market is discounting and they will rise further as the full consequences of bail-in resolution are understood. Very few banks are properly capitalised; many fall short of even the bare minimum. We remain conviction sellers of European banks and note the very weak performance of Eurozone banks in absolute and relative terms since OMT was announced. It’s as good as it gets. ● Why the note? There is a crisis in the regulation of bank capital. The role of capital is misunderstood. But we note belated recognition by the authorities that bank balance sheets are the issue. This begs the question – are we approaching Europe’s Takenaka (Japan) moment? ● Basel ratios are not fit for purpose; equity-to-assets is better. The faults with the Basel approach are legion – it confuses what capital is for, the modelling process is flawed, and it encourages the wrong sort of behaviour. We prefer equity-to-assets for its simplicity, superior predictive power, accountability, history, and above all its grounding in uncertainty (which is what capital is for) rather than risk. ● Ideal equity-to-assets ratio is 6-8%. History, the recent crisis and academia all point to 6-8% as the right ratio for banks. The move to bail-in resolution and likely adoption of depositor preference will push ratios to the top of this range over time. ● We propose two equity-to-asset ratios. No one ratio is perfect. Our “plain” ratio tests a bank for idiosyncratic risk, providing an upperbound “what-you-see” estimate of its capital strength. Our “pain” ratio tests a bank for a stressed bankruptcy where systemic risks are high. As such, it provides a lower-bound “what-you-get” estimate of capital. ● European banks need at least €350bn to €400bn of new capital. Our top-down and bottom-up work combined with OECD estimates point to a material deficit, two-thirds of which is in the Eurozone. The estimates ignore upside risk from adopting depositor preference. Options to plug the deficit include contingent capital – not CoCos (which do not work, in our view), but forms of standby capital. ● Several catalysts will crystallise the deficit. We note proposals from regulators and supervisors, and growing political support: the EC bail-in directive is expected this summer and ECB/EBA balance sheet reviews are due late spring 2014. Urgency comes from excess global liquidity, which suggests that the next (leg of the) crisis is not far away. ● The six best capitalised banks in Europe on our “pain” ratio are: Standard Chartered (Sell), Swedbank (Buy), DNB (Buy), HSBC (Buy), Handelsbanken (Hold) and ING (Buy). ● The six weakest banks in Europe on our “pain” ratio are: Credit Suisse, Crédit Agricole, Deutsche Bank, Santander, Société Générale and Commerzbank. All are Sell-rated; the first four have “pain” ratios below 2%. A flexor model, allowing the user to vary the definitions of the ratios and also to riskweight assets (if wanted!) for the 34 European and US banks in our analysis, is available upon request. Barclays plc Sell Closing price:GBp 309 PT: GBp 160 BBVA SA Sell Closing price:EUR 6.94 PT: EUR 7.00 BNP Paribas SA Sell Closing price:EUR 43.90 PT: EUR 25.00 Commerzbank AG Sell Closing price:EUR 7.63 PT: EUR 6.00 Crédit Agricole SA Sell Closing price:EUR 7.01 PT: EUR 3.00 Credit Suisse Group AG Sell Closing price:CHF 27.12 PT: CHF 13.00 Danske Bank A/S Sell Closing price:DKK 113.50 PT: DKK 82.00 Deutsche Bank AG Sell Closing price:EUR 36.27 PT: EUR 23.00 (Old: EUR 20.00) DNB ASA Buy Closing price:NOK 92.00 PT: NOK 88.00 EFG International AG Buy Closing price:CHF 11.45 PT: CHF 13.50 Erste Group Bank AG Sell Closing price:EUR 23.81 PT: EUR 13.00 Svenska Handelsbanken AB Hold Closing price:SEK 284.20 PT: SEK 250.00 HSBC Holdings plc Buy Closing price:GBp 700 PT: GBp 790 ING Groep NV Buy Closing price:EUR 6.99 PT: EUR 8.00 Intesa Sanpaolo SpA Sell Closing price:EUR 1.36 PT: EUR 1.00 Julius Bär Gruppe AG Hold Closing price:CHF 37.03 PT: CHF 39.00 KBC Groupe SA Buy Closing price:EUR 30.86 PT: EUR 35.00 Lloyds Banking Group plc Sell Closing price:GBp 62 PT: GBp 24 Nordea Bank AB Buy Closing price:SEK 79.10 PT: SEK 81.00 Raiffeisen Bank International Sell Closing price:EUR 25.43 PT: EUR 22.00 RBS plc Sell Closing price:GBp 334 PT: GBp 190 Banco Santander SA Sell Closing price:EUR 5.41 PT: EUR 3.90 (Old: EUR 5.95) SEB AB Hold Closing price:SEK 67.80 PT: SEK 61.00 Société Générale SA Sell Closing price:EUR 29.72 PT: EUR 16.00 Standard Chartered plc Sell Closing price:GBp 1,480 PT: GBp 1,450 Swedbank AB Buy Closing price:SEK 152.80 PT: SEK 165.00 UBS AG Buy Closing price:CHF 16.86 PT: CHF 17.00 Unicredit SpA Sell Closing price:EUR 3.99 PT: EUR 2.50 Vontobel Holding AG Hold Closing price:CHF 29.45 PT: CHF 25.00 Closing prices as at 10/06/2013, respective home exchange Rating system: Relative 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] 5 European Banks Banking Summary Figure 1. Berenberg coverage universe and estimate/price target changes Rating Share Barclays BBVA BNP Paribas Commerzbank Credit Agricole Credit Suisse Danske Bank Deutsche Bank DNB EFG International Erste Group Bank Handelsbanken HSBC Holdings ING Groep Intesa SanPaolo Julius Baer KBC Groupe Lloyds Banking Group Nordea Raiffeisen Bank International RBS Santander SEB Societe Generale Standard Chartered Swedbank UBS Unicredit Vontobel New Sell Sell Sell Sell Sell Sell Sell Sell Buy Buy Sell Hold Buy Buy Sell Hold Buy Sell Buy Sell Sell Sell Hold Sell Sell Buy Buy Sell Hold Old Sell Sell Sell Sell Sell Sell Sell Sell Buy Buy Sell Hold Buy Buy Sell Hold Buy Sell Buy Sell Sell Sell Hold Sell Sell Buy Buy Sell Hold GBp EUR EUR EUR EUR CHF DKK EUR NOK CHF EUR SEK GBp EUR EUR CHF EUR GBp SEK EUR GBp EUR SEK EUR GBp SEK CHF EUR CHF Price Target New 160.00 7.00 25.00 6.00 3.00 13.00 82.00 23.00 88.00 13.50 13.00 250.00 790.00 8.00 1.00 39.00 35.00 24.00 81.00 22.00 190.00 3.90 61.00 16.00 1450.00 165.00 17.00 2.50 25.00 Old 160.00 7.00 25.00 6.00 3.00 13.00 82.00 20.00 88.00 13.50 13.00 250.00 790.00 8.00 1.00 39.00 35.00 24.00 81.00 22.00 190.00 5.95 61.00 16.00 1450.00 165.00 17.00 2.50 25.00 EPS revision FY1 FY2 0.0% 0.0% 0.0% 0.0% 0.3% -3.2% -37.3% -48.8% 7.5% 3.2% 0.0% 0.0% 0.0% 0.0% -4.1% -16.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.7% 0.7% -11.6% -0.7% -0.4% 1.5% 0.0% 0.0% 0.0% 0.0% 650.4% -13.2% 0.1% 0.0% 0.0% 0.0% 39.3% -12.6% 0.0% 0.0% 0.0% 0.0% -24.4% -10.8% 0.0% 0.0% 0.0% 0.0% 43.5% -4.6% 0.8% 0.4% 0.0% 0.0% Change? N N Y Y Y N N Y N N N Y Y Y Y N N Y Y N Y N N Y N N Y Y N Note: Relative rating system Source: Berenberg research 6 FY3 0.0% 0.0% 0.6% -48.8% 18.4% 0.0% 0.0% -15.1% 0.0% 0.0% 0.0% 0.1% 0.7% -0.7% 0.6% 0.0% 0.0% -7.9% 0.0% 0.0% -6.1% 0.0% 0.0% 0.1% 0.0% 0.0% -3.6% -0.1% 0.0% FY1 27.62 0.99 4.64 0.34 0.99 1.74 8.71 2.50 8.37 0.88 1.53 21.38 96.49 0.63 0.14 1.52 3.34 3.59 0.81 3.05 6.13 0.51 5.67 2.85 228.15 13.37 0.69 0.13 1.94 EPS FY2 29.80 0.83 4.40 0.85 0.95 1.92 9.20 3.17 9.59 1.19 1.70 22.37 106.36 0.82 0.15 1.90 3.51 2.81 0.87 3.61 15.17 0.58 5.93 3.69 239.23 13.92 0.90 0.26 2.04 FY3 33.04 0.96 4.67 0.95 1.05 2.16 9.68 4.79 10.01 1.44 1.67 23.40 116.88 0.92 0.16 2.32 3.61 3.63 0.91 3.56 23.91 0.61 6.13 4.03 252.82 14.40 1.03 0.34 2.31 FY1 27.62 0.99 4.62 0.55 0.93 1.74 8.71 2.60 8.37 0.88 1.53 21.36 95.80 0.72 0.14 1.52 3.34 0.48 0.81 3.05 4.40 0.51 5.67 3.77 228.15 13.37 0.48 0.13 1.94 OLD EPS FY2 29.80 0.83 4.54 1.65 0.92 1.92 9.20 3.79 9.59 1.19 1.70 22.36 105.60 0.82 0.15 1.90 3.51 3.24 0.87 3.61 17.35 0.58 5.93 4.14 239.23 13.92 0.94 0.26 2.04 FY3 33.04 0.96 4.64 1.86 0.89 2.16 9.68 5.64 10.01 1.44 1.67 23.39 116.05 0.92 0.16 2.32 3.61 3.94 0.91 3.56 25.47 0.61 6.13 4.02 252.82 14.40 1.07 0.34 2.31 European Banks Banking Introduction “This is a crisis. A large crisis. In fact, it’s a 12-storey crisis with a magnificent entrance hall, carpeting throughout, 24-hour portage, and an enormous sign on the roof, saying ‘This Is a Large Crisis’. A large crisis requires a large plan. Get me two pencils and a pair of underpants.” Captain Edmund Blackadder, Blackadder Goes Forth, BBC (1989) There is a crisis in the regulation of bank capital. Bank capital has become a very complex debate with a wide array of opinions from academics, regulators, banks, the media and, of course, politicians. We do not claim to have all the answers but we do believe that the debate over bank capital levels has lost sight of the purpose of capital. The sophisticated maths and modelling which underpins Basel II/III calculations has blinded creditors, markets, regulators and bank managers to what capital really is for. Anat Admati and Martin Hellwig coined the phrase “the bankers’ new clothes” to describe some of the broader myths that have grown up in the media, among politicians and even among the bankers themselves around what capital actually is. In this note, we argue that capital is a simple concept. It is a form of bank financing that covers unexpected losses or, in more popular parlance, “unknown unknowns” or black swans. As with our previous reports, we unashamedly include an examination of historical banking data and practices back to the 19th century. As we have noted before, this a business with long asset lives and tail risks. It is also an industry that is 700+ years old. “Those who cannot remember the past are condemned to repeat it.” Spanish/American philosopher George Santayana (1905) In short, we believe that capital levels remain deficient, not least as they are calibrated for idiosyncratic risks not systemic uncertainties. And Basel lies at the heart of the problem. As Rogoff and Reinhart showed in 2008 (see Figure 2), “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically”. Excess global liquidity can only compound the problem of highly mobile capital. Banks remain unprepared for such outcomes. We are also firmly of the view that fixing capital will not affect the asset side of the balance sheet. However, until it is fixed, it will impede confidence and therefore the broader economy (a point belatedly acknowledged by the ECB). Finally, a note on terms: Capital and equity. We are somewhat lazy and use these terms interchangeably. Equity is a sub-set of bank capital but, as demonstrated by the recent crisis, is the one proven form of loss-absorbing, permanent capital. Risk versus uncertainty. We address this in more detail later in the note, but in short risk is measurable, uncertainty is not. Put another way, if something is measurable then it is not uncertain. 7 European Banks Banking Figure 2. Recipe for banking crisis: just add capital mobility for extra spice Capital mobility and incidence of banking crises – all countries, 1800-2007 1 0.9 1914 0.8 35 Share of Countries in Banking Crisis, 3 –year Sum (right scale) 30 25 0.7 0.6 20 0.5 Capital Mobility (left scale) 0.4 0.3 1825 15 10 1980 1860 Percent High 0.2 0 2000 1980 1990 1970 1960 1940 1950 1920 1930 1910 1890 1900 1880 1870 1850 1860 1840 1830 1820 1800 0 1810 Low 5 1945 1918 0.1 Source: Rogoff and Reinhart, “This Time is Different” (2008) Figure 3. Note: Eurozone banks are struggling to perform even without capital concerns Share price performance, Eurozone banks a) Absolute b) Relative to market 200 120 180 110 160 100 140 90 120 80 100 70 80 60 60 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 50 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Note: Indices used = Euro STOXX Banks and Euro STOXX Source: Bloomberg 8 European Banks Banking Executive summary “We need to create full transparency about the risks on banks’ balance sheets. Such transparency is a pre-condition for the banking sector to return to lasting health. And a healthy banking sector is a pre-condition to revitalising bank lending.” Mario Draghi, President ECB (June 2013) “The single supervisor, scheduled to start operating under the European Central Bank in the summer of 2014, will not only help prevent banks from accumulating excessive risk. Standing above national authorities, it will increase the pressure on banks to repair their balance sheets.” Wolfgang Schäuble, Minister of Finance, Germany (May 2013) “I am not sure advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values, and recapitalisation of their financial systems...Just as in 2008, there is a deep reluctance to admit the extent of the undercapitalisation of the banking system in parts of the industrialised world…[The] pretence that debts could be repaid [was comparable to the 1930s]. We must not repeat that mistake.” Mervyn King, Governor of the Bank of England (October 2012) What is bank capital for? Capital is for unexpected losses, while expected losses are expensed through the income statement (in the form of loan loss provisions). Capital is there to reassure the bank’s creditors. Determining bank capital (with added history) The amount of capital that a bank needs is a function of: 1) the amount of risk embedded in the asset side of its balance sheet; and 2) how much of that risk is transferred away from bank creditors through the financial safety net. 100+ years of historical data show that the introduction of deposit insurance lowered bank equity ratios, while the subsequent introduction of depositor preference increased bank equity ratios. Formal bank resolution regimes (typically bail-in and often including depositor preference) lead bank creditors to demand more capital. The correct valuation of the assets on a bank’s balance sheet is a prerequisite of determining the amount of capital the bank needs. Asset values on balance sheet may diverge from more “conservative” (true and fair) values due to significant loan forbearance, inadequate loan loss provisioning, and material Level 3 assets. Finally, we note that risk within bank balance sheets, measured by the volatility of asset values, has been stable for over 100 years. In other words, increasing equity volatility is a function of falling capital ratios. What is wrong with Basel First, some “advantages”: it encourages risk-based pricing; it encourages the transfer of risk to those more willing to hold it; and it has encouraged banks to keep track of risks. 9 European Banks Banking The flaws in Basel are many and material. In the note, we list at least 14 disadvantages. The key critique is that Basel confuses what capital is for: it uses expected losses to model capital, whereas capital is for unexpected losses (which by definition cannot be modelled). Put another way, it allows banks to hold capital only for idiosyncratic failure (not the issue) rather than for systemic failure (more likely and more damaging). The modelling process is flawed: the uncertainty of the data is lost in presentation, risk weights are based on incomplete time series (a maximum of 25 years), it is a black box/an insiders’ metric, models are inherently weak, and it is subject to spreadsheet errors. It encourages the wrong sort of behaviour by banks. Banks focus on the number (it is rule-based regulation), not the underlying credit risk (it is not incentive-based). It leads to “RWA optimisation” (the two most dangerous words in finance, in our view) and encourages regulatory and tax arbitrage. Nor does it penalise growth – the most important driver of risk in banking. Central banks and regulators are losing faith, so why should anyone else bother? Why equity-to-assets is better Digression – risk versus uncertainty: this is core to what is wrong with Basel. Basel sets capital levels according to measurable risks, but capital is needed for unmeasurable uncertainties or “unknown unknowns”. “The systemic problem [in modern finance] lies in the lax control over errors of judgment. This has arisen because of the mistaken belief that diversification…can substitute for the control of bad judgement through due-diligence and oversight.” Amar Bhide, Tufts University. We see five advantages of the equity-to-assets ratio: better predictability of future losses than Basel; simplicity (the theory of the second best – better to be roughly right than precisely wrong); accountability (you and I can audit the number); historical support (150+ years of usage); and, most of all, it is based on uncertainty not risk. The key critique of equity-to-asset ratios is that they ignore the riskiness of assets; thus banks are discouraged from holding liquid assets and maximise risk per euro of assets held. We have no truck with this – a wellrun bank will choose to do the right thing. The issue is incentives not regulation. What is the right number? This is the difficult bit! Capital is very subjective and the ideal amount varies over time as the confidence of creditors ebbs and flows. An equity-to-assets ratio of 6-8% seems appropriate based on history, the recent crisis and academic research. Other key issues are: should all banks have the same number (no, but impractical to implement); what is the floor ratio below which no bank can go under any circumstance bar bankruptcy (all the capital is there to absorb losses, but a floor above zero is desirable as a margin of error); and where 10 European Banks Banking should the capital reside (it should be at subsidiary not group level, in our view, a major issue for large/complex global banks; eg Santander)? Should we target a number at all? No, but only as long as banks are free to fail. Regulation by numbers is a recent phenomenon of the last 40 years and its success is highly questionable. Calculating an adjusted equity-to-assets ratio Our two key principles are to include more not fewer assets, and only capital of the highest quality. Our preferred asset adjustments are to include derivatives on a gross basis (not net), to leave repos in and to bring in off balance sheet liabilities. Our preferred equity adjustments are to remove intangibles, minorities, state aid and deferred tax assets. Ideally we would like to make adjustments for Level 3 asset valuations and insurance assets. However, we are prevented from doing so by limited disclosure. We propose two key ratios for unweighted equity-to-assets. 1) The “plain” ratio tests a bank for idiosyncratic risk and provides an upperbound “what-you-see” estimate of its capital ratio (assets as per balance sheet but with derivatives netted; equity net of intangibles and minorities). 2) The “pain” ratio tests a bank’s capital strength for a stressed bankruptcy where systemic risks are high. As such, it provides a lowerbound “what-you-get” estimate. Compared to the “plain” ratio, assets include gross derivatives and off balance sheet exposures, while equity also excludes state aid and deferred tax assets. Capital shortfall – how large and how to make good? European banks need at least €350bn to €400bn of new capital based on a combination of methods and sources (top-down versus bottom-up, Berenberg and OECD analyses). Approximately two-thirds of this deficit resides in the Eurozone banks. European commercial banks with the strongest “plain” and “pain” equity-to-asset ratios: top six = Standard Chartered, Raiffeisen Bank, DNB, Swedbank, KBC and HSBC. (If we focus on the “pain” ratio only, the top six stays the same bar KBC and Raiffeisen which are replaced by Handelsbanken and ING. Of the “pain” ratio top six, three banks have ratios exceeding 4%: Standard Chartered, Swedbank and DNB.) European commercial banks with the weakest “plain” and “pain” equity-to-asset ratios: bottom six = Commerzbank, Santander, Société Générale, Deutsche Bank, Credit Suisse and Crédit Agricole. (If we focus on the “pain” ratio only, the bottom six stays the same. Of the “pain” ratio bottom six, four banks have ratios falling below 2%: Santander, Deutsche, Crédit Agricole and Credit Suisse.) A flexor model (spreadsheet-based), allowing the user to vary the definitions of the ratios and also to risk-weight key asset classes for the 34 European and US banks in our analysis is available on request. European banks with equity-to-assets most sensitive to Level 3 asset valuations: top six = DNB, Credit Suisse, Deutsche Bank, KBC, Barclays and BNP Paribas. 11 European Banks Banking Shortfall can be made good with permanent capital or contingent capital. Permanent options include fresh equity, retained earnings (but this would take 10+ years for Eurozone banks) and asset optimisation. Contingent options include Finaxiom’s standby capital and two from history – the UK’s “reserved liability” and US/Canadian “double liability”. We note that the use of “reserved liability” in the UK coincided with an unprecedented 100 years of financial stability. Key to making good the deficit is the time period allowed and the incentives offered to banks. Catalysts for change. Bank management and market pressure are unlikely to have much effect. Key is the political/regulatory process. We note a change in sentiment in the last month, with the ECB coming into line with the Bank of England’s thinking that the problem is the quality of bank balance sheets (the recognition of true asset values and appropriate recap where necessary). The ECB/EBA have announced a balance sheet audit process to conclude by mid-2014. Coinciding with the move to a formal bail-in regime in Europe and the likely adoption of depositor preference, we see capital deficits at European banks increasing in size and being crystallised. 12 European Banks Banking Key charts Figure 4. Basel does not work; bail-in requires more capital; ECB/EBA balance sheet review could be Europe’s Takenaka moment 4.1 Capital ratios pre-crisis (average 2006-08) versus subsequent write-downs/losses (cumulative 2007-09) a) Basel Tier 1 capital ratio b) Equity-to-assets ratio 4.2 Equity-to-assets ratio, US and Switzerland a) US (tangible equity) b) Switzerland (equity) 22% 18% FDIC established 20% 18% All Banks 16% Priority insurance introduced 14% 16% 14% 12% Depositor preference introduced 12% Excluding big banks Liquidity insurance introduced 10% 10% 8% 8% 6% 6% 4% 4% Priority insurance limits raised 2% 2% 4.3 Share price performance – banks versus market, Japan (actual) versus Europe (2005 rebased to 1994) 120 Japan Europe 110 100 90 Takenaka plan announced 80 70 60 50 40 30 20 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Source: OECD, Berenberg research, Fed, SNB, DataStream 13 07 08 09 10 11 12 13 2005 1995 1985 1975 1965 1955 1945 1935 1925 1905 2010 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 1915 0% 0% European Banks Banking Figure 5. Usual suspects Equity-to-asset ratio – “pain” (systemic crisis) versus “plain” (idiosyncratic risk), selected banks, 31/12/12 (Left hand of bar = “pain” ratio; right hand of bar = “plain” ratio; ranked by mid-point) 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% VONN BAER CITI STAN RBI 'Pain' ratios GS DNB SWEDA 'Plain' ratios KBC HSBA BAC BBVA RBS MS ISP JPMC EBS UCG SHBA INGA EFGN LLOY NDA SEB UBSN DANSKE BARC BNP CBK SAN GLE DBK CSGN ACA Note 1: “Pain” ratio: equity = tangible equity less minorities, state aid, deferred tax assets and IAS19; assets = on B/S incl gross derivatives plus off B/S Note 2: “Plain” ratio: equity = tangible equity less minorities; assets = on B/S with derivatives netted Note 3: Commerzbank “pain” ratio increases from 2.2% to 2.5% post rights issue Source: Berenberg research, company data 14 European Banks Banking What is bank capital for? “All right, but apart from the sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the Romans ever done for us?” Reg in Monty Python’s Life of Brian (1979) 1. Prelude: “What have the Victorians ever done for us?” “There is…a possibility of being over cautious; but in banking that is one of the cardinal virtues, compared with the opposite evil and mischief of being over credulous.” George Rae, Chairman North and South Wales Bank (1873-98) “Adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking.” Walter Bagehot, banker, editor of The Economist (1861-77) Victorian bankers in Britain learned about the purpose and importance of their balance sheet structure (capital and liquidity reserves) the hard way. As British economic historian Forrest Capie observed, if a financial crisis is defined as a “disturbance that threatens the payments system”, then “from 1866 onwards there was essentially 100 years of financial stability without any financial crises”. (The failure in 1878 of The City of Glasgow Bank was the result of fraud, and Barings Bank which (first!) failed in 1890 was an investment bank; neither threatened/involved the payments system, according to Capie.) Rae and Bagehot were in senior positions in the banking industry from the mid1860s onwards and thus played a key role in the rebuilding of the financial system after the last proper crisis in 1866 (when the major discount house Overend Gurney failed). Both were closely involved in running banks and both wrote highly influential books on banking. George Rae wrote The Country Banker in 1885 – still in print today, and viewed by many as the handbook for branch managers and senior management on how to run a commercial bank. Walter Bagehot’s Lombard Street was published in 1873 and is still seen as providing the blueprint for how central banks should manage crises (both the Bank of England and Federal Reserve quoted freely from it during 2009). Capie draws three lessons from banking crises up to 1866 which paved the way for the relative stability of British banking between 1866 and 1971 (our emphasis in bold): “[First] the banks had to learn what shape their balance sheet should have. They did and stuck to it. They did suffer abuse for the next 100 years for being too conservative…[Second] it needed to be clear in advance that liquidity would be available [from the central bank…And [third] regulation is not necessarily the solution; it is just as likely to be the problem.” Forrest Capie, 200 Years of Financial Crises (2012) 2. So what is capital for? Capital is for unexpected losses while expected losses are expensed through the income statement (in the form of loan loss provisions). It is there to reassure the bank’s creditors. As Capie observes, banks learned the right shape of their balance sheet. Holding adequate liquidity against depositor runs was one element; the other was adequate capital to cover asset losses. Funding a bank’s balance sheet with the appropriate 15 European Banks Banking level of capital is key to the bank’s stability, durability and longevity. But such a funding strategy requires the bank to exercise the caution that Rae and Bagehot learned from the 19th century banking crises which came to an end in 1866. The modern Basel accords say remarkably little on what capital is for. There is no discussion on this in the 77 pages of Basel III: A global regulatory framework for more resilient banks and banking systems. The document tells us that banks need “high quality capital” and it defines quality capital in a technical sense (“common shares and retained earnings”), but it fails to reflect on what it is for. In contrast, the US Federal Reserve at least acknowledges its purpose: “Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. (Loan loss reserves are generally intended to cover expected losses.) Thus, bank capital plays a critical role in the safety and soundness of individual banks and the banking system.” Federal Reserve Bank of San Francisco (2001) We would also flag Capie’s third lesson of the Victorian banking crises: that regulation can also be the problem. As we will discuss later, the best intents of Basel’s original capital accord became subsumed by banks gaming and lobbying the system. 16 European Banks Banking Determining bank capital (with added history) “My momma always said, ‘Life was like a box of chocolates. You never know what you’re gonna get’.” Forrest Gump, Forrest Gump (1994) “A well-run bank needs no capital. No amount of capital will rescue a badly-run bank.” Walter Bagehot, Lombard Street (1873) 1. Drivers of bank capital The amount of capital that a bank needs for unexpected losses is a function of two variables: the amount of risk embedded in the asset side of its balance sheet, and how much of that risk is transferred away from bank creditors through the financial safety net. Asset risk. This primarily covers credit risk – primarily losses/defaults on loans as well as loss in market value on securities and other financial assets, both on and off balance sheet. Key influences include the bank’s credit standards, the mix of loan book, and the size/diversification of the bank/loan book. Asset risk would include operational risk as well. Financial safety net. This covers the extent to which risks are ultimately borne by those other than the bank’s creditors. Such safety nets put in place by the national authorities comprise several elements: deposit insurance schemes, bank resolution procedures (bail-in versus bail-out), regulation/ supervision, and the central bank’s lender of last resort role. The safety net is supposedly augmented by the market discipline exerted by the bank’s creditors (depositors, bond holders and equity providers) in which so much faith has been placed by Basel. Balance sheet risk and financial safety nets are linked, however. The more the risks are not borne by the bank’s creditors (ie the stronger the safety net), the more risks a bank may choose to take on the asset side of its balance sheet (our emphasis in bold). “Bank safety nets are difficult to design and administer, because they have the conflicting objectives of protecting bank customers and reducing banks’ incentives to engage in risky activities. In several countries including the US, the financial safety net, structured to reduce the vulnerability of the financial system, appears to have had quite the opposite result… There is a real danger that regulatory forbearance policies and overly generous depositor protection increase rather than reduce the excessive bank risk taking which has been the root cause of many bank failures.” Demirgüç-Kunt, World Bank and Huizinga, Tilburg University Balance sheet risk is bank-specific (ie idiosyncratic). The next two sections therefore focus on the financial safety net (ie systemic issues). The rest of this section focuses primarily on two elements of a financial safety net – deposit insurance schemes and bank resolution procedures – and the degree to which they have influenced how much capital funds a bank. Regulation, the third key element of a financial safety net, is covered in the subsequent section in which we look at what is wrong with Basel. 17 European Banks Banking 2a. Deposit insurance schemes “A deposit insurance system is like a nuclear power plant. If you build it without safety precautions, you know it’s going to blow you off the face of the earth. And even if you do, you can’t be sure it won’t.” L. William Seidman, Chairman, Federal Deposit Insurance Corporation (FDIC), 1985-91 Depositor protection takes two forms – deposit insurance schemes and priority treatment in bankruptcy. Deposit insurance schemes, also known as deposit guarantee schemes, exist to reimburse depositors in the event of a bank failing. The first known scheme was set up in New York in 1829; the first nationwide scheme is believed to be the US’s FDIC which was established in 1934. According to the International Association of Deposit Insurers, there were only 12 explicit national schemes by 1974 but 111 by 2011, with a further 41 under consideration. (The UK scheme, for example, was only introduced in 1982 while Australia only introduced one in 2008 (although it has had depositor preference since 1945).) In Figures 42 and 43 in the Appendix, we summarise the main European schemes in terms of coverage and funding. Even if there is no explicit government backing, we believe that all schemes have implicit state support for the simple reason that the cost of true risk-based insurance would be prohibitively expensive. Many of the existing schemes target a fund equal to only 1% of eligible deposits for this reason (and the EC’s proposal in the new deposit guarantee scheme directive is for only 1.5% of eligible deposits). By offering explicit protection to the depositor, this transfer of risk means that the bank itself needs less capital to reassure depositors. Historically, capital ratios were expressed relative to deposits rather than total assets. George Rae, writing in 1875, talked of the “proportion which your entire capital…bears to your liabilities”, while the FDIC on establishment in 1934 “determined that minimal safety required banks to have net sound capital equal to at least 10 per cent of deposits”. This thinking was prevalent even into the 1960s with an official UK government report of 1967 noting that: “Banks do however tend to consider their [capital] reserve requirements…in relation to total deposit obligations”. Allied to deposit insurance schemes is depositor preference, whereby depositors (subject to certain definitions and possibly limits) are given legal priority over a bank’s assets ahead of all other unsecured creditors in the event of a bankruptcy. This is covered in more detail under Bank resolution regimes below. The impact of schemes can be seen in the history of the US since 1896 (Figure 6), Switzerland since 1906 (Figure 7) and the UK since 1880 (Figure 8). US. Prior to the establishment of the FDIC, US banks typically had capital equal to 15-20% of assets. Following the launch of the FDIC, it settled in the range of 6-8% from 1945 onwards. The introduction of depositor preference, however, pushed it from the bottom to the top of that range. Switzerland. In Switzerland, before the introduction of priority insurance (depositor preference up to a limit), also in 1934, bank capital was in the range of 11-14% of assets. It then gradually declined and since the mid1950s has been in the range of 6-8% for the Swiss banks excluding the big banks (ie UBS and Credit Suisse since 2005). More generous depositor preference terms pushed the ratio back to the top of the range. UK. The introduction of deposit insurance in the UK (legislated in 1982) had a similar depressing effect. Having averaged 6% during the 1970s, the 18 European Banks Banking equity-to-assets ratio declined to c4% by the early 1990s. Note: there is no depositor preference scheme in the UK. Figure 6. Introduction of deposit insurance lowered capital levels…while depositor preference subsequently raised them US banks – key tangible equity ratios 1896 to date 45% Equity as % Assets Equity as % Deposits 40% 35% FDIC established 30% Depositor preference introduced 25% 20% 15% 10% 5% 2005 1995 1985 1975 1965 1955 1945 1935 1925 1915 1905 1895 0% Note 1: US Federal Deposit Insurance Corporation established 1934; depositor preference (priority of all depositors in bankruptcy) introduced in 1993 Note 2: Equity defined as tangible common equity Source: Berenberg research, Federal Reserve, FDIC Figure 7. More generous depositor preference led to increased capital levels Swiss banks (excluding “big” banks) – key equity ratios 1906 to date 40% Eqty as % Assets Eqty as % Deposits Priority insurance introduced 30% Liquidity insurance introduced 20% Priority insurance limits raised 10% 2005 1995 1985 1975 1965 1955 1945 1935 1925 1915 1905 0% Note 1: Priority insurance introduced in 1934 (comparable to depositor preference; ie depositor has priority in bankruptcy subject to limits) with limit of CHF5,000 per depositor; raised to CHF10,000 per depositor in 1971 and to CHF30,000 in 1997. Liquidity insurance introduced 1984 in which member banks mutually guarantee to pay out deposits that have priority Note 2: All banks includes cantonal, regional/savings, Raiffeisen and other banks as well as the big banks. Since 2005, there are only two banks in the “big” bank group; ie UBS and Credit Suisse Source: Berenberg research, SNB 19 European Banks Banking Figure 8. Introduction of deposit insurance lowered capital levels UK banks – equity ratios 1880 to date 18% Published 16% 14% Corporation tax introduced Capital raising controlled by government 12% True Deposit insurance introduced 10% 8% 6% 4% Hidden reserves disclosed 2% 0% 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Note UK banks had “hidden reserves” from 1860s to 1969 Source: Billings and Capie, Bank of England In summary, we observe that historically: the introduction of deposit insurance has lowered bank equity ratios; the introduction of depositor preference has increased bank equity ratios. As alluded to earlier, there is a concern backed by academic research that deposit insurance schemes increase risk-taking by banks and therefore negate much of the benefit. As Professor Amar Bhide wrote in 2009: “The FDIC freed banks from the challenge of earning the confidence of depositors”. Writing in 1989 in the wake of the US savings and loan crisis, two US academics (both professors at the University of Baltimore) reviewed the history of deposit insurance schemes in the US since their origins in New York in the early 19th century. They concluded that such schemes had had adverse consequences, contributing to the savings and loan crisis. “In short, the history of deposit insurance has been disastrous. State-sponsored deposit insurance funds have all exhibited the same moral hazard problem that is evident at the federal level today. The consistent pattern of reckless banking is explained by the perverse incentives of flat-rate deposit insurance.” Professors Thies and Gerlowski, University of Baltimore Has anything changed? No. More recent academic research published by the World Bank in 2000 reached similar conclusions, based on detailed empirical analysis of schemes in 50 countries through the 1990s. “Deposit insurance is found to be valued by bank creditors, since it leads to lower required interest rates. The increase in perceived safety for depositors, however, comes at a cost of a reduction in market discipline.” Demirgüç-Kunt, World Bank and Huizinga, Tilburg University The faith in deposit insurance schemes remains, however. Basel’s Liquidity Coverage Ratio (LCR) cuts the deposit weighting from 5% to 3% if there is a pre-funded deposit scheme. Thus banks are incentivised to lobby for and contribute to deposit insurance schemes despite these concerns. 20 European Banks Banking 2b. Bank resolution regimes Bank resolution regimes are the second key element of a financial safety net. How a country’s legal code dictates the priority or ranking of creditors in the wind-up of a bank (triggered when liabilities exceed the value of assets) can have a huge influence on the risk-taking appetite of a bank and on how much capital it decides to hold. There are many variations in the potential design of bank resolution regimes. The one common element is that shareholders are typically wiped out. In most countries, there is no regime, an issue which came to a head during the current crisis. The following points/observations are not exhaustive: No resolution regime (and the “too big to fail” – TBTF – issue). This was the common situation in most countries leading up to the crisis. In this scenario, the authorities have three choices: use existing generic corporate bankruptcy legislation, try and sell the firm, or bail-out the failed firm with taxpayer monies. The market interpreted the Federal Reserve’s rescue of LTCM in 1998 as the endorsement/confirmation of the unspoken TBTF doctrine as official policy. The market has taken a similar view in most other countries. If a bank is TBTF, it will always be rescued. If a bank is always rescued, it needs less capital to reassure its creditors. We note the big regulatory/political push, especially in the US, to remove this hidden subsidy. Resolution regimes (and bail-in). If a formal resolution scheme exists, then it will invariably take the form of a bail-in whereby existing creditors (depositors, bondholders etc) are forced to take losses according to some pre-agreed ranking of the creditors. If the creditors are at risk of being bailed-in, then they will presumably want the bank to hold more capital to reduce their potential losses. The amount of extra capital a bank holds under a bail-in regime will depend on how the creditors are ranked and what losses they may bear. Depositor preference. Under depositor preference, depositors are given a preferential claim over the firm’s assets. In practice, they will rank after secured creditors (eg central bank, covered bonds). While we view depositor preference as a sub-set of bail-in, lawyers point to two key differences. Under bail-in, the “regulator should retain…a degree of discretion [over] the extent and the quantum of the bail-in” (source: Clifford Chance). And, if depositor preference combined with insurance is intended to prevent retail bank runs, then “one aim of bail-in…is to avoid wholesale runs (that is, exercise of termination and close-out rights in trading positions)” (ibid). Without getting too involved in the arcana, we would argue in broad terms that depositor preference requires banks to hold more capital as the potential losses faced by the residual unsecured creditors can be material. Indeed, the experience of the US and Switzerland (Figures 6 and 7) suggests that this is so. Note 1: depositor preference was introduced in the US in 1993 in the wake of the savings and loans crisis in order to reduce the risk that the FDIC’s deposit insurance scheme could be overwhelmed in the event of a large bank failing. Were this to happen, the fear was that a taxpayer bail-out would be required after all. European politicians appear to be arriving at the same conclusion in the design of the single banking union. Note 2: unrestricted depositor preference mainly exists in Argentina, Australia, China, Malaysia, Russia and the US. In Chile, Hong Kong SAR and Switzerland, depositor preference only applies to insured deposits. 21 European Banks Banking Treatment of insured versus uninsured depositors. Nuances in bail-in regimes include whether insured depositors are given priority or rank equally alongside other unsecured creditors but are then made good by the insurance fund. Again, this affects the loss borne by other creditors and therefore the amount of capital needed. The treatment of uninsured depositors is also important. For an average European bank, uninsured depositors typically account for 1% of deposit accounts but c50% of deposits by value. Uninsured by definition, if they are not given depositor preference (eg Switzerland) and rank pari passu with other unsecured, senior creditors, then they will favour banks with stronger capital bases. Note: some regimes give specific sub-sets of uninsured depositors preference; eg government, charity etc. Treatment of secured creditors. For the avoidance of doubt and to avoid future legal disputes, a bail-in regime should also explicitly address the treatment of secured creditors such as covered bonds. As with depositor preference, the more creditors you exclude, the greater the losses to be borne by the remaining creditors (ie the greater their subordination) and the more likely they are to demand capital. This is the risk with asset encumbrance and hence why some countries impose limits on the size of covered bond issuance by a bank (eg Australia imposes an 8% cap on cover pool assets relative to the bank’s domestic assets). This risk is likely to increase as banks, encouraged by their regulators as well as experience, choose to lend on a secured or collateralised basis and, conversely, are forced to borrow on a secured or collateralised basis. The European Commission (EC) has been working on a bail-in directive for some time. The deadline for the European Union to put the EC directive into law is June 2013. It requires approval from both the European Parliament and national governments. As Gunnar Hoekmark, a member of the European Parliament leading work on bailin legislation, said in an interview in April: “Secured liabilities such as covered bonds shall not be subject to bail-in. [The bail-in plans exclude debt] backed by assets or collateral.” He went on: “[The law must give] high legal certainty. This means secured liabilities shall be secured and insured depositors shall be protected. Legal clarity is crucial in order to make the bail-in tool applicable in crisis situations.” The devil, of course, is in the detail. But as the Dutch Finance Minister (and Chair of the Eurogroup) Jeroen Dijsselbloem made clear in the wind-up of SNS Reaal in January, bail-in is the future and non-depositor unsecured creditors will face losses. He repeated his “bail-in is the future” views following the Cyprus bank “rescue” in March. 3. Correct valuation of assets Of course, determining the amount of capital a bank needs presupposes that the assets on the balance sheet are correctly valued. There are three principal areas where reported asset values may diverge from what we might euphemistically call more “conservative” values. Loan forbearance Loan loss provisions Level 3 asset values 22 European Banks Banking 3a. Loan forbearance Loan forbearance is when a bank chooses to restructure a loan (longer repayment period, lower interest rate etc) rather than foreclose. As we have always argued, it is an entirely rational act for any bank to follow. Assuming an economic recovery, the borrower will be able to service/repay their loan again. The key phrase is “assuming an economic recovery”. We have also argued that with the end of a 60-year debt cycle, economic growth will be anaemic (why else have interest rates been at the zero bound for so long?). With no economic recovery, forbearance cannot be sustained and eventually a bank must recognise the true quality of its loans. Uncertain credit quality and therefore asset values is the number one issue facing bank managements and bank creditors today, as Jeroen Dijsselbloem recognises. “The first thing that the ECB will have to do is to have an asset-quality review of the main banks that will be under their supervision, and soon after that all the other banks in Europe as well. The outcome…we don’t know yet, but it might be worrying…What I do know is that if we do have the outcome, if it’s worrying, we need to have a way to deal with it.” Jeroen Dijsselbloem, Dutch Finance Minister, Chair of Eurogroup (May 2013) The difficulty of sustaining loan forbearance in the face of anaemic growth has come to a head in Spain. The Bank of Spain has forced the Spanish banks to disclose how many of their loans have been restructured. The total was recently disclosed for the first time – €208bn, or 14% of total lending to the private sector. By “restructuring” loans, the banks had hoped to keep them out of the non-performing category and thus reduce provisioning requirements. The Bank of Spain is now forcing the banks to reclassify most of the restructured loans as sub-standard or non-performing and therefore increase provisions. “There is a high dispersion across institutions [in the refinancing and rescheduling of loans] ...These differences may be indicative of different business and risk-management models, though they may also be the result of differences in banks’ accounting practices.” Bank of Spain, Financial Stability Report (May 2013) If asset values are overstated due to forbearance, then so are equity values and banks’ capital levels. Given uncertain asset values due to forbearance and anaemic economic growth, we believe that more capital is needed to reassure bank creditors, all other things being equal. 3b. Loan loss provisions Another major influence on bank capital is non-performing loans and the extent to which they are appropriately covered through balance sheet provisions and collateral. The original Basel I accord (1988) acknowledged “the close relationship between capital and provisions”. Under pressure to build capital ratios, we believe that some banks have allowed nonperforming loan (NPL) coverage ratios (including collateral) to fall. Commerzbank (Figure 9) is a case in point where the ratio has dropped from 100%. Returning to 100% coverage would reduce Commerzbank’s tangible equity by 7%. With uncertainty over collateral values, prudency dictates that banks should aim for 100% coverage of NPLs (including loan loss provisions and collateral). 23 European Banks Banking Figure 9. Coverage-lite Commerzbank NPL coverage ratio – loan loss provisions plus collateral 110% 100% 90% 80% 70% 60% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 08 09 10 11 12 13 Source: Berenberg research, company data 3c. Level 3 asset values The third key influence on a true and fair view of banks’ asset values is Level 3 assets. Under IFRS, banks are required to hold all financial assets at “fair value”. Loans are exempted and can be carried at amortised cost but all other financial assets must be held at fair value. Banks and their auditors have three options: Level 1 = mark-to-market. There is an observable market price, be it a listed bond or share. In this case, there would be little dispute over the valuation of the asset. (There is, of course, a whole debate over whether bank assets should be recorded at fair value or at historical cost. There is a strong and compelling argument that IAS was a major contributor to the lack of preparedness of European banks for the crisis.) Level 2 = mark-to-model. Where there is no market price, a value can be computed based on a known cash flow from the asset and an observable discount rate. Examples include real estate and simple options. Again, the valuation process is not controversial. Level 3 = everything else. Known affectionately as “mark-to-myth”, with no observable inputs – let alone market price – the bank and its auditors have by definition a lot of leeway in what is a very subjective valuation process. Examples include exotic options/derivatives, private equity investments etc. At the risk of being cynical, if a bank is short of capital then will it value its Level 3 assets very conservatively, reflecting the subjective nature of the process, or more generously? There can be little doubt in the answer. 4. The trade-off – depositor confidence versus shareholder returns This debate has been a key issue in banking for at least 200 years. Can a bank reassure its creditors and at the same time generate a sufficient RoE to attract equity investment? During the current crisis, the debate has taken centre stage. Crudely, regulators/politicians want creditor reassurance; bank managements want to be able to attract equity capital. For a given RoA, lower leverage (ie more equity relative to assets) implies a lower RoE. However, the RoA is not a given. If lower leverage reassures creditors then those creditors may accept a lower return, thus increasing the bank’s RoA. 24 European Banks Banking We discuss how banks can manage the RoE impact of higher equity-to-asset ratios later in the report. 5. Other determinants of bank capital Economies of scale and risk diversification. The reduction in equity-toasset ratios through the late 19th century up to the 1930s has been attributed by some commentators to consolidation of the banking industry in various countries. The more diversified a bank’s credit portfolio, the lower the maximum losses it is likely to face and therefore the less capital it needs. It is likely that the maximum benefits of risk diversification were achieved some time ago (see Figures 10 and 11). In the UK, for example, the five largest banks held 31% of deposits in 1900 but by 1920 this had reached 80% (source: Saunders and Wilson (1999)). Consolidation was slower in the US due to regulatory restrictions on the share of national deposits any one bank could have (10%). We also note Handelsbanken’s views on diversification. It regards the benefits as overstated and believes that diversification is no substitute for proper credit appraisal. Figure 10. To infinity and beyond Banks – average assets, (real terms, 2011 prices, linear scale) a) US commercial banks ($m) b) Swiss banks (CHFm) 2,500 4,500 4,000 2,000 3,500 3,000 1,500 2,500 2,000 1,000 1,500 1,000 500 500 0 0 1895 1915 1935 1955 1975 1995 1905 Source: FDIC, Federal Reserve, St Louis Fed, SNB, Swiss Federal Statistical Office 25 1925 1945 1965 1985 2005 European Banks Banking Figure 11. Go large US commercial banks – average assets, $m (real terms, 2011 prices, log scale) 10,000 Glass-Steagall repealed FDIC established 1,000 100 Federal Reserve established; Pujo Committee Post 1934 peak in number of banks at 14,469 10 1 Number of banks peaks at 30,456 Depositor preference introduced Glass-Steagall Act 1933 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 Source: Berenberg research, St Louis Fed, FDIC, Federal Reserve Recentness of a crisis. The proximity of a recent banking crisis is also likely to lead banks to hold more capital rather than less, both voluntarily and under pressure from regulators. Tax treatment of different capital instruments. Historically, equity was the only form of bail-in-able bank capital. Financial innovation spurred on by changing tax legislation prompted the development of other lossabsorbing instruments. In the UK, for example, corporation tax was introduced with the Corporation Tax Act of 1965. By making debt interest tax deductible and thus debt much cheaper, it would have encouraged the use of debt in preference to equity within bank capital structures. 6. Has asset risk changed over time? It would appear that the risk within bank balance sheets has been stable over very long periods of time. In other words, changes in capital levels over time have been influenced more by the development of the financial safety net, and to a lesser extent consolidation (early on) and tax treatment of capital instruments (latterly). This is the important finding made by US academics Anthony Saunders and Berry Wilson. They calculated asset volatility data of US, Canadian and UK banks’ balance sheets by deleveraging equity volatility data derived from share prices. Their analysis is presented in Figure 12. While noting certain implicit assumptions in the analysis, they draw two conclusions. “First, the graphs display virtually no secular trend in asset risk over the 100-year period …Second, the figures reveal secular increases in equity volatility over the study period …Given the relatively flat asset volatilities, these trends point to falling capital ratios as driving increasing equity volatility levels.” A. Saunders and B. Wilson (1999) 26 European Banks Banking Figure 12. Price is what you pay, risk is what you get Equity and asset volatility – bank balance sheets a) UK EQUITY VOLATILITY ASSET VOLATILITY 0.05 0.05 EQUITY VOLATILITY 0.045 0.045 0.04 0.04 0.035 0.035 0.03 0.03 0.025 0.025 0.02 0.02 ASSET VOLATILITY 0.015 0.015 0.01 0.01 0.005 0.005 0 1988 1983 1978 1973 1963 1968 1953 1958 1948 1938 1943 1928 1933 1923 1918 1913 1908 1903 1893 1898 0 b) Canada ASSET VOLATILITY EQUITY VOLATILITY 0.05 0.05 0.045 0.045 0.04 0.04 EQUITY VOLATILITY 0.035 0.035 0.03 0.025 0.03 ASSET VOLATILITY 0.02 0.02 0.015 0.015 0.01 0.01 0.005 1989 1992 1986 1980 1983 1974 1977 1959 1962 1965 1968 1971 1947 1950 1953 1956 1944 1938 1941 1926 1929 1932 1935 1923 1920 1917 1911 1914 1908 1899 1902 1905 1893 0 1896 0 c) US ASSET VOLATILITY EQUITY VOLATILITY 0.14 0.6 EQUITY VOLATILITY 0.12 0.5 0.1 0.4 0.08 0.3 0.06 0.2 0.04 ASSET VOLATILITY 0.1 0.02 1992 1989 1986 1980 1983 1974 1977 1959 1962 1965 1968 1971 1947 1950 1953 1956 1938 1941 1944 1923 1926 1929 1932 1935 1920 1917 1911 1914 1908 1899 1902 1905 1893 0 1896 0 Note: Equity volatility derived from published share price data; asset volatilities derived by deleveraging equity volatilities using balance sheet data Source: A. Saunders and B. Wilson; “Impact of consolidation and safety-net support on Canadian, US and UK banks” (1999) 27 European Banks Banking What is wrong with Basel “A long time ago in a galaxy far, far away…It is a period of civil war. Rebel spaceships, striking from a hidden base, have won their first victory against the evil Galactic Empire. During the battle, Rebel spies managed to steal secret plans to the Empire’s ultimate weapon, the DEATH STAR, an armoured space station with enough power to destroy an entire planet. Pursued by the Empire’s sinister agents, Princess Leia races home aboard her starship, custodian of the stolen plans that can save her people and restore freedom to the galaxy....” Star Wars, Episode IV: A New Hope (1977) opening crawl “Remember, risk-weighting is a way of pretending assets are safer than they are.” Martin Wolf, chief economics commentator, Financial Times As discussed in the prior section, the amount of capital that a bank needs to hold is a function of the risk within its balance sheet and the financial safety net thrown around it. We have already discussed the transfer of risk away from the creditors through deposit insurance schemes and bank resolution regimes. Here we address regulation, specifically the Basel accords covering capital. 1. What is good about Basel To be honest, we struggle to think of anything that is right with the Basel capital rules. The overriding aim of the original Basel agreement was noble, being “to secure international convergence of supervisory regulations governing the capital adequacy of international banks”. Against this, the committee set itself two objectives: “to strengthen the soundness and stability of the international banking system” and “to have a high degree of consistency…to diminish an existing source of competitive inequality among international banks”. The problems then began. Basel I ran to 30 pages and there were no supplements. Its simplicity sowed the seeds of its own demise, in our view. The original accord noted that “much also depends on the quality of a bank’s assets”. Basel II thus sought to develop “significantly more risk-sensitive capital requirements that are conceptually sound”. The main body of Basel II ran to 347 pages and the Committee proudly stated that it “believes that the revised Framework will promote the adoption of stronger risk management practices by the banking industry, and views this as one of its major benefits”. As the financial crisis unfolded within a year of Basel II’s final version being published, the Committee was forced to make rapid changes. Sticking with the core principle of Basel II of self-calculation of risk-weights, Basel III attempted to patch things up by calling for more and better-quality capital, plus rules on other risks, notably liquidity. Basel III currently runs to somewhere between 600 and 700 pages (we lose count) and is still expanding. So what are the positives? It encourages risk-based pricing, claim promoters of Basel II/III. But this surely only applies in large, centralised banking models where the branch manager/officer has become little more than a salesman or relationship manager. In the few decentralised banking models in operation, such as Handelsbanken’s, the branch manager is in charge of his P&L and 28 European Banks Banking balance sheet and thus instinctively prices loans to match the likely riskiness of the future cash flows. Risk transfer. If banks cannot generate an adequate risk-adjusted return on an asset, Basel II/III encourages the bank to transfer the asset to an entity that can earn its required return. It has encouraged banks to keep track of risk. A surprising claim given risk management should be the core DNA of a bank, but for some banks at least, it has taken Basel II/III to encourage them to build the systems to do so. Once rules are set, inconsistencies, loopholes and opportunities are there to be exploited and arbitraged. Basel IV, the next iteration, cannot be that far away. 2. What is wrong with Basel In this section we do not attempt to critique Basel from a theoretical/technical point of view (the OECD has done a good job of this in a 2010 paper titled “Thinking Beyond Basel III: Necessary Solutions for Capital and Liquidity”). Nor do we address calculation/methodology issues here (we cover these in a subsequent section, Calculating an adjusted equity-to-assets ratio). Instead we focus on some basic, practical flaws with Basel. If the following seems like a “sledgehammer to crack a nut”, we make no apologies – we genuinely believe that the self-calculating, risk-weighted approach is not just deeply flawed but has damaging consequences for bank shareholders. In no particular order: How do you model the unexpected? We are truly intrigued by the idea that banks are expected to model the unexpected. Models are by definition based on past experience: they predict the future by extrapolating the past. Basel II and III are built on the very notion that banks can model the unexpected; this is oxymoronic. Thus at the heart of Basel lies a fundamental flaw – that bank capital can be modelled from expected losses. The economist Professor John Kay dismisses it as “pseudo-science”. “Relying on simplistic faith in arguably proven risks and formulas is intrinsic incompetence. It is not what we know but what we do not know that we must always address to avoid major failures, catastrophes and panics.” Richard Feynman, Nobel prize-winning physicist (Indeed, we wonder whether the increasing frequency of financial crises and the volatility of markets are the very function of the belief that the unexpected can be captured in a model. The stronger this belief, surely the greater the surprise when something happens outside of what was predicted.) Calibrates capital for an idiosyncratic failure, not a systemic crisis. The problem of using expected losses to estimate capital for unexpected losses can be looked at another way. The Basel construct is focused on ensuring a bank has sufficient capital to protect against idiosyncratic failure (that the bank fails on its own) rather than a systemic failure or crisis (where other banks fail or are threatened). The latter is a more realistic scenario in a global economy, in our view. Uncertainty of data lost in presentation. The models that are built to calculate the probability of default (PD) and loss given default (LGD), and thus the risk weights, are like any other data-mining exercise bound by 29 European Banks Banking confidence intervals. A typical 95% confidence interval means that 95% of observations are expected to fall within a range of values. By mining lots of data, the bank hopes to narrow the upper and lower bound of the confidence intervals. But as the financial crisis showed, black swans happen. Quoting risk weights to one decimal place and capital ratios to two decimal places is an insult to the statistics profession and the users of banks’ accounts. Industry estimates suggest that the PDs can vary by 15% either side of the reported value. Given a likely bias to underestimation, then the real value could be 30%+ higher, implying more capital is actually needed. An infamous FSA benchmarking exercise in 2009, where UK banks were asked to calculate the capital required for a theoretical portfolio, found their answers differed by 100-300% for the various exposures! The BIS reached similar conclusions in a similar exercise in 2012. Lack of data over time. Let us suppose that the unexpected losses can be modelled by extrapolating trends from past credit loss experience (the basic assumption behind all Basel models). For almost every European bank, this is based on data from the early 1990s onwards; ie little more than 20 years. As we have noted in previous reports, the debt cycle is perhaps 60-70 years in duration. Thus banks’ models are capturing only one-third of the debt cycle and a very benign stage at that. Consider retail mortgages. Exceptionally low losses in the last 20 years have been associated with favourable demographics and supply shortages. What if the ageing of – and decline in – the overall population led to material declines in real house prices? Would losses on retail mortgages remain in the range of 10-20bp? Rule-based not incentive-based regulation. Basel sets out a series of rules with which banks must comply. They must hold a certain amount of capital of a certain quality. We strongly believe that this has encouraged banks to focus on the number rather than think about the underlying risk of the credit. The market is not interested in supervising banks. Basel II was built on three pillars. The third pillar was focused on the disclosure of information. By providing additional disclosure on risks and exposures, the thinking went that the debt and equity markets would help supervisors in policing the banks. However, if supervisors lack resources to do their job, then the market lacks incentives to do the supervisors’ job. Markets are not as efficient as Basel assumes. Equity markets, for example, are focused on growth. As we argued in European Banks – Growth: just say no (23 November 2012), growth in banking is strongly associated with increased risk. We view this focus on growth as incompatible with “policing” banks’ risk-taking. Pro-cyclical. Some of the pro-cyclicality of Basel is a function of the fair value accounting requirements of IAS (a “false idol” according to a Spanish economics professor), which affects equity-to-assets as well. But the calculation of PDs and LGDs (from which is derived the risk weight) relies on judgements which tend to the bullish in booms and bearish in busts. Basel III makes proposals to address this but has not yet progressed them. Insiders’ metric. Basel II introduced complexity and opacity to bank regulation. The models are incredibly complicated. Andrew Haldane at the Bank of England reckons a large bank now needs to make 200m+ calculations to determine its capital needs. How can a supervisor – let alone an outsider (ie the market) – check this black box? And what about Basel III fully-loaded ratios, which all banks are now quoting – who can possibly say that these are “true and fair”? 30 European Banks Banking “Consider the position of a large, representative bank using an advanced internal set of models to calibrate capital. Its number of risk buckets has increased from around seven under Basel I to, on a conservative estimate, over 200,000 under Basel II. To determine the regulatory capital ratio of this bank, the number of calculations has risen from single figures to over 200m. The quant and the computer have displaced the clerk and the envelope.” Andrew Haldane, executive director, Bank of England “Although the CEOs and directors of banks may not deliberately hold an insufficiently high level of capital necessary to avoid insolvency, they may be lulled into believing that they are adequately capitalized if they adhere to the Basel Committee’s models (which they are unlikely to understand).” H. Benink and G. Benston, professors of finance at Tilburg/Emory Universities It is instructive to recall that the Northern Rock was one of the first banks to be allowed to use the Basel II IRB (internal ratings based) approach. The UK’s FSA, “one of the best staffed and most sophisticated of supervisors” according to the OECD, approved this in June 2007. Northern Rock subsequently failed and was nationalised in February 2008. Spreadsheet errors. Of course, even if all of the data were reliable and the model design valid, it presupposes that a highly complex spreadsheet is without errors arising from its construction. It is estimated that 90%+ of all spreadsheets contain errors (source: EuSpRiG). However, only the truly exceptional are revealed, the most recent being associated with JP Morgan’s CIO losses. “Further errors were discovered in the Basel II.5 model, including, most significantly, an operational error in the calculation of the relative changes in hazard rates and correlation estimates. Specifically, after subtracting the old rate from the new rate, the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a factor of two and of lowering the VaR.” JP Morgan Task Force Report – 2012 CIO Losses “RWA optimisation” – the two most dangerous words in finance. If ever there were proof that Basel has skewed banks’ attitudes to risk, it is the prevalence of “RWA optimisation” and other euphemisms among banks’ strategies for meeting higher capital ratios. If a risk weight is 50%, or “optimised” to 35%, in most cases the inherent risk of the asset will still be the same. As Figure 13 shows, the average risk weights for banks have fallen globally, but it is hard to imagine that the underlying risks faced by the banks have fallen by over a third. Put another way, have the PDs fallen by a third or the LGDs fallen by that amount? 31 European Banks Banking Figure 13. Einstein would not approve – risk cannot be created or destroyed Average risk weights – RWA as % total assets 55.0 UK Europe US 50.0 45.0 40.0 30.0 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 35.0 Source: OECD Regulatory and tax arbitrage remains unaddressed. The gaming which has characterised capital regulation since its inception with the first Basel accord in 1988 remains unresolved. As the OCED observes: “There is a massive incentive in financial markets to use ‘complete market’ techniques to reconfigure credits as capital market instruments to avoid capital charges and reduce tax burdens for clients...[Further] banks can shift [‘promises’ eg credits] beyond the jurisdiction of bank regulators.” Note: “complete markets” refer in particular to the ability to short credit through a CDS. Central banks/regulators are losing faith. We note the increasing number of regulators which are overriding risk weights. The most notable examples are retail mortgage risk weights. Sweden, Norway and New Zealand have all set or are planning to set a minimum floor for such loans. Swiss banks also face higher capital requirements for retail mortgages than their models suggest. Elsewhere, UK banks have to “slot” their commercial real estate exposures, again overriding their models. If the regulators are losing faith in Basel, why should anyone else rely on it? Spirit of Basel lost: Part 1 – it’s all about the number. Both the original Basel I accord of 1988 and the revised Basel II framework of 2006 were clear that the “framework is designed to establish minimum levels of capital for internationally active banks”. The wording was clear that “national authorities will be free to adopt arrangements that set higher levels of minimum capital.” Somehow it never really happened. In interpreting the latest version, Basel III, the market and therefore the banks have decided to reach the new targets as soon as possible (and not by 2019) and ignore what The Economist called the “carefully calibrated scale of capital charges”. “It’s a race to 10% [core tier 1 ratio] and beyond.” Anshu Jain, co-CEO Deutsche Bank 32 European Banks Banking “More generally, capital ratios, judged in isolation, may provide a misleading guide to relative strength. Much also depends on the quality of a bank’s assets and, importantly, the level of provisions a bank may be holding outside its capital against assets of doubtful value.” Basel I Accord (July 1988) Spirit of Basel lost: Part 2 – the tail is wagging the dog. The whole point of the original Basel accord was the “international convergence of supervisory regulations”. How can this possibly be the case today with the wide disparity of risk weights across multiple homogenous lending classes? Growth is not penalised. As noted in an earlier point, we believe that growth in banking is strongly correlated with risk, indeed is a driver of risk (European Banks – Growth: just say no, 23 November 2012). The Basel construct does not penalise growth except in the extreme where it has led to scale and a bank has become SIFI designated. 3. The Basel track record In the subsequent section we present more detailed analysis of the predictiveness of risk-weighted capital ratios versus plain vanilla equity-to-asset ratios. Here, though, we note the performance of specific European banks following the EBA’s infamous stress tests of July 2011. These tests were based on published, Basel-derived Core Tier 1 (CT1) ratios including planned mitigation actions and then “stressed” in an “adverse scenario” (which was about as stressful as deciding which vintage of Felton Road Pinot Noir to drink, in our view). Figures 40 and 41 in the Appendix repeat the full EBA stress test results for all 91 banks, but we would highlight the following (list not exhaustive). Banks rated “pass” which subsequently failed: Dexia (ranked 13th with CT1 under adverse scenario of 10.4%), SNS Bank (ranked 49th with CT1 of 7.0%) and Bank of Cyprus (ranked 64th with CT1 of 6.2%). Dexia is the stand-out. At end-2010 it reported a CT1 ratio of 12.1%, which as noted fell less than 2% points under the adverse scenario. In contrast, its tangible equity-to-adjusted assets ratio (deferred tax assets and derivatives excluded) was 1.0% at end-2010! Banks rated “near fail” which subsequently failed: TT Hellenic Postbank, BFA-Bankia and Marfin Popular (“near fail” defined as stressed CT1 ratio under adverse scenario of between 5% and 6%). Bankia was another worrying example. The EBA stress test found Bankia €1.3bn short of a stressed 6% CT1 ratio, but its subsequent rescue in May 2012 required €24bn of new capital! As at end-2010, its tangible equity-toadjusted assets ratio was 2.8%; its CT1 ratio was 6.9%. To reach the European average equity-to-assets of 4.3%, it would have required €4.6bn of new capital; to reach 5% industry best practice, it would have required €7bn. While still short of the final recap, equity-to-assets was more indicative of the scale of the problem. Banks rated “pass” which subsequently raised capital: Danske Bank (placing), KBC Bank (placing), DNB (cut dividend), Santander (multiple asset sales), National Bank of Greece (rights issue), Alpha Bank (rights issue), Unicredit (rights issue), Deutsche Bank (placing), Commerzbank (rights issue). 33 European Banks Banking Why equity-to-assets is better “Go on failing. Go on. Only next time, try to fail better.” Samuel Beckett, Irish novelist, playwright and poet “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” Donald Rumsfeld, US Secretary of Defense (2001-06) 1. A digression: risk versus uncertainty The distinction between risk and uncertainty lies, we believe, at the heart of the debate over the Basel risk-weighted model and the appropriateness of simpler concepts. Basel sets capital levels according to measurable risks. We believe, however, that capital is for unmeasurable uncertainties. Frank Knight, an economics professor at the University of Chicago, argued that uncertainty and risk had little in common. “Uncertainty must be taken in a sense radically distinct from the familiar notion of risk… The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character...It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.” Frank Knight, Risk, Uncertainty and Profit (1921) A modern champion of Knight’s view is Professor Amar Bhide, currently at Tufts University and previously on the faculty of Harvard Business School and the University of Chicago’s Graduate School of Business. He has argued passionately in favour of “more primitive finance”, contending that modern finance’s “defects derive from the academic theories and regulatory structures that have evolved since the 1930s – dysfunctional foundations.” At the heart of the problem, Bhide believes, is the triumph of risk over uncertainty. He notes how two views of uncertainty prevailed up to the 1930s. The Knightian/Keynesian (and Rumsfeldian!) view believed that “uncertainties could not be reduced to quantifiable probabilities”. In contrast, the Bayesian school believed that all uncertainties were quantifiable. The latter came to dominate because “it allowed the construction of seemingly scientific mathematical models…[which] underpinned basic theories of modern finance”. “Faced with unquantifiable uncertainty, sensible investors, bankers or borrowers make subjective judgments in the holistic manner of a common law judge, considering all the relevant precedents and features of the case at hand, and anticipating the possibility of mistake and ignorance. If all uncertainty can be reduced to probability distributions, however – and omniscience ensures that market prices always accurately reflect the risks – case by case judgments are unnecessary. Returns are maximized for the least risk simply by diversification.” Amar Bhide, Tufts University Bhide argues in favour of a “more primitive regulatory regime” and of narrow banking (crudely, that banks are limited to raising deposits and making loans). 34 European Banks Banking “The systemic problem lies in the lax control over errors of judgment. This has arisen because of the mistaken belief that diversification (and well aligned incentives) can substitute for the control of bad judgment through due-diligence and oversight.” Amar Bhide, Tufts University 2. Why equity-to-assets is better We see five advantages of the equity-to-assets ratio. Based on uncertainty not risk Predictability Simplicity Accountability Historical support a. Based on uncertainty not risk An equity-to-assets ratio does not seek precision. In Rumsfeldian terms, it addresses the “unknown unknowns” rather than focusing solely on “known unknowns”. Being rooted in Knightian uncertainty rather than Bayesian measurable risk, it restores the role of balanced, human judgement, and does not base itself on diversification. b. Predictability Analysis from the OECD and Bank of England (Figures 15 and 16) shows the better predictability of future losses with the equity-to-assets ratio versus the Basel riskbased ratio. The causality of the relationship is unclear. What is clear to us, however, is that banks that focus on building a strong balance sheet structure (measured by a high equity-to-assets ratio) rather than complying with Basel capital regulations (where “RWA optimisation” is frequently resorted to) tend to incur lower losses and last longer. The driver may be that banks which do not attempt to arbitrage the Basel regulations tend to be more focused on managing the risk in their underlying credit book. (A good example was CDOs pre-crisis: Basel-focused banks bought AAA slices as this required little capital and offered an apparently attractive risk-reward; risk-focused banks questioned whether the asset was AAA in first place.) In other words, risk-focused banks let the dog wag the tail. We call this “biodynamic” risk management in honour of some of the best wines in the world being made according to some of the strangest beliefs, without recourse to agrochemicals (a Knightian not Bayesian view of the world). 35 European Banks Banking Figure 14. Biodynamic winemaking Unclear causality is also the case with biodynamic winemaking. Referred to by cynics as voodoo winemaking, biodynamics is essentially the antithesis of interventionist grapegrowing/winemaking. Practices include spraying vines with very dilute cow manure that had been buried for six months in a cow horn in the vineyard! Conventional agrochemicals are shunned. The science behind biodynamic practices in the vineyard and cellar remains unproven, if not deeply flawed. But the fact remains that some of the best wines in the world’s top wine regions (eg in Burgundy and New Zealand) are made biodynamically. Names include Domaine de la Romanée-Conti, Felton Road. The most likely explanation is that biodynamic winemakers simply care more and thus spend more time in the vineyard/cellar addressing causes and underlying problems rather than treating symptoms. Source: Berenberg research Figure 15. “Biodynamic” risk management Capital ratios pre-crisis versus subsequent write-downs/losses, selected banks a) Basel Tier 1 capital ratio b) Equity-to-asset ratio Note: Calculations based on the sample of banks reporting write-downs and credit losses as reported by Bloomberg, excluding US banks (where most conglomerate losses occurred in off balance sheet vehicles to which Basel capital adequacy did not apply). Write-downs and losses are accumulated from January 2007 until mid-2009. Tier 1 ratios, total assets and common equity are averages of 2006-08 end-of-year data (2007-08 for Japan Tier 1 ratio) Source: OECD (with data from Bloomberg, DataStream, Worldscope) The Bank of England’s analysis (Figure 16) is based on a sample of global banks with assets in excess of $100bn as at the end of 2006, about 100 in all. Not only does the equity-to-asset ratio appear visually to be a better predictor of failure than the risk-based Basel ratio, the relationship is also statistically robust. The equity-to-assets ratio of failed banks was found to be statistically significantly lower (1% significance) than that of surviving banks (by 1.2% points). For the Basel ratio, the differences between the ratios of failed and surviving banks is not statistically significantly different. As Andy Haldane concluded in a speech, “regulatory [Basel] capital ratios do about as well in predicting crises as a coin toss”. 36 European Banks Banking Figure 16. “Biodynamic” risk management (cont’d) Capital ratios – major global banks, end-2006 versus subsequent failure/survivorship a) Basel Tier 1 capital ratio b) Equity-to-asset ratio Source: Bank of England c. Simplicity In economics terms, the equity-to-assets ratio is aligned with the theory of the second best: it is better to be roughly right than precisely wrong. As per the US Navy design principle of the 1960s, “Keep It Simple, Stupid” – most systems perform better if their design is kept simpler rather than made complex. We know that bank models and balance sheets are incredibly complicated. To seek to manage or regulate this through complexity (the Basel approach) risks compounding the problem. The equity-to-assets ratio offers simplicity. “The general theorem of the second best optimum states that if there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, although still attainable, are, in general, no longer desirable…[It] states that if one of the Paretian optimum conditions cannot be fulfilled a second best optimum situation is achieved only by departing from all other optimum conditions.” R. Lipsey and K. Lancaster, The Review of Economic Studies (1956) Note: Pareto optimum is where resources are allocated such that no individual can be made better off without making somebody worse off. d. Accountability It is easier for outsiders to calculate and assess a bank’s equity-to-assets ratio than its Basel risk-weighted capital ratio. This principle of auditability is hugely important, in our view, if creditors are to have confidence in the bank’s capital strength. Of particular concern with Basel is the number of banks stating a Basel III fully-loaded ratio as a single data point without any supporting data. Combined with “RWA optimisation” to achieve it, it is hard to see such a number having credibility. e. Historical support Banks managed their capital structure according to simple equity-to-asset ratios for at least 150 years. In contrast, Basel I was used for 15 years while Basel II lasted for seven years. We do not claim that it is perfect, but the equity-to-assets ratio has stood the test of time and offers a long-term data series as a reference point. 37 European Banks Banking 3. What is wrong with the equity-to-assets ratio One of the main critiques of the equity-to-assets ratio is that it discourages banks from holding low-risk, low-return assets including liquid assets. Many Nordic banks, for example, exploit their high credit ratings versus competitors to take in large deposits in the US (eg from money market funds) which they immediately place at the Federal Reserve. The banks earn a very small margin on it, but it is as close to risk-free as possible given the Federal Reserve’s standing (and ownership of the printing presses). In our view, the loss of such business is a small price to pay. Regarding the pressure on liquid assets, this can either be mitigated by targeting a liquidity ratio or, as we will discuss in the next section, left unregulated instead rely on the risk of failure. Some strengthen the critique by turning it around and arguing that banks will be encouraged to maximise the risk they take on per euro of balance sheet assets. The original Basel Accord was borne of the Basel Committee’s desire to “halt the erosion of capital standards in their banking systems and to work towards greater convergence in the measurement of capital adequacy. This resulted in the emergence of a broad consensus on a weighted approach to the measurement of risk, both on and off the balance sheet” (source: BIS, History of the Basel Committee). This argument is extended by others to say that by discouraging banks from holding low-return assets such as repos and simple derivatives, it will push up funding and hedging costs for governments and corporates. But if these were backed by insufficient capital (and no asset is risk-free), then arguably such assets were underpriced in the first place. Another argument is that it makes comparing banks in different jurisdictions or with different business models difficult. For example, is the risk of a US mortgage where the borrower can hand the keys back and walk away the same as a UK mortgage where the borrower cannot walk away from his/her liability? As we have argued earlier, rules-based regulation has failed. We believe regulation needs to focus on incentives to ensure that banks do the right thing rather than focus on gaming/arbitraging the rules. 4. Why not regulate equity-to-assets and Basel capital ratios? In a sense, this is what the Basel Committee has proposed in Basel III. It has proposed a leverage ratio (aka equity-to-assets ratio), but primacy remains with the risk-weighted ratio; the leverage ratio merely serves as a backstop. As we have argued in previous reports (eg European Banks: Mad, bad and dangerous to know, 28 January 2013), we believe the equity-to-assets ratio should have primacy. (And we would add the need to dramatically simplify the risk-weight calculation process.) The OECD also believes in the primacy of the leverage ratio over risk-weighted capital ratios. Making the leverage ratio the backstop has potentially damaging consequences. “There is a risk that setting the leverage ratio too low, if combined with the RWA approach, that regulators will be setting maximum capital requirements and cause portfolio distortions, as capital arbitrage and risk-bucket transformation operates to ensure that Basel III does not cause banks to hold more capital than the ‘maximum’.” A. Blundell-Wignall and P. Atkinson, OECD Journal, 2010/1 38 European Banks Banking What is the right number? “There is no rule of thumb method of deciding the size of the capital funds which a bank needs in order to carry on its business. The guiding principles are that the resources as a whole must be sufficient to provide absolute security for our depositors and the reserves sufficient to meet fluctuation in our trading from year to year.” Sir Oliver Franks, Chairman of Lloyds Bank, 1954-62 “The mood among investment banks that I talk to…is such that they expect that the regulation is over, they expect that they will be able to keep growing their balance sheets, that they will be growing bigger than ever. The mood among the regulators I talk with is more like ‘we haven’t even started’.” Axel Weber, Chairman of UBS, former Bundesbank President Capital is very subjective – the right amount is whatever your creditors/stakeholders want it to be. Further, you do not need capital in a boom, but you do need it in a bust – by which point it is too late to get it. And as Walter Bagehot observed, a “well-run bank needs no capital”. Nor is the number static. During a crisis, more is generally preferable to less. And as Axel Weber has remarked, regulators (and by extension, politicians) are in the mood for more. “We’re about to raise capital requirements; we won’t back down. There are possibly reasons [to look into] taking a few further steps on capital requirements.” Anders Borg, Swedish Finance Minister, May 2013 1. What is the right number? In arriving at a possible “right number” for the equity-to-assets ratio, we draw on a number of sources including historical and academic. a. History Banking is a long-term business given very long asset lives and tail risks. It is also a mature industry dating back at least 700 years. Historical data is therefore a good starting point. Data compiled by academics (Figure 17) show how average capital ratios have fallen for European banks over the last 160 years. Averaging about 30% between 1850 and 1880, the ratio settled at c15% during the interwar period. After 1945, it settled into a range of c5-6%. Note: these estimates are based on published accounts and do not adjust for conservative provisioning. The steady reduction during the 20th century can be attributed to four factors as noted earlier: increasing diversification of banks as banking consolidated, a lack of banking crises (unlike the US, there were few in Europe in the 1930s), the dominance of large banks operating cartel-like structures in many European banking markets, and the emergence of an implicit government guarantee of deposits. We would also add the influence of depositor protection schemes. We would note, however, that managing (and regulating) banks according to capital levels is a more recent concept. Historically, the prime management (and central bank) focus was on liquidity – ensuring sufficient liquid assets to meet depositors’ calls. 39 European Banks Banking Figure 17. Capital is so last century Equity-to-assets ratio, average European commercial banks, 1847-2001 Note: Unweighted average based on 10 countries: Denmark (1847+), Norway (1851+), Germany (1872+), UK (1880+), Italy (1891+), Netherlands (1900+), Switzerland (1906+), Spain (1923+), Finland (1934+) and Belgium (1935+) Source: Harald Benink and George Benston (2005) The importance of depositor protection schemes can be seen in the US and Swiss experience, which we present in Figure 18. The adoption of depositor protection in the 1930s led to a big reduction in the equity-to-assets ratio as the need to protect depositors was transferred off balance sheet. The ratio subsequently settled at c6-8% following the Second World War in both countries. However, subsequent amendments to depositor protection have seen banks generally hold more capital. Figure 18. Depositor insurance/preference have a material impact on capital levels Equity-to-assets ratio, US and Switzerland a) US (tangible equity) b) Switzerland (equity) 30% All Banks 18% 25% 16% FDIC established 20% Priority insurance introduced 14% 12% Depositor preference introduced 15% Excluding big banks Liquidity insurance introduced 10% 8% 6% 10% 4% 5% Priority insurance limits raised 2% 2005 1995 1985 1975 1965 1955 1945 1935 1925 1905 2005 1995 1985 1975 1965 1955 1945 1935 1925 1915 1905 1895 1915 0% 0% Note: Switzerland – All banks includes cantonal, regional/savings, Raiffeisen and other banks as well as the big banks. Since 2005, there are only two banks in the big bank group; ie UBS and Credit Suisse Source: Berenberg research, Fed, SNB 40 European Banks Banking In the UK, we observe a broad period of stability in the equity-to-assets ratio of c8% from 1910 to 1970. The variation in the ratio before, during and after this period can be attributed to a number of factors. The reduction from high teens in the 1880s to 8% by the 1910s was largely attributed to the consolidation of the banking industry (driven by the adoption of joint stock banking from 1826, which paved the way for branch-based banking, and limited liability banking from 1856). The lower capital ratios in the 1940s and 1950s resulted from government control of capital raising, triggered by the financing needs of the Second World War. All UK companies had to apply to the Capital Issues Committee, which operated from 1939 to 1959, before raising capital. High marginal tax rates on dividends in the UK and the introduction of corporation tax in 1965 increased the attractiveness of debt over equity, leading banks to issue debt capital instruments. The reduction in the ratio below 6% (as shown in Figure 19) from the 1980s onwards coincided with the introduction of deposit insurance in the UK. Figure 19. Equity-to-assets ratio, UK – with and without hidden reserves 18% Published 16% True 14% 12% 10% 8% 6% 4% 2% 2000-08 1990-99 1984-89 1970-79 1960-66 1950-59 1940-49 1930-39 1920-29 1910-19 1900-09 1890-99 1880-89 0% Note: Published = capital ratio as per annual accounts. True = capital ratio including hidden or “inner” reserves but not including loan loss provisions. Hidden reserves were disclosed from 1970 onwards Source: Billings and Capie (2007), OECD, Bank of England Note: the published capital levels of UK banks were understated due to the practice of holding hidden reserves. First established in the 1860s, such reserves were material from the late 1920s until 1970 when the practice ended. The aim was fascinating. “Capital was considered so important that the British government and the Bank [of England] accepted the public interest argument which allowed the concealment of ‘true’ profits and ‘true’ capital until…1970. The maintenance of…‘hidden’ reserves allowed banks to smooth their reported profits, reassuring depositors and shareholders by presenting a picture of financial soundness and prudent and public-spirited behaviour, thereby contributing to financial stability.” M. Billings and F. Capie, Capital in British Banking (2007) b. The recent crisis Andrew Haldane, head of Financial Stability at the Bank of England, estimated that “for the world’s largest bank, the [equity-to-assets] ratio needed to guard against failure in this crisis would have been above 7%”. c. Academic research A Bank of England Discussion Paper (Optimal bank capital, 2011) argued that “ultimately loss-absorbing capital should be 16-20% of RWA”, with considerable 41 European Banks Banking stress on the phrase “loss-absorbing” (ie equity). Assuming average risk weights of between 33% and 50%, then a 20% equity-to-RWA ratio would imply equity-toassets of 7-10%, in its opinion. The Bank of England bases its analysis on data from “shocks to incomes” for a large number of countries over a long period “to assess risks to banks and how equity funding protects against those risks.” As is obvious from the above, the Bank finds that “the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework”. The authors (Miles, Yang and Marcheggiano) also share the refrain of Admati and Hellwig (authors of The Bankers’ New Clothes) that requiring banks to fund their balance sheets with more equity and less debt has no effect on lending. As they succinctly put it: “The change that is needed is on the funding side of banks’ balance sheets – on their liabilities – and not their assets. The idea that banks must shrink lending to satisfy higher requirements on equity funding is a non-sequitur.” We regard it as astonishing how not just the media but the banking industry itself (including its lobbyists) confuse the issue or deliberately conflagrate it. 2. Should all banks have the same number? No! The Basel construct was based on the idea that the risks of each bank’s assets were different. While we agree with the concept of differentiation, execution à la Basel was flawed for the many reasons we have already set out. A different dimension is growth. As we argued in European Banks – Growth: just say no (23 November 2012), we believe that capital ratios should be tiered based on growth rates. We have long argued that growth is one of the prime drivers of risk within banks. It is a fact that faster-growing banks take on more risk than slower-growing ones and generate inferior returns in all but the short term. But as we also noted, there are practical problems with implementing such a tiered system including definitions, complexity and gaming by the banks. So we believe that all banks are not the same and should therefore have different ratios, but simplicity/history suggest that this may not be feasible. 3. Is 7% the new zero? Critical to the amount of capital that a bank must hold is how much is considered a buffer and how much is an inviolate level below which a bank cannot fall under any circumstance. Following the start of the crisis and based on regulatory/political discussions, we fear that not all capital is available to absorb losses. Is this a recognition by regulators of the flawed design of Basel and its basis in expected losses? Note, in our later top-down estimate of the capital required by European banks, we use a post-crisis target for the equity-to-assets ratio of 3%, acknowledging that all of the capital is there to absorb losses. 4. Where should the capital reside? Another influence on the amount of capital that an individual bank needs to hold is where the capital is held. Is the capital within the subsidiary’s balance sheet or does it sit with the holding company balance sheet? Two of the major global banks operating fully subsidiarised (ie federal) models are HSBC and Santander, and for the latter the lack of capital in the parent company is a major concern. For large banking groups which have historically been run through strong corporate centres where most of the capital and liquidity is held (such as the French banks), it is also a concern. We also note that the UK regulator requires its banks to comply on both a UK entity and a group basis. 42 European Banks Banking Modern and complex group structures tend to obscure this issue but it has become an important regulatory battlefield giving rise to the issue of Balkanisation; ie regulators forcing banks to be adequately capitalised (and liquid) within local subsidiaries. This is both to comply with “living will” rules and to minimise reputational damage to a country’s banking system and the need for local taxpayers to fund foreign banks’ losses. Recent headlines include moves by US regulators to ensure this as well as an EC/EBA investigation into moves by BaFin, the German regulator, to do this. “Banks live globally but die locally.” Mervyn King, Governor, Bank of England Where banks operate locally through branches, they are coming under pressure from regulators on both sides of the Atlantic to create local subsidiaries. “There is a continued difficulty of regulating overseas branches operating in the UK. We ought to have subsidiaries rather than branches in the UK. The vast majority of the wrongdoing was done outside of the UK’s supervisory net.” Hector Sants, ex-CEO, UK FSA (January 2013) 5. Should we have a target number at all? Regulating a bank’s capital structure is taken as a given by many. The case for regulation was stated clearly by the former Chairman of the US FDIC in June 2007. “There are strong reasons for believing that banks left to their own devices would maintain less capital – not more – than would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real…In short, regulators can’t leave capital decisions totally to the banks. We wouldn’t be doing our jobs or serving the public interest if we did.” Sheila Blair, Chairman, FDIC, 2006-11 Some, in contrast, have argued that there should be no target ratio at all for bank capital – a view with which we sympathise as long as all banks are free to fail. Indeed, the sceptic would note that the era of more structured and invasive bank regulation and supervision (1970s to date) coincides with a material pick-up in banking crises (see Figure 2). The UK, for example, created a Bank Supervision Department within the Bank of England in 1974 and only established statutory bank supervision in the 1979 Banking Act. In Canada, banking supervision was introduced in 1924 but until 1980 there were only seven supervisors. The Institute of Economic Affairs (IEA; a UK free-market think-tank) has proposed scrapping capital regulation altogether, arguing that: “The whole apparatus of bank capital regulation which has done so much to make the banking system more opaque should be abandoned”. Blaming banks’ gaming of the system, the authors argue as follows. “Capital regulation is relatively recent and led to banks trying to game the rules contributing to the complexity that was created in the banking system. An analysis of history demonstrates that capital regulation is not necessary if banks are not underwritten by the state…The principle, which should be at the heart of regulatory reform, is that banks should be wound up in an orderly way if they fail.” Forrest Capie and Geoffrey Wood, IEA 43 European Banks Banking Andrew Haldane (FPC member, Bank of England) concluded his well-publicised Jackson Hole speech (“The Dog and the Frisbee”, 31 August 2012) by asking whether quantity-based regulation should replace price-based regulation. “Over the past 30 years or so, the regulatory direction of travel has been towards pricing risk in the financial system, rather than prohibiting or restricting it…regulators have pursued price over quantity-based regulation. That makes sense when optimising in a risky world. It may make less sense when optimising in an uncertain world. Quantity-based restrictions may be more robust to mis-calibration. Simple, quantity-based restrictions are the equivalent of a regulatory commandment: ‘Thou shalt not’.” Andrew Haldane, Bank of England The views of Capie, Wood and Haldane endorse the principles behind the Vickers and Volcker reform proposals, namely banning activities and/or breaking up the banking conglomerates. We note that Handelsbanken, the role model for banking in Europe in our view, has always sought to hold what it thinks is the right amount of capital to hold given the risks that it faces. A very Victorian approach to banking, it does not optimise for regulation. 44 European Banks Banking Calculating an adjusted equity-to-assets ratio “Keep It Simple, Stupid.” US Navy design principle (1960) Our preference for the equity-to-assets ratio is based on its simplicity and the ability with which outsiders can calculate/assess it. That said, we believe there are a few basic issues to address/adjustments to make in both the numerator and the denominator. Some of these are straightforward, others are more controversial. Our overriding principles are: Assets – more not less. Capital is for uncertainty and the uncertainties over asset values are greatest in a crisis and least in a boom. We therefore believe in a maximum definition not a minimum in order to cast the broadest net around a bank’s exposures and sources of potential losses. Capital – highest quality. Capital must be permanently and instantly available to absorb losses, especially when a bank fails. Period. This generally means a smaller rather than a larger number. 1. Asset adjustments The following are the key debates for adjusting assets in order to arrive at an assets figure which most closely reflects the boundaries of the risks faced by a bank. Derivatives – to net or not to net? We say no because we care about a bank’s gross exposure, as this is where the risk originates. We would highlight JP Morgan’s $7bn derivative loss in 2012 which compared to a $92bn net on balance sheet exposure or a $1.89trn gross exposure at the end of 2011. IFRS focuses on the intention to settle net in the ordinary course of business which results in the grossing up of derivatives. Further, we do not believe that the IFRS grossed-up figure is correct, as both RBS and Deutsche Bank show that their IFRS/“gross” on balance sheet derivative exposure is already netted down by between a third and 50%. Deutsche Bank, for example, nets down its true gross derivative assets exposure of €994bn to €656bn on its balance sheet, which then nets further to a mere €9bn. 45 European Banks Banking Figure 20. Rollercoaster balance sheets Gross market value (GMV) of G-SIFI bank derivative holdings versus VIX Source: A. Blundell-Wignall and P. Atkinson, OECD (2012) Off balance sheet liabilities – to include or not? We say yes. This is one of the least contentious adjustments. Contingent liabilities or commitments represent clear liabilities for a bank – while the credit or guarantee may not yet have been drawn down on or invoked, in a crisis it might well be. Repos – to deduct or not? We say no. The bulls argue that repos should be deducted from assets when calculating an equity-assets ratio given that these are seen as low-risk transactions. As the crisis showed, however, there were many unforeseen consequences as the loss of confidence in counterparties led to a drying-up of liquidity. And this is the whole point of capital. It is for unexpected losses (ie uncertainty) not expected losses (ie (measurable) risk). Janet Yellen, Vice-Chairman of the Federal Reserve and heir apparent to Ben Bernanke, has expressed such concerns. “A major source of unaddressed risk emanates from the large volume of short-term securities financing transactions – repos, reverse repos, securities borrowing and lending transactions, and margin loans – engaged in by broker-dealers...and other shadow banks. The perfect solution may not yet be clear but possible options are evident: [including] raising bank and broker-dealer capital.” Janet Yellen, Vice-Chairman, Federal Reserve Consistency with equity adjustments. While relatively trivial given the financial leverage in a bank’s balance sheet, any adjustments to equity should be made equally to assets; for example, deducting intangible assets. 2. Equity adjustments We define equity as capital permanently and instantly available to absorb losses. Given this, we would make the following comments on potential adjustments. Intangibles. We deduct all. Deducting goodwill is non-controversial. We also deduct other intangibles including capitalised software costs. Such assets are unlikely to have any disposal value (being bespoke to the bank) and many were created to circumvent accounting standards and reduce the goodwill arising on acquisitions. 46 European Banks Banking Minority interests. We deduct all. Deducting all minority interests is more conservative given the associated asset figure is not adjusted, but we believe that this is more appropriate in the event of winding up a bank. Subordinated debt. We deduct all. This applies only to BNP Paribas and Société Générale, which both include a form of sub-debt within equity. State aid. We deduct all in our stressed measure of capital. This includes silent participations/participation capital. We exclude this on the grounds that it lacks permanence. In the case of the Austrians, for example, although it is “perpetual” and ranks pari passu with ordinary equity in absorbing losses, there is a stepped coupon on their “participation capital”. This creates an incentive for early repayment as the coupon increases with time and thus cannot be viewed as core capital. This repayment incentive led Commerzbank, for example, to launch a €2.5bn rights issue and repay its “silent participations” in May 2013. Deferred tax assets (DTAs). We deduct all in our stressed measure of capital. The test here is simple. Were a bank to be wound up tomorrow, would those DTAs have any value that can be realised and used to meet the bank’s liabilities? In most cases, the answer is no as they reflect timing differences or an offsetting gain needs to be generated first. We therefore exclude them. IAS19. We deduct all in our stressed measure of capital. These refer to the net pension assets on balance sheet. Level 3 assets. We would discount valuations. These have an enormous impact on equity values for some banks. As discussed earlier, the valuation of Level 3 assets is highly subjective, earning them the moniker “mark-tomyth”. While these assets clearly have some value, the subjectivity generates a concern that during a period of stress or in the event of the bank being wound up, they are unlikely to achieve balance sheet values. Removing all of them is clearly too aggressive, but a discount of perhaps 10-25% seems more appropriate. Loan loss provisions. Loan losses cover expected losses, while capital is for unexpected losses. However, some countries have more conservative provisioning regimes than others and this “excess” provisioning can be viewed as a form of capital. Indeed, the original 1988 Basel Accord acknowledged this point early on. Adding back loan loss provisions gives an inflated measure of a bank’s capital. It does, however, make comparison across jurisdictions more meaningful. In that sense, it is analogous to EBITDA for industrials. Insurance treatment. We would make a deduction from equity where a bank takes insurance risk and is subject to the resultant insurance volatility. In the ratios we calculate, we make no adjustment for simplicity but we accept that results in mixed treatment. Where the banks are actually taking insurance risk (UK, France), this undercapitalises the insurance assets relative to their own capital and flatters their leverage ratios as insurance capital needs are higher than the bank ratios. However, where the insurance risk is unit-linked and there is no exposure for the bank (Sweden), the bank is effectively penalised and the ratios are artificially low. 47 European Banks Banking 3. To weight or not to weight? Hmmm. We believe that this is one of the major flaws within Basel – sound in theory, problematic in practice. While we do not favour such an approach, we accept the argument that a retail mortgage in western Europe with a 50% loan-to-value does not have the same risk profile as an unsecured loan in an emerging market. We have included an additional ratio using a simple weighting given the argument that not all assets face the same risks. Our weighted ratio uses the following simple weights: 0% for cash/central bank balances; 50% for mortgages; 100% for all other assets. 4. Equity-to-assets ratio In the following section, we include four ratios for European banks: Ratio 1: Plain equity-to-assets ratio (“Plain ratio”) – idiosyncratic risk scenario. This is the more generous ratio providing an upper-bound “whatyou-see” estimate of a bank’s capital ratio. It assumes the bank failed as a result of idiosyncratic risks and that systemic risks are low. Assets are as per balance sheet with derivatives netted and intangibles deducted. Equity is as per balance sheet less minorities, subordinated debt (where included) and intangibles. State aid is not deducted. Ratio 2: Pain equity-to-assets ratio (“Pain ratio”) – systemic crisis scenario. This is the less generous ratio providing a lower-bound “whatyou-get” estimate of a bank’s capital ratio. As such, it is based on a stressed bankruptcy where systemic risks are high. Assets are as per balance sheet with gross derivative positions included and off balance sheet liabilities added. Equity is as per balance sheet less minorities, subordinated debt (where included) and intangibles. We also deduct state aid and deferred tax assets and IAS19 balances. We do not discount Level 3 valuations but do provide a sensitivity. Ratio 3 and 4: Weighted equity-to-assets ratio (“Weighted ratio”). For both 3 and 4 we use the same asset figure; namely assets as per the balance sheet with no adjustment to the gross derivative position, off balance sheet exposures added back and assets weighted as per the above weights. For equity, in Ratio 3 we use the same definition as per Ratio 1 less state aid. For Ratio 4 we use the same definition as per Ratio 2 but also add back loan loss provisions. 48 European Banks Banking Figure 21. The good, the bad and the ugly Equity-to-asset ratios – definitions of ratios 1, 2, 3 and 4 compared Ratio 1 Plain ('idiosyncratic event') Equity Equity as per B/S less minorities less intangibles less subordinated debt Ratio 3 Risk Weights + Tangible Equity Ratio 2 Pain ('systemic failure') Equity as per B/S Equity as per B/S less minorities less minorities less intangibles less intangibles less subordinated debt less subordinated debt less state aid less state aid less deferred tax assets (DTAs) less IAS 19 balances Ratio 4 Risk Weights + Adjusted Tangible Equity Equity as per B/S less minorities less intangibles less subordinated debt less state aid less deferred tax assets less IAS 19 balances plus loan loss provisions Note: Level 3 as stated Assets Assets as per B/S derivatives netted less intangibles Assets as per B/S derivatives gross less intangibles/DTAs plus off B/S commitments Source: Berenberg 49 Assets as per B/S derivatives gross less intangibles plus off B/S commitments Assets as per B/S derivatives gross less intangibles/DTAs plus off B/S commitments plus loan loss provisions Simple weights: 0% cash/central bank balances 50% mortgages 100% all other assets Simple weights: 0% cash/central bank balances 50% mortgages 100% all other assets European Banks Banking Capital shortfall – how large and how to make good? Camp Freddie: “Charlie, I don’t think you have the kind of scheme that yields the size of profit Mr Bridger is accustomed to.” Charlie Croker: “But, Freddie, this job is big.” Camp Freddie: “Charlie, you wouldn’t even know how to spell big.” Charlie Croker: “B-I-G. Big.” The Italian Job (1969) As noted earlier, the required capital ratio is both subjective and subject to change. The required level of capital is whatever bank creditors want it to be to feel reassured and this can change at different stages in the short-term business/longterm debt cycle. The emerging consensus in the equity market at least – and among some regulators – is that banks have sufficient capital; indeed, some now argue that banks are in a position to return surplus capital. Two years ago, the EBA famously quantified the deficit among EU banks at a mere €2.5bn. But others have their doubts. The Bank of Spain is nervous regarding the high levels of inadequately provisioned restructured loans on bank balance sheets. The German Finance Minister recently spoke of “the pressure on banks to repair their balance sheets”, while his Swedish counterpart talked about “taking a few further steps on capital requirements”. And the Dutch Finance Minister is nervous that the result of the ECB’s asset quality review “might be worrying”. Given the persistent doubts, the uncertainty that continues to surround asset values, high levels of forbearance and anaemic economic growth, we believe that banks remain short of capital and must raise more. If we are wrong – great; but at least confidence will have been restored. Banks can return any surplus capital in three or four years’ time once the “unknown unknowns” have become “known knowns”. Banking is all about confidence, so why not remove the issue now once and for all? 1. Quantifying the capital shortfall To estimate the capital shortfall among the banks, we employ a variety of methods. The following estimates suggest a capital shortfall of between €350bn and €400bn for European banks. Berenberg top-down estimate = €360bn deficit. Updating analysis first published in UK Banks – Financial repression to bear on the sector (29 February 2012), we estimate that European banks are €360bn short of capital. This top-down estimate is derived on a country-by-country basis. Of this total, Eurozone banks account for €330bn, with German and French banks accounting for the majority – see Figure 22. Our estimates are based on a “Swedish-style” scenario whereby European banks face losses equal to those experienced by the Swedish financial system in the early 1990s (peak NPLs of 12% and a loss rate of 50% on the NPLs). The capital deficit is the amount required to absorb such losses and return the banking system to a 3% equity-to-assets ratio. 50 European Banks Banking Figure 22. Significant capital still required to meet Swedish or Japanese scenarios Scenario analysis for European banks to meet a Swedish or Japanese-style banking crisis Tangible equity/assets June 2012 All banks Domestic banks Belgium Denmark Germany Ireland Greece Spain France Italy Netherlands Austria Portugal Finland Sweden UK Switzerland 4.6% 4.3% 3.6% 5.9% n/a 4.4% 4.1% 5.4% 4.1% 6.4% 5.7% 3.6% 4.2% 4.4% 5.4% 3.4% 4.4% 3.6% 7.3% n/a 4.5% 4.2% 5.4% 4.2% 6.3% 6.1% 6.7% 4.1% 4.7% 6.2% Average Total 4.7% 5.1% Note: Japan scenario (Fiscal cost 25% GDP) Total assets (Ebn) All banks Domestic banks 1,164 933 8,285 1,092 409 4,026 6,903 2,893 2,837 1,189 512 652 1,648 11,354 2,150 554 815 7,806 373 338 3,713 6,661 2,633 2,534 874 394 148 1,640 8,008 1,875 46,047 38,366 Peak NPLs Loss rate 35% 40% Banking assets/GDP All banks Domestic banks 3.1x 3.8x 3.1x 6.9x 2.0x 3.8x 3.3x 1.8x 4.7x 3.8x 3.1x 3.3x 4.1x 6.0x 4.6x 3.8x % loans assets Japan scenario impact (Ebn) All banks Domestic banks % GDP % Bkg assets 1.5x 3.3x 3.0x 2.3x 1.6x 3.5x 3.2x 1.7x 4.2x 2.8x 2.3x 0.8x 4.0x 4.2x 4.0x 58% 67% 60% 42% 73% 68% 54% 67% 69% 71% 74% 37% 72% 38% 49% 61% 67% 59% 65% 69% 66% 55% 66% 71% 69% 72% 68% 65% 46% 56% 9% 22% 17% 15% 11% 23% 17% 11% 29% 19% 17% 5% 26% 19% 22% 6.0% 6.6% 5.8% 6.4% 6.8% 6.5% 5.4% 6.5% 7.0% 6.8% 7.1% 6.7% 6.4% 4.5% 5.5% 40.7 13.8 25.0 -30.6 10.1 6.5 10.5 8.0 14.6 9.1 5.4 14.9 13.4 9.1 9.5 2.8x 60% 64% 17% 6.2% 10.7 Sweden scenario Peak NPLs Loss rate 12% 50% Source: Berenberg research, ECB, SNB, Riksbank 51 Sweden scenario impact GOP Yrs to Equity cover required* % GDP % Bkg assets -31 -43 -408 -8 n/a -184 -279 -107 -146 -30 -16 -4 -87 -222 -41 4% 9% 7% 6% 5% 10% 7% 5% 12% 8% 7% 2% 11% 8% 9% 2.6% 2.8% 2.5% 2.7% 2.9% 2.8% 2.3% 2.8% 3.0% 2.9% 3.0% 2.9% 2.7% 1.9% 2.3% 17.4 5.9 10.7 -13.1 4.3 2.8 4.5 3.4 6.3 3.9 2.3 6.4 5.7 3.9 4.1 -12 -12 -150 6 n/a -47 -74 -10 -45 4 0 1 -28 -15 17 -115 -1,606 7.5% 2.7% 4.6 -26 -365 GOP = Gross operating profit (ie pre provisions) * Assume require 3% equity/assets post losses GOP Yrs to Equity cover required* European Banks Banking OECD bottom-up estimate = €400bn deficit. The OECD has come down strongly in favour of the equity-to-assets ratio, being highly critical of the Basel ratios. In a report published in December 2012, it estimated the capital required to lift all Eurozone banks to a 5% equity-to-assets ratio as being €400bn. This was based on the 200 largest banks using balance sheets as at September 2012 and included a deficit for the Greek banks of c€16bn since filled. The estimates by country relative to GDP are summarised in Figure 23. As per our analysis, the largest deficits are in Germany and France. Figure 23. OECD estimated Euro-area capital deficit at €400bn Capital deficit as % GDP, large banks by country 7.8% 7.4% 6.0% 5.6% 5.4% 5.2% 4.2% 3.3% 0.2% 0.0% Portugal Austria Spain Ireland Euro-Area Finland Netherlands Germany Belgium France 0.6% Italy 1.8% Greece 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Note: Sample based on 200 largest banks in the Euro-area. Deficit based on individual banks reaching 5% equity-to-assets ratio. Data based on end-September 2012 balance sheets. Data excludes subsequent capital raising in Greece including disbursement of ESM monies Source: OECD Berenberg bottom-up estimate = c€400bn deficit. In Figure 24 we summarise the aggregate capital deficit for European banks based on four equity-to-asset ratios (“plain” for idiosyncratic risk scenarios, “pain” for systemic risk scenarios, and two simple risk-weighted versions) for a range of targets from 3% to 8%. As noted in a prior section, history, academics and an analysis of the recent crisis suggest a target “plain” ratio of 6-8%. Based on a “plain” ratio of 6% (lower end of the range) and a “pain” ratio (ie highly stressed) of 4%, then we estimate that the deficit for European banks is between €350bn and €460bn, with a mid-point of €405bn. Note: this estimate just covers the large, listed European banks. 52 European Banks Banking Figure 24. Time to load up Capital deficit/surplus (€bn) – various equity-to-asset ratios, aggregate European banks 3% 4% 5% 6% 7% 8% Ratio 1 Plain ('idiosyncratic event') -265 -60 145 351 556 761 Ratio 2 Pain ('systemic failure') 165 458 752 1,046 1,339 1,633 Ratio 3 Risk Weights + Tangible Equity -78 186 450 714 978 1,242 Ratio 4 Risk Weights + Adjusted Tangible Equity -157 108 373 638 904 1,169 Source: Berenberg research We provide a broad geographic split of the deficits by the main geographies using the “plain” and “pain” ratios in Figure 25. The Eurozone accounts for around two-thirds of the deficit. The results for the banks in our coverage universe (plus the US universal/ investment banks for comparison) are summarised in Figures 26 to 29, including a measure of liquidity. These are based on the “pain” ratio (lefthand end of the bar) and “plain” ratio (right-hand end of the bar), ranked by mid-point, “plain” and “pain” ratios. Note: a flexor model based on the spreadsheet used to calculate the ratios and these deficits is available on request. The adjustments to equity and to assets can be varied, as can the risk weights (if desired). The output is on both a per bank and a regional basis. Figure 25. Eurozone banks account for two-thirds of the deficit Capital deficit/surplus (€bn) by unweighted equity-to-assets ratios, aggregate European banks a) Ratio 1 (“Plain ratio”) b) Ratio 2 (“Pain ratio”) Europe EU Eurozone UK Europe EU Eurozone 3% -265 -245 -98 -133 3% 165 128 137 4% -60 -58 17 -73 4% 458 388 295 5% 145 129 133 -14 5% 752 649 453 6% 351 315 248 45 6% 1,046 909 611 7% 556 502 364 105 7% 1,339 1,169 769 8% 761 688 479 164 8% 1,633 1,430 927 Source: Berenberg research, company data 53 UK -4 84 173 261 349 437 European Banks Banking Figure 26. Usual suspects Equity-to-assets – “pain” versus “plain” ratio; individual European and US banks, 31/12/12 (Left hand of bar = “pain” ratio; right hand of bar = “plain” ratio; ranked by mid-point) 0% 1% 2% 3% 4% 5% 6% 7% 8% VONN BAER CITI STAN RBI 'Pain' ratios GS DNB SWEDA 'Plain' ratios KBC HSBA BAC BBVA RBS MS ISP JPMC EBS UCG SHBA INGA EFGN LLOY NDA SEB UBSN DANSKE BARC BNP CBK SAN GLE DBK CSGN ACA Note: Commerzbank “pain” ratio increases from 2.2% to 2.5% post rights issue Source: Berenberg research, company data 54 9% European Banks Banking Figure 27. Few banks exceed 6% on our “plain” ratio (idiosyncratic risk basis) Equity-to-assets – “pain” versus “plain” ratio, individual European banks, 31/12/12 (Left hand of bar = “pain” ratio; right hand of bar = “plain” ratio; ranked by “plain” ratio) 0% 1% 2% 3% 4% 5% 6% CITI GS VONN RBI BAC MS STAN JPMC BAER RBS KBC BBVA ISP DNB UCG HSBA SWEDA EBS UBSN LLOY BARC INGA SHBA NDA CBK EFGN SAN SEB BNP DANSKE GLE DBK CSGN ACA Note: Commerzbank “pain” ratio increases from 2.2% to 2.5% post rights issue Source: Berenberg research, company data 55 7% 8% 9% European Banks Banking Figure 28. Very few banks exceed the 4% “pain” ratio threshold (systemic crisis basis) Equity-to-assets – “pain” versus “plain” ratio, individual European banks, 31/12/12 (Left hand of bar = “pain” ratio; right hand of bar = “plain” ratio; ranked by “pain” ratio) 0% 1% 2% 3% 4% 5% 6% VONN BAER STAN SWEDA DNB HSBA EFGN SHBA INGA EBS RBI KBC NDA DANSKE LLOY GS SEB BBVA ISP CITI RBS BNP UBSN BARC UCG JPMC CBK GLE BAC MS SAN DBK ACA CSGN Note: Commerzbank “pain” ratio increases from 2.2% to 2.5% post rights issue Source: Berenberg research, company data 56 7% 8% 9% European Banks Banking Figure 29. Banks with liquid balance sheets also typically have stronger capital ratios Liquidity ratios – cash and central bank balances as % assets, selected banks, 31/12/12 0% 5% 10% 15% DNB SHBA STAN SAN DBK LLOY SEB RBS BARC UBSN SWEDA CSGN BBVA BNP GLE NDA HSBA EBS RBI DANSKE ACA CBK INGA KBC UCG ISP VONN BAER EFGN GS BAC CITI MS JPMC Note: Assets as per ratio 1; ie “plain” ratio Source: Berenberg research, company data 57 20% European Banks Banking Figure 30. Capital ratios at some banks are very sensitive to Level 3 valuation Tangible-equity-to-tangible-assets ratio – sensitivity to Level 3 valuations, individual banks, 31/12/12 Level 3 Assets as % Tangible Equity Barclays 49% BBVA 4% BNP Paribas 42% BoA 26% Citi 15% Commerzbank 13% Credit Agricole 16% Credit Suisse 133% Danske Bank 16% Deutsche Bank 96% DNB 114% EFG International 14% Erste 3% Goldman Sachs 76% Handelsbanken 2% HSBC 11% ING 11% Intesa 8% JP Morgan 62% Julius Baer 0% KBC 40% Lloyds 10% Morgan Stanley 55% Nordea 14% Raiffeisen 1% RBS 19% Santander 3% SEB 13% SocGen 18% Standard Chartered 13% Swedbank 0% UBS 37% Unicredit 23% Vontobel 0% Effect of Level 3 Asset Haircut on TE/TA ratio (bps) -10% -20% -30% -40% -50% -21 -41 -62 -83 -104 -2 -4 -6 -8 -10 -16 -32 -48 -64 -80 -16 -32 -48 -64 -81 -12 -23 -35 -46 -58 -5 -10 -14 -19 -24 -2 -5 -7 -10 -12 -38 -76 -115 -154 -193 -6 -12 -18 -24 -29 -29 -57 -86 -116 -145 -60 -120 -181 -243 -306 -5 -11 -16 -22 -27 -1 -3 -4 -6 -7 -49 -99 -150 -201 -252 -1 -1 -2 -3 -3 -6 -12 -17 -23 -29 -5 -10 -14 -19 -24 -4 -9 -13 -17 -22 -36 -73 -110 -147 -185 0 0 0 0 0 -22 -45 -68 -91 -114 -4 -9 -13 -17 -21 -33 -67 -101 -135 -169 -5 -11 -16 -22 -27 -1 -2 -2 -3 -4 -11 -22 -33 -44 -55 -1 -2 -3 -4 -5 -5 -10 -15 -20 -25 -5 -11 -16 -22 -27 -8 -16 -24 -32 -40 0 0 -1 -1 -1 -16 -32 -48 -65 -81 -12 -23 -35 -47 -59 0 0 0 0 0 Note: Tangible equity defined as reported equity less minorities and intangibles. Tangible assets defined as reported balance sheet assets less intangible assets and with derivatives netted off Source: Berenberg research, company data 58 European Banks Banking Figure 31. Capital generation is most sensitive to the cost of risk but also costs Capital generation relative to assets – sensitivity to key performance metrics (2013 estimates) Key Performance Metrics NIM Costs/ATA LLC/ATA RoA Barclays BBVA BNP Commerzbank Credit Agricole Credit Suisse Danske Bank Deutsche Bank DNB EFG International Erste Handelsbanken HSBC Intesa Julius Baer KBC Lloyds Nordea Raiffeisen RBS Santander SEB SocGen Standard Chartered Swedbank UBS Unicredit Vontobel Weighted Average Simple Average 0.80% 2.49% 1.09% 0.86% 0.72% 0.36% 0.99% 0.73% 1.22% 1.06% 2.30% 1.09% 1.35% 1.44% 0.86% 1.64% 1.16% 0.84% 2.42% 0.88% 2.37% 0.72% 0.93% 1.68% 1.12% 0.50% 1.55% 0.28% 1.09% 1.19% 1.27% 1.77% 1.25% 1.13% 0.64% 1.16% 0.78% 1.29% 0.91% 2.56% 1.91% 0.66% 1.44% 1.35% 2.80% 1.59% 1.08% 0.77% 2.37% 1.10% 1.63% 0.89% 1.28% 1.63% 0.86% 1.96% 1.62% 2.85% 1.27% 1.45% 0.22% 0.87% 0.21% 0.26% 0.16% 0.01% 0.23% 0.08% 0.15% 0.00% 0.84% 0.07% 0.22% 0.65% 0.00% 0.41% 0.56% 0.13% 0.73% 0.41% 0.95% 0.04% 0.28% 0.21% 0.02% 0.01% 0.78% 0.00% 0.30% 0.30% 0.23% 0.85% 0.27% 0.05% 0.12% 0.17% 0.25% 0.12% 0.59% 0.54% 0.28% 0.57% 1.19% 0.30% 0.60% 0.60% 0.04% 0.48% 0.29% 0.04% 0.45% 0.50% 0.23% 0.82% 0.80% 0.15% 0.13% 0.58% 0.34% 0.40% Annual Capital Generation If … Costs -10% NII + 5% LLC - 25% (bp assets) (bp assets) (bp assets) 9 3 4 12 9 15 9 4 4 8 3 5 4 3 3 8 1 0 5 3 4 9 3 1 6 4 3 18 4 0 13 8 15 5 4 1 10 5 4 9 5 16 20 3 0 11 6 7 8 4 10 5 3 2 17 8 13 8 3 7 11 8 17 6 3 1 9 3 5 11 6 4 6 4 0 14 2 0 11 5 19 20 1 0 9 4 5 10 4 6 Note: For simplicity, 30% tax rate assumed for all banks except calculation of LLC sensitivity of Intesa and Unicredit as LLC are not tax deductible Source: Berenberg research, company data 2. How to make good the shortfall Before discussing the options for making good any shortfall in capital, it is worth putting the scale of the deficit into context. As shown in Figure 32 below, between end-2009 and end-2012, the tangible equity of the listed European banks in our coverage universe increased by c€200bn, of which €75bn came from Eurozone banks. Over the next three years, we estimate that tangible equity will increase by €150bn and €75bn respectively. The estimates are based on retained earnings and only include the capital raises, already announced, from Commerzbank and Deutsche Bank. 59 European Banks Banking Figure 32. Europe has transformed its capital base before Tangible equity – aggregate listed European and Eurozone banks (€bn) 1,200 Total Europe Euro-Zone 1,000 800 600 400 200 0 2009 2010 2011 2012 2013e 2014e 2015e Note: Aggregate of banks covered by Berenberg Source: Berenberg research, company data In order to make good the capital deficit identified above, banks have the option of permanent or contingent capital combined with an unspecified time period. We also discuss the incentives required to encourage compliance. a. Permanent capital Classically, banks can either raise fresh equity (eg accelerated book-build or rights issue) or retain earnings. The impact of retained earnings can be boosted by reducing or passing the dividend and/or generating capital gains through disposing of assets (whole businesses or equity stakes). However, banks, especially Eurozone banks, will struggle to make good their deficits through retained earnings. As can be seen in Figure 33, the listed European banks under our coverage are expected to generate €80bn of net income (ie before dividends) in 2013, of which €30bn comes from Eurozone banks. As noted in Figure 31, de-costing and de-risking the balance sheet can boost capital generation relative to assets by c15bp on average. Note: while the listed banks that we cover do not represent the whole European sector (there are also the small listed and the unlisted banks), our coverage accounts for 51% of all Eurozone banks by revenues and 65% of all EU27 banks by revenues. More importantly, they accounted for all of the net income in their respective geographies in 2011 and 2012! 60 European Banks Banking Figure 33. Retained earnings will take years to make good the deficit Net income – aggregate of listed European and Eurozone banks (€bn) 120 Total Europe Euro-Zone 100 80 60 40 20 0 2009 2010 2011 2012 2013e 2014e 2015e Note: Aggregate of banks covered by Berenberg Source: Berenberg research, company data For investment banks, one option to rebuild capital bases quickly is to retain employee bonuses. We discussed such an instrument – Capital Adequacy Buffer Securities (CABS) – in Investment Banks: Time to change the model, 20 July 2012. A more contentious option is to shrink the balance sheet through running down or selling the loan book. Unpopular with politicians, it is arguably inevitable given the end of the debt cycle and planned deleveraging by the private sector. Note also, as some have pointed out (eg Admati and Hellwig), that capital is a financing decision and in theory should not affect the asset side of the balance sheet. Only marginally profitable business may be affected by a change in the funding mix. Another option used by many banks to meet Basel capital ratios is “RWA optimisation”, but this is not an option with an unweighted equity-to-assets ratio by definition. Figure 34 highlights changes in the average risk weight (RWA/assets) for the major European banks since Q1 2011; ie just before the EBA’s infamous stress test. We note the following. Average decrease in average risk weights over the last two years is 5.5% points on a simple basis and 3.5% points on a weighted basis. Banks least likely to “optimise” their RWA were the Swiss banks (where average risk weights typically increased) and the UK banks. Both the Swiss and the UK regulators have been at the forefront of over-riding the riskweight process. Banks most likely to “optimise” their RWA were banks in the periphery – specifically Italy, Spain, Portugal and Ireland. The most surprising results (positively) were Santander, Commerzbank and Unicredit which ranked just above the median value; and Deutsche Bank which ranked in the top quartile. The most surprising results (negatively) were SEB and Nordea. 61 European Banks Banking Figure 34. Hmmm…the bigger the pressure on capital, the bigger the drop in average risk weights Average risk weights – change Q1 2011 to date, European banks (top 50 listed) -30% -20% -10% 0% 10% 20% Credit Suisse UBS RBS St. Galler KB Walliser KB Standard Chartered Berner KB BNP Barclays Luzerner KB Deutsche Bank Pohjola Deutsche Postbank Mediobanca HSBC CIC KBC DNB Handelsbanken Unicredit Santander Commerzbank Julius Baer Komercní banka SocGen Öst. Volksbanken Raiffeisen Danske Bank BBVA Credit Agricole Swedbank BCV Lloyds Erste Monte dei Paschi Nordea Intesa Natixis BPER BoI SEB AIB Sabadell BES CaixaBank Bankinter UBI Banco Popular Banco de Valencia Banco Popolare Note: Average risk weight defined as RWA as % total assets on balance sheet Source: Berenberg research, SNL b. Contingent capital Contingent capital is defined as capital not currently on the bank’s balance sheet but available at the bank’s discretion and/or subject to certain criteria being met. To be effective, the market (and regulator) must believe in its availability. 62 European Banks Banking Contingent Convertibles (CoCos) are one form where debt is converted to equity subject to certain conditions. We have been critical of these from their inception. CoCos suffer from a “time consistency” problem – at the point that they need to be triggered, they are unlikely to be triggered as management fears the consequences of the trigger. The problems with the trigger are both the level and defining if it has happened. In some cases, the trigger is based on a CT1 capital ratio below 7%, which under Basel III is where dividend and bonus payments are restricted and a bank would be perceived as being in increasingly severe difficulty. Defining the trigger is also fraught: accounting triggers suffer from the timeliness of the accounting data; market-based triggers can be affected by volatility and manipulated; while regulatory triggers are potentially ad hoc in nature and thus uncertain. We have in mind three other instruments, one proposed and two historical. Finaxiom’s “standby capital”. A UK financial services partnership, Finaxiom, has developed a form of contingent capital which it describes as “standby capital”. It takes the form of an “on-demand” financial contract. The contingent capital pledged by an investor is backed by assets provided by the investor and held in a ring-fenced SPV. The investor promises to deliver the liquidity upon demand by the bank in return for an annual fee (equating to a yield of +/- 8% pa) and equity at a pre-agreed discount to the bank’s share price or NAV at the time of any call. The trigger is simple – it is at the discretion of the bank’s management rather than being based on a capital ratio being breached. The investor keeps the return on his pledged assets as well as receiving the generous retainer fee. The contract is a fiveyear rolling term reviewable annually as to risk profile within agreed parameters. Our understanding is that it has received regulatory support as well as interest from both investors and issuers; ie banks and others. It has echoes of two earlier forms of contingent capital – reserved liability in the UK and double liability in the US and Canada, both prevalent from the mid-19th century to the mid-20th century. Both, however, were only triggered on bankruptcy. Reserved liability. The UK’s Joint Stock Bank Act of 1879 introduced the concept of “reserved liability” to address the perceived disadvantages of the then prevalent unlimited liability. The influential banker George Rae (Chairman of the North and South Wales Bank) persuaded the government to “adopt a system of ‘reserved liability’, whereby any capital not called up was divided between shares on call at the discretion of the bank’s directors and reserve share capital which could only be called in the event of bankruptcy”. In other words, share capital not called up or fully paid. Reserved liability remained in use in the UK at least into the 1930s. In 1934, Midland Bank’s share capital was divided into £12 par stock, of which £2.50 was paid in, £2.50 was callable and £7 was a reserve liability “of shareholders to creditors”. Was it effective? We note its use in the UK coincided with the 100-year absence of financial crises (defined as a threat to the payments system) between 1866 and the early 1970s. Double liability. Double liability appeared in North America at about the same time as “reserved liability” in the UK. It remained in existence at least until the 1930s. Under double liability, stockholders in US and Canadian banks were liable for further losses over and above their equity investment up to the par value of the stock. 63 European Banks Banking “In event of the property and assets of the bank being insufficient to pay its debts and liabilities, each shareholder of the bank shall be liable for the deficiency to an amount equal to the par value of the shares held by him, in addition to any amount not paid up on such shares.” Bank Act of 1871, Canada c. Time period The time period over which banks can make good any deficit identified is perhaps as important as the means by which any deficit is filled. If banks had to do so within one year, it would clearly place enormous strain on the system. If banks were allowed 10 years, it would lack credibility given the likely reoccurrence of the next crisis. The answer lies somewhere in between and will vary depending on whether capital is permanent or contingent. d. Incentives We have long argued that bank regulation should be based around incentives not rules (see European Banks: Mad, bad and dangerous to know, 28 January 2013). Banks will always “game” rules, but the right incentives should in theory align bank behaviour with that desired by their stakeholders. Possible incentive reforms we have discussed in the past include: setting a high minimum dividend payout ratio to stop banks growing and therefore taking on risk; for investment banks, dividend decisions should be taken at the same time as variable compensation decisions so that the two are balanced; less frequent reporting of results (the EC has recently announced that all corporates can drop quarterly reporting from 2015. Banks take note!); allowing the bank to fail “to encourage the others”. Writing in the Financial Times, a Harvard law professor (Mark Roe) proposed changing the tax treatment of debt. (In most jurisdictions, interest payments on debt for all corporates, including banks, are tax deductible.) “With debt taxed more and equity taxed less by such a reform, the incentives inside big banks would better align with Brown-Vitter”, where Brown-Vitter’s bill in the US argues that “banks should hold much more capital to absorb losses and have less risky debt”. As noted earlier, the reduction in equity ratios in the UK through the 1970s coincided with the introduction of corporation tax in the mid-1960s, which effectively made debt financing cheaper relative to equity. Clearly this would affect retail deposits as well as wholesale debt, but given current interest rates on deposit products are so low, the impact would be minimal. 3. Addressing the RoE impact Lower leverage reduces a bank’s RoE, all other things being equal. In order to reduce or even eliminate the impact on its economic profit (RoE less cost of equity), a bank has two choices: Increase RoA. In theory, a better capitalised bank is a less risky proposition to depositors and bond holders who are therefore likely to accept a lower return. We would also look to banks to reduce their asset risk; ie de-risk the bank’s balance sheet. As the CEO of Handelsbanken (one of the very few European banks with a credit culture) repeatedly points out, the only acceptable target for loan losses is zero. Swedbank’s new management team under Michael Wolf has shown the very clear benefits of adopting such a 64 European Banks Banking strategy. Reduce cost of equity. Linked to increasing RoA, a better capitalised bank and a bank with a less risky balance sheet is likely to enjoy a lower cost of equity. For example, the implied cost of equity for European banks between 1 January 2007 and 31 August 2011 was 10.7% but only 9.3% for the Swedish banks. 4. Catalysts for change There are several catalysts which may crystallise the capital deficits we believe that European banks face. Investor/market pressure. This has been limited to date beyond bringing forward compliance with Basel III from 2019 to now. As some participants have observed, if the regulator does not want more capital and management does not want more capital, why should I ask for more capital? Bank management voluntarily building capital. Turkeys may not vote for Christmas, but such a scenario is not impossible given the example of the Swedish banks, especially Swedbank and Handelsbanken. If a bank were to see a funding advantage (the argument pushed by the Swedish banks), then it may chose to build capital ratios beyond what the regulator demands. However, it remains unlikely – certainly peer pressure is unlikely to prompt it, as the CEO of Danske Bank admitted on the Q1 conference call. “We have a relatively high leverage…a low leverage ratio that is but we’re not so concerned about that at the moment. We have different ways to operate the bank. It’s not a specific problem for Danske Bank. I think you have that problem across Europe, where European banks need to discuss what is relevant, what is the relevant mission, and so on.” Eivind Kolding, CEO Danske Bank (May 2013) Political/regulatory pressure following bank balance sheet audits. We believe that this is the most likely driver and note the change in sentiment in the last month or so, with the ECB now falling into line with the Bank of England’s thinking. “We need to create full transparency about the risks on banks’ balance sheets. Such transparency is a pre-condition for the banking sector to return to lasting health. And a healthy banking sector is a pre-condition to revitalising bank lending.” Mario Draghi, President ECB (June 2013) “I am not sure advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values, and recapitalisation of their financial systems. Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery...Just as in 2008, there is a deep reluctance to admit the extent of the undercapitalisation of the banking system in parts of the industrialised world…[The] pretence that debts could be repaid [was comparable to the 1930s]. We must not repeat that mistake.” Mervyn King, Governor of the Bank of England (October 2012) Both the EBA and the ECB plan to conduct an audit of bank balance sheets beginning in late 2013 and concluding sometime in H1 2014. The EBA’s motivation is to try to regain credibility for its next set of stress tests (Dexia 65 European Banks Banking was ranked the 13th strongest bank in the July 2011 stress test, months before it failed). The ECB’s motivation is to understand what risks it is taking on when it becomes the single supervisor in the Eurozone. We cannot stress enough the significance of the EBA/ECB balance sheet audits. As we argued in a recent note (European Banks: Europe – the final countdown, 20 May 2013), this could be Europe’s Japanese moment. As shown in Figure 35, Japan’s Takenaka plan (where banks were forced to come clean about the state of their balance sheets and to recapitalise them) marked the end of a 10-year bear market in banks. See UK Banks: Financial repression to bear on the sector, 29 February 2012, for more detail of the plan. Figure 35. “I think I’m turning Japanese, I really think so.” Share price performance – banks versus market, Japan (actual) versus Europe (2005 rebased to 1993) 120 Japan Europe 110 100 90 Takenaka plan announced 80 70 60 50 40 30 20 93 95 97 99 01 03 05 07 09 11 13 Source: Berenberg research, DataStream To conclude our discussion of potential catalysts for banks raising capital, we highlight recent comments from the German Finance Minister. “The single supervisor, scheduled to start operating under the European Central Bank in the summer of 2014, will not only help prevent banks from accumulating excessive risk. Standing above national authorities, it will increase the pressure on banks to repair their balance sheets.” Wolfgang Schäuble, Minister of Finance, Germany The German Finance Minister’s comments from an op-ed written for the Financial Times in May 2013 contain two clear messages. Banks must repair their balance sheets. This has two implications: recognition of the true value of assets and ensuring the provision of adequate capital within the liability structure of a bank. Banks cannot be trusted. The phrase “help prevent banks from accumulating excessive risk” is rather chilling, in our view. It clearly suggests that the authorities bluntly do not trust banks any longer to do their job – which is, quite simply, to manage risk. Banking is about nothing else, period. 66 European Banks Banking Feedback on our views “You have been wrong! If I listened to the team over the last year I would have lost my job.” While we have been negative on European banks overall, some of our biggest concerns have been with the Eurozone banks. In contrast, we have been very positive on the Nordic banks as well as more broadly a group of banks we have identified as long-term winners (ING, KBC, HSBC, UBS, Swedbank and Handelsbanken). As we note in the introduction to this report, Eurozone banks have been weak performers in the nine months following OMT. In absolute terms, they are now back to levels reached on 11 September 2012 in the immediate aftermath of the OMT euphoria. Relative to the broader Eurozone market, banks are now below the level reached on 5 September, the day OMT was announced. Looking back over the last 40 years, in relative terms Eurozone banks have only been lower than they are today during May, June and July last year and April this year. Bar the depths of last July’s meltdown, the relative is only 10% off the lowest it has ever been – in 40 years! In contrast, Nordic banks have increased in absolute terms and outperformed both the sector and the market over one-, three-, six- and 12-month periods. “Timing: the structural issues that the team are talking about may not materialise for a long time. What should I do in the short term?” In the past, we have advocated a barbell strategy. The safe end of the barbell would be made up of our long-term winners (ING, KBC, HSBC, UBS, Swedbank and Handelsbanken) which are characterised as managing for secular decline and having relatively strong balance sheets. The other end of the barbell would include the better-quality Eurozone banks such as Intesa, BBVA and BNP (note: all Sell-rated). “The government will want to support the Eurozone recovery and will therefore not put pressure on banks to raise capital. The conclusions of the ECB’s balance sheet review will be watered down.” Political interference is a major risk to our view. But as both the ECB and German/Dutch finance ministers have finally realised, until bank balance sheets have been cleaned up, bank lending will remain constrained. It took the Japanese authorities until 2002 to realise this, leading to the “lost decade”. That said, the ultimate problem is one of demand, in our view – the end of a 70-year debt cycle will be characterised by weak loan growth regardless of banks’ propensity to lend. “The central banks will save the day.” Short-term possibly, but we would make two points. First, the ECB has fallen into line with the Bank of England’s thinking that bank balance sheets must be fixed. Second, there is a growing awareness (concern even) that the limits of monetary policy have been reached. The Federal Reserve minutes reveal a debate on this point. Others have been more vocal. A Spanish economics professor has likened modernday central banking to Soviet-era central planning – both assume the possession of perfect knowledge when in fact they have anything but. Bill Gross, co-CIO and founder of Pimco, has also criticised central bank policies on the simple premise that they “don’t seem to be working very well”, leading him to conclude that it is their “policies that may be now part of the problem rather than the solution”. 67 European Banks Banking “What stocks would you own if you were more positive on the macro environment in Europe?” If we were more positive on the macro environment in Europe and therefore by extension the outlook for growth, we would favour those banks which currently have high loan loss charges (LLC) relative to their pre-provision operating profits (PPOP). Our bear case is based on anaemic economic growth forcing the crystallisation of hidden loan losses (which arise from unsustainable forbearance), thus making loan losses higher for longer. We have always been clear that this is one of the basic building blocks of our bear case. Change the growth assumption and we would be more constructive. Banks where the ratio of PPOP to LLC is very low include much of the Eurozone but we would highlight: Italian, Spanish and Austrian banks. “Post the current correction, the rotation out of bonds into equities and from defensives into riskier names will resume. In this environment, you must own banks.” This is broadly similar to the point above. The current correction in the market has been attributed to the rapid rise in real interest rates leading to volatility in the pricing of a wide range of financial assets. The bull case runs that higher real rates reflect positive expectations for economic growth. This in turn would reduce loan loss assumptions for banks and therefore lead to a rapid increase in consensus estimates. Note that over the very long-term – 30+ years – the performance and returns of banks are negatively correlated with the level of interest rates, reflecting the bondlike characteristics of a bank’s balance sheet. Note also that to sustain the current valuation of many European banks, you need earnings to increase – and lower loan loss charges are the most realistic driver. “Capital: regulators aren’t worried about it; management aren’t worried about it; why should I worry about it?” This argument was valid in 2006 and 2007. More seriously, we would note that regulators and politicians are beginning to worry. We note comments in the last month from the German/Dutch finance ministers and especially from the ECB which all suggest that the prime concern has become the quality of bank balance sheets, for which read capital levels. 68 European Banks Banking Valuation Figure 36. European bank valuation – earnings Printed 11 Jun 13 Benelux ING KBC Price Consensus EPS 2013E 2014E 2015E EPS Growth 12E/13E 13E/14E 14E/15E Consensus P/E 2013E 2014E 2015E 2013E DPS 2014E 2015E 2013E Yield 2014E 6.99 30.9 1.00 3.55 1.12 4.02 1.16 4.28 4% 6% 11% 13% 4% 6% 7.0x 8.7x 6.3x 7.7x 6.0x 7.2x 0.02 0.08 0.16 0.66 0.31 1.01 0.3% 0.3% 2.2% 2.1% Russia, C & Eastern Europe Erste Group Komercni Bank Pekao PKO BP OTP Bank Raiffeisen Bank International Sberbank 23.8 3722 172 36.8 5080 25.4 97.8 2.01 321 10.1 2.55 538 3.05 16.86 2.81 335 10.9 2.92 615 3.85 18.19 3.30 358 12.1 3.25 786 4.54 20.61 40% -10% -9% -16% 12% -13% 8% 40% 5% 8% 15% 14% 26% 8% 17% 7% 11% 11% 28% 18% 13% 11.8x 11.6x 17.0x 14.4x 9.4x 8.3x 0.2x 8.5x 11.1x 15.7x 12.6x 8.3x 6.6x 0.2x 7.2x 10.4x 14.1x 11.3x 6.5x 5.6x 0.1x 0.51 223 7.86 1.42 155 1.00 3.37 0.70 237 8.48 1.54 220 1.06 3.60 0.86 243 9.68 1.82 252 1.26 3.98 2.1% 6.0% 4.6% 3.9% 3.1% 3.9% nm 2.9% 6.4% 4.9% 4.2% 4.3% 4.2% nm France BNP Paribas Credit Agricole Natixis Societe Generale 43.9 7.01 3.49 29.7 4.73 0.93 0.32 3.23 5.42 1.15 0.37 4.16 6.31 1.32 0.41 5.00 -15% 47% 5% 11% 15% 24% 17% 29% 16% 15% 11% 20% 9.3x 7.6x 11.0x 9.2x 8.1x 6.1x 9.4x 7.1x 7.0x 5.3x 8.5x 5.9x 1.72 0.28 0.14 0.94 2.07 0.32 0.20 1.50 2.44 0.41 0.18 1.90 3.9% 3.9% 4.0% 3.2% 4.7% 4.5% 5.6% 5.0% Germany Commerzbank Deutsche Bank 7.59 36.2 0.50 4.07 0.90 4.77 1.25 5.82 -48% 13% 80% 17% 40% 22% 15.3x 8.9x 8.5x 7.6x 6.1x 6.2x 0.00 0.82 0.07 1.06 0.37 1.46 0.0% 2.3% 1.0% 2.9% Italy Banca Monte Paschi Siena Banca Popolare di Milano Banco Popolare Intesa Sanpaolo Mediobanca UBI Banca Unicredit 0.23 0.40 1.05 1.36 4.96 3.17 3.99 -0.02 0.02 0.09 0.11 0.31 0.16 0.19 0.01 0.04 0.15 0.14 0.57 0.29 0.37 0.02 0.05 0.21 0.18 0.65 0.39 0.55 -33% 15% nm -13% -41% -25% -4% nm 74% 64% 37% 83% 87% 93% 156% 30% 33% 23% 14% 32% 49% nm 17.2x 11.2x 13.0x 15.9x 20.2x 20.8x 25.2x 9.9x 6.8x 9.5x 8.7x 10.8x 10.8x 9.9x 7.6x 5.1x 7.7x 7.6x 8.2x 7.2x 0.00 0.01 0.02 0.05 0.08 0.06 0.08 0.00 0.01 0.04 0.07 0.19 0.10 0.13 0.00 0.02 0.06 0.09 0.22 0.14 0.18 0.0% 1.8% 1.8% 3.7% 1.6% 1.9% 2.1% 0.4% 3.5% 3.9% 4.8% 3.7% 3.2% 3.1% Portugal Millennium BCP Banco Espirito Santo Banco BPI 0.10 0.72 0.97 -0.02 0.00 0.07 0.00 0.06 0.10 0.02 0.12 0.14 -75% nm -27% nm nm 37% 350% 83% 43% nm nm 13.3x 25.0x 11.3x 9.7x 5.6x 6.2x 6.8x 0.00 0.00 0.00 0.00 0.01 0.00 0.00 0.02 0.00 1.0% 0.1% 0.2% 1.0% 1.8% 0.4% 113.5 92.0 225.5 79.1 12.3 67.8 51.3 284.2 152.8 8.75 9.25 21.0 0.82 1.07 5.82 6.17 21.6 13.3 12.2 10.46 25.5 0.91 1.15 6.26 6.74 22.9 14.2 14.2 11.19 28.6 0.99 1.24 6.68 6.89 24.3 14.9 60% 11% 90% 9% -23% 9% 18% 1% 9% 39% 13% 21% 12% 7% 8% 9% 6% 7% 16% 7% 12% 8% 8% 7% 2% 6% 5% 13.0x 9.9x 10.7x 11.1x 11.5x 11.6x 8.3x 13.2x 11.5x 9.3x 8.8x 8.9x 9.9x 10.7x 10.8x 7.6x 12.4x 10.8x 8.0x 8.2x 7.9x 9.2x 9.9x 10.2x 7.4x 11.7x 10.2x 2.27 2.15 0.00 0.41 0.56 3.09 1.56 11.4 10.13 4.35 2.46 0.00 0.48 0.60 3.32 1.73 12.1 10.64 5.50 3.69 0.00 0.51 0.65 3.54 1.96 12.9 11.13 2.0% 2.3% 0.0% 4.5% 4.5% 4.6% 3.0% 4.0% 6.6% 3.8% 2.7% 0.0% 5.2% 4.8% 4.9% 3.4% 4.3% 7.0% Spain Bankinter BBVA Banco de Sabadell Banco Popular Banesto Caixabank Santander 2.85 6.94 1.40 0.63 3.51 2.67 5.41 0.20 0.70 0.08 0.02 0.38 0.10 0.49 0.26 0.81 0.17 0.07 0.53 0.28 0.60 0.31 0.97 0.23 0.09 0.67 0.36 0.70 44% 80% 160% nm nm 870% 35% 27% 16% 115% 360% 39% 184% 24% 20% 19% 38% 29% 26% 29% 16% 14.2x 9.9x 17.9x nm 9.2x 27.5x 11.1x 11.1x 8.5x 8.3x 9.1x 6.6x 9.7x 9.0x 9.3x 7.2x 6.0x 7.1x 5.2x 7.5x 7.7x 0.09 0.42 0.03 0.00 0.13 0.21 0.57 0.11 0.41 0.07 0.03 0.22 0.20 0.52 0.14 0.45 0.09 0.04 0.30 0.21 0.54 3.2% 6.0% 2.3% 0.6% 3.7% 7.8% 10.5% 4.0% 6.0% 4.8% 5.2% 6.3% 7.3% 9.6% Switzerland BCV Credit Suisse EFG International Julius Baer UBS Vontobel 477 27.1 11.45 37.0 16.9 29.5 33.4 2.57 1.00 2.15 0.97 2.30 34.1 2.98 1.11 2.76 1.29 2.68 36.2 3.30 1.33 3.45 1.67 2.99 -4% 45% 31% 3% 30% 14% 2% 16% 11% 28% 32% 17% 6% 11% 20% 25% 29% 11% 14.3x 10.5x 11.5x 17.2x 17.3x 12.8x 14.0x 9.1x 10.4x 13.4x 13.1x 11.0x 13.2x 8.2x 8.6x 10.7x 10.1x 9.8x 32.8 0.84 0.18 0.61 0.24 1.29 33.6 1.13 0.33 0.69 0.53 1.43 33.8 1.34 0.51 0.97 1.18 1.59 6.9% 3.1% 1.6% 1.6% 1.4% 4.4% 7.0% 4.2% 2.9% 1.9% 3.1% 4.8% Turkey Akbank Garanti Bank Turkiye Is Bankasi Yapi Kredi 8.14 8.50 5.90 4.84 0.84 0.88 0.75 0.58 0.89 0.93 0.77 0.61 1.01 1.04 0.84 0.71 23% 12% 11% 28% 6% 7% 3% 6% 14% 12% 9% 16% 9.7x 9.7x 7.9x 8.4x 9.2x 9.1x 7.7x 7.9x 8.1x 8.1x 7.0x 6.8x 0.21 0.21 0.16 0.07 0.25 0.24 0.18 0.06 0.29 0.28 0.20 0.07 2.5% 2.5% 2.7% 1.5% 3.1% 2.8% 3.0% 1.3% UK & Ireland Barclays HSBC Lloyds RBS Standard Chartered Bank of Ireland 309 700 61.6 334.0 1480 0.171 36.6 98 4.57 21.62 232 -0.02 43.9 108 5.88 31.06 252 0.00 51.2 120 6.84 37.31 274 0.01 3% 9% 80% 33% 8% -66% 20% 10% 29% 44% 9% nm 17% 10% 16% 20% 9% 250% 8.4x 11.0x 13.5x 15.4x 9.9x nm 7.0x 10.0x 10.5x 10.8x 9.1x nm 6.0x 9.1x 9.0x 9.0x 8.4x 12.2x 7.31 52.1 0.11 0.05 91.90 0.00 9.68 57.8 1.09 1.54 100.50 0.00 13.64 65.9 2.31 7.25 110.50 0.00 2.4% 4.8% 0.2% 0.0% 4.0% 0.0% 3.1% 5.3% 1.8% 0.5% 4.4% 0.0% Scandinavia Danske DNB Jyske Bank Nordea Pohjola SEB Sparebank 1 SR Svenska Handelsbanken Swedbank Source: Berenberg research, DataStream 69 European Banks Banking Figure 37. European bank valuation – book Printed 11 Jun 13 Benelux ING KBC Consensus BVPS 2013E 2014E Consensus P/BV 2013E 2014E Consensus TBVPS 2013E 2014E TBVPS Growth 12E/13E 13E/14E Consensus P/TBV 2013E 2014E RoE 2013E 2014E RoTE 2013E 2014E 14.35 31.08 14.99 33.97 0.49x 0.99x 0.47x 0.91x 13.26 29.15 13.90 30.60 8% 15% 5% 5% 0.53x 1.06x 0.50x 1.01x 7.2% 11.8% 7.6% 12.4% 7.9% 13.1% 8.2% 13.5% 30.1 2620 90.4 20.7 6061 42.3 85.22 32.1 2711 93.0 22.1 6590 45.0 100.10 0.79x 1.42x 1.90x 1.78x 0.84x 0.60x 0.04x 0.74x 1.37x 1.84x 1.66x 0.77x 0.57x 0.03x 22.5 2494 88.3 19.8 5121 36.3 2.89 24.4 2589 92.3 21.3 5484 38.2 3.44 7% 8% 6% 9% 11% 0% 21% 9% 4% 4% 8% 7% 5% 19% 1.06x 1.49x 1.94x 1.86x 0.99x 0.70x 1.05x 0.98x 1.44x 1.86x 1.73x 0.93x 0.66x 0.88x 7.0% 12.9% 11.3% 12.6% 9.2% 7.3% 21.6% 9.0% 12.6% 11.9% 13.6% 9.7% 8.8% 19.6% 9.3% 13.4% 11.8% 13.4% 11.1% 8.4% nm 12.0% 13.2% 12.1% 14.2% 11.6% 10.3% nm 65.2 16.6 5.63 60.2 68.0 17.4 5.85 62.6 0.67x 0.42x 0.62x 0.49x 0.65x 0.40x 0.60x 0.47x 54.8 10.4 4.86 49.2 58.3 11.3 5.02 52.1 8% 4% 4% 3% 7% 9% 3% 6% 0.80x 0.67x 0.72x 0.60x 0.75x 0.62x 0.70x 0.57x 7.5% 5.8% 5.6% 5.5% 8.1% 6.8% 6.5% 6.8% 9.0% 9.1% 6.6% 6.7% 9.6% 10.6% 7.5% 8.2% 23.95 58.0 24.23 61.5 0.32x 0.62x 0.31x 0.59x 21.63 45.7 20.80 48.5 -23% 2% -4% 6% 0.35x 0.79x 0.36x 0.75x 1.8% 7.0% 3.7% 8.0% 2.0% 9.0% 4.2% 10.1% Italy Banca Monte Paschi Siena Banca Popolare di Milano Banco Popolare Intesa Sanpaolo Mediobanca UBI Banca Unicredit 0.56 1.05 4.71 2.93 7.96 10.4 10.3 0.61 1.11 4.82 3.00 8.45 10.7 10.5 0.40x 0.38x 0.22x 0.46x 0.62x 0.30x 0.39x 0.37x 0.36x 0.22x 0.45x 0.59x 0.30x 0.38x 0.50 1.00 3.72 2.22 7.57 7.75 8.38 0.48 1.07 3.84 2.29 8.06 7.92 8.6 -26% -10% -1% 3% 5% 6% 1% -5% 7% 3% 3% 6% 2% 2% 0.45x 0.40x 0.28x 0.61x 0.65x 0.41x 0.48x 0.47x 0.37x 0.27x 0.59x 0.61x 0.40x 0.47x nm 2.1% 1.9% 3.6% 4.0% 1.5% 1.8% 1.5% 3.7% 3.2% 4.9% 7.0% 2.8% 3.6% nm 2.2% 2.5% 4.8% 4.2% 2.1% 2.3% 1.8% 3.9% 4.1% 6.4% 7.3% 3.7% 4.4% Portugal Millennium BCP Banco Espirito Santo Banco BPI 0.14 1.56 1.33 0.15 1.73 1.47 0.71x 0.46x 0.73x 0.68x 0.42x 0.66x 0.14 1.59 1.41 0.15 1.64 1.58 -18% 2% 1% 4% 3% 12% 0.71x 0.45x 0.69x 0.69x 0.44x 0.62x nm nm 5.9% 2.8% 3.9% 7.2% nm nm 5.2% 2.8% 4.0% 6.7% Scandinavia Danske DNB Jyske Bank Nordea Pohjola SEB Sparebank 1 SR Svenska Handelsbanken Swedbank 144 85.0 242 7.35 9.21 52.5 54.4 174 96.3 153 93.4 265 7.80 9.78 55.6 59.8 184 99.7 0.79x 1.08x 0.93x 1.23x 1.34x 1.29x 0.94x 1.63x 1.59x 0.74x 0.99x 0.85x 1.16x 1.26x 1.22x 0.86x 1.54x 1.53x 125 81.8 238 6.53 6.31 46.1 53.6 164 85.5 134 90.2 261 6.97 6.94 49.2 59.1 174 88.4 6% 10% 10% 6% 11% 1% 13% 9% 4% 7% 10% 10% 7% 10% 7% 10% 6% 3% 0.91x 1.13x 0.95x 1.39x 1.95x 1.47x 0.96x 1.74x 1.79x 0.85x 1.02x 0.86x 1.30x 1.78x 1.38x 0.87x 1.63x 1.73x 6.2% 11.4% 9.1% 11.4% 12.3% 11.1% 12.0% 12.8% 14.0% 8.2% 11.7% 10.0% 12.0% 12.1% 11.6% 11.8% 12.8% 14.5% 7.2% 11.9% 9.3% 12.9% 17.9% 12.7% 12.2% 13.8% 15.9% 9.4% 12.2% 10.2% 13.5% 17.3% 13.2% 11.9% 13.6% 16.3% Spain Bankinter BBVA Banco de Sabadell Banco Popular Banesto Caixabank Santander 3.70 7.96 2.80 1.06 7.18 4.36 6.94 3.82 8.43 2.87 1.12 7.31 4.38 7.1 0.77x 0.87x 0.50x 0.59x 0.49x 0.61x 0.78x 0.75x 0.82x 0.49x 0.57x 0.48x 0.61x 0.77x 3.46 6.44 2.41 0.84 7.04 3.77 4.70 3.48 6.90 2.47 0.91 7.36 3.83 4.86 7% 9% -4% -16% 0% -10% -5% 0% 7% 3% 8% 5% 2% 3% 0.82x 1.08x 0.58x 0.75x 0.50x 0.71x 1.15x 0.82x 1.01x 0.57x 0.69x 0.48x 0.70x 1.11x 5.6% 9.1% 2.7% 1.3% 5.3% 2.2% 6.9% 6.8% 9.9% 5.9% 6.3% 7.3% 6.3% 8.6% 6.0% 11.3% 3.2% 1.6% 5.4% 2.4% 10.1% 7.4% 12.2% 6.9% 7.9% 7.4% 7.2% 12.6% Switzerland BCV Credit Suisse EFG International Julius Baer UBS Vontobel 388 27.0 9.40 22.7 12.7 25.2 391 29.1 10.26 23.7 13.5 26.4 1.23x 1.00x 1.22x 1.63x 1.32x 1.17x 1.22x 0.93x 1.12x 1.56x 1.25x 1.12x 386 21.5 6.72 12.1 11.2 23.4 390 23.5 7.59 13.0 11.9 24.4 2% 2% 8% -8% -4% 8% 1% 9% 13% 8% 7% 4% 1.23x 1.26x 1.70x nm 1.51x 1.26x 1.22x 1.16x 1.51x 2.84x 1.42x 1.21x 8.6% 9.6% 11.6% 9.5% 7.6% 9.4% 8.7% 10.6% 11.3% 11.9% 9.8% 10.4% 8.7% 12.1% 15.3% 17.1% 8.6% 10.2% 8.8% 13.2% 15.5% 22.0% 11.2% 11.2% Turkey Akbank Garanti Bank Turkiye Is Bankasi Yapi Kredi 6.00 5.67 5.58 4.08 6.65 6.34 6.15 4.71 1.36x 1.50x 1.06x 1.19x 1.22x 1.34x 0.96x 1.03x 6.00 5.73 5.55 3.87 6.66 6.41 6.17 4.42 17% 17% 20% 22% 11% 12% 11% 14% 1.36x 1.48x 1.06x 1.25x 1.22x 1.33x 0.96x 1.09x 15.0% 16.5% 14.7% 15.5% 14.1% 15.5% 13.1% 13.9% 15.0% 16.5% 14.7% 16.4% 14.0% 15.4% 13.2% 14.7% 423 975 62.5 570.2 1930.4 0.21 450 1028 66.0 591.1 2087.1 0.22 0.73x 1.11x 0.99x 0.59x 1.19x 0.81x 0.69x 1.06x 0.93x 0.57x 1.10x 0.78x 368 825 56.3 462.4 1659.9 0.19 396 881 60.0 485.0 1812.9 0.20 -1% 9% -1% -1% 12% -5% 8% 7% 7% 5% 9% 3% 0.84x 1.32x 1.09x 0.72x 1.38x 0.90x 0.78x 1.23x 1.03x 0.69x 1.27x 0.87x 8.5% 10.5% 7.3% 3.8% 12.7% nm 10.1% 10.8% 9.2% 5.3% 12.5% 1.9% 9.9% 12.4% 8.1% 4.6% 14.8% nm 11.5% 12.7% 10.1% 6.6% 14.5% 2.1% Russia, C & Eastern Europe Erste Group Komercni Bank Pekao PKO BP OTP Bank Raiffeisen Bank International Sberbank France BNP Paribas Credit Agricole Natixis Societe Generale Germany Commerzbank Deutsche Bank UK & Ireland Barclays HSBC Lloyds RBS Standard Chartered Bank of Ireland Source: Berenberg research, DataStream 70 European Banks Banking Figure 38. European bank valuation – performance Printed 11 Jun 13 Benelux ING KBC Price Price 12m l 12m h Market cap (bn) Local Euro 1w Absolute price performance 1m 3m 6m 12m Performance v.Euro STOXX Banks 600 1w 1m 3m 6m 12m 6.99 30.9 4.57 13.93 7.91 33.1 26.8 12.87 26.8 12.87 -2% 2% 3% 0% 7% 3% -2% 32% 45% 116% 0% 4% 7% 4% 9% 5% -8% 23% 8% 60% Russia, C & Eastern Europe Erste Group Komercni Bank Pekao PKO BP OTP Bank Raiffeisen Bank International Sberbank 23.8 3722 172 36.8 5080 25.4 97.8 13.3 3280 133 30.5 3307 21.7 81.4 26.9 4235 173 38.5 5313 34.0 112 9.39 141 45.0 45.9 1422 4.97 2111 9.39 5.51 10.54 10.76 4.75 4.97 49.5 -5% 0% 5% 8% 5% -3% -1% -2% 3% 14% 11% 4% -8% -6% -7% -10% 7% 7% 5% -15% -7% 8% -6% 5% 3% 27% -20% 5% 65% 11% 23% 15% 49% 11% 20% -2% 3% 7% 10% 7% 0% 1% 1% 6% 18% 15% 8% -4% -2% -5% -8% 9% 10% 7% -14% -5% 1% -12% -2% -4% 19% -25% -2% 23% -18% -8% -14% 11% -17% -11% France BNP Paribas Credit Agricole Natixis Societe Generale 43.9 7.01 3.49 29.7 26.2 2.91 1.76 15.3 47.9 7.995 3.70 34.4 54.5 17.5 10.79 23.2 54.5 17.5 10.79 23.2 -3% -3% -3% -3% -2% 1% 0% -1% -2% -3% 7% -4% 2% 18% 38% 3% 54% 122% 73% 70% -1% -1% -1% -1% 2% 5% 4% 3% 0% -2% 9% -2% -5% 10% 29% -4% 15% 65% 29% 26% Germany Commerzbank Deutsche Bank 7.59 36.2 6.79 22.1 13.04 38.7 8.64 36.9 8.64 36.9 -2% 1% -2% 0% -30% 4% -26% 6% -27% 27% 1% 3% 2% 3% -28% 6% -31% -1% -46% -6% Italy Banca Monte Paschi Siena Banca Popolare di Milano Banco Popolare Intesa Sanpaolo Mediobanca UBI Banca Unicredit 0.23 0.40 1.05 1.36 4.96 3.17 3.99 0.14 0.30 0.79 0.85 2.34 1.82 2.25 0.31 0.62 1.60 1.54 5.66 4.04 4.9 2.65 1.28 1.86 21.1 4.27 2.86 23.1 2.65 1.28 1.86 21.1 4.27 2.86 23.1 -7% -5% -8% -5% -3% -7% -7% 5% -15% -13% -3% -3% -7% -4% 7% -22% -11% 8% 6% -10% 1% 17% 2% -2% 12% 22% 8% 15% 5% 13% 9% 24% 54% 27% 47% -5% -2% -5% -3% 0% -5% -5% 9% -12% -10% 1% 1% -3% 0% 9% -21% -9% 10% 8% -8% 3% 10% -5% -9% 4% 14% 1% 8% -22% -16% -19% -8% 14% -6% 9% Portugal Millennium BCP Banco Espirito Santo Banco BPI 0.10 0.72 0.97 0.05 0.46 0.40 0.12 1.19 1.38 1.97 2.89 1.35 1.97 2.89 1.35 -5% -4% -5% -7% -10% -14% -10% -27% -19% 41% -12% 14% 85% 40% 134% -2% -2% -2% -3% -6% -10% -8% -25% -17% 31% -18% 7% 37% 4% 74% 113.5 92.0 226 79.1 12.33 67.8 51.3 284 153 76.5 53.9 148 54.9 8.42 41.7 30.1 208 104.0 117 97.75 242.3 83.9 13.7 72.45 54.25 304 170 114.5 149.8 16.1 320 3 147.1 13.1 177 173.0 15.4 19.7 2.2 36.7 3.1 16.9 1.7 20.3 19.8 0% -4% -1% -2% -1% -2% -1% 0% -1% 9% -4% -4% -1% -7% -3% -1% -4% -8% 4% -1% 14% 4% 0% -1% 6% 1% -4% 16% 31% 39% 28% 13% 22% 40% 19% 22% 39% 63% 44% 43% 41% 62% 58% 36% 43% 3% -1% 1% 0% 1% 1% 1% 2% 1% 13% 0% 0% 3% -4% 1% 2% 0% -4% 6% 1% 16% 6% 1% 1% 8% 3% -2% 8% 22% 30% 20% 5% 14% 31% 11% 14% 3% 22% 7% 6% 5% 20% 17% 1% 6% Spain Bankinter BBVA Banco de Sabadell Banco Popular Banesto Caixabank Santander 2.85 6.94 1.40 0.63 3.51 2.67 5.41 1.32 4.17 1.17 0.53 1.90 1.95 3.67 3.06 7.72 2.27 1.06 3.99 3.15 6.38 2.50 38.4 4.14 5.40 2.41 12.4 58.5 2.50 38.4 4.14 5.40 2.41 12.4 58.5 1% -3% -3% -1% 0% -2% -2% 1% -7% -10% 6% 0% -5% -2% -1% -8% -19% -10% -4% -11% -7% 48% 9% -34% 12% 25% 3% -1% 78% 39% 3% -30% 31% 21% 25% 3% -1% 0% 2% 2% 0% 1% 5% -4% -7% 10% 4% -2% 2% 1% -6% -18% -8% -2% -10% -5% 38% 1% -38% 4% 17% -4% -7% 33% 4% -23% -48% -2% -10% -7% Switzerland BCV Credit Suisse EFG International Julius Baer UBS Vontobel 477 27.1 11.45 37.0 16.9 29.5 466 15.6 4.77 29.9 9.685 17.8 560 29.3 13.3 41.0 18.0 33.4 4.1 42.8 1.68 8.29 64.6 1.91 3.3 34.5 1.36 6.69 52.1 1.54 0% -3% 0% -1% 0% -2% -7% -5% -11% -4% -3% -3% -10% 7% -11% -1% 12% -11% -5% 22% 34% 13% 13% 8% -4% 45% 84% 20% 51% 51% 2% 0% 2% 1% 2% 1% -4% -1% -7% 0% 1% 1% -8% 9% -9% 1% 14% -9% -11% 14% 26% 6% 5% 1% -29% 8% 37% -11% 12% 13% Turkey Akbank Garanti Bank Turkiye Is Bankasi Yapi Kredi 8.14 8.50 5.90 4.84 6.00 6.34 4.00 3.23 10.50 11.35 7.80 6.28 32.6 35.7 26.5 21.0 13.0 14.2 10.58 8.38 0% 1% -5% -2% -18% -19% -21% -19% -14% -10% -13% -11% -7% -4% -4% -6% 36% 32% 48% 50% 3% 3% -3% 0% -15% -16% -17% -16% -12% -8% -11% -9% -13% -11% -10% -12% 1% -2% 10% 12% 309 700 61.6 334.0 1480.0 0.171 148 509 27.8 193.3 1092.0 0.082 338 773 63.7 370.6 1860.5 0.199 39.7 130.4 43.8 20.4 35.9 5.15 46.7 153 51.5 24.1 42.2 5.15 -3% -3% 0% 0% -4% -8% -2% -6% 4% 12% -7% -4% -3% -5% 23% 9% -18% 9% 24% 9% 32% 12% -1% 41% 62% 32% 120% 50% 9% 75% 0% 0% 2% 3% -1% -5% 2% -2% 8% 16% -3% -1% -1% -3% 25% 11% -16% 11% 16% 2% 23% 5% -8% 32% 21% -2% 64% 11% -19% 30% Scandinavia Danske DNB Jyske Bank Nordea Pohjola SEB Sparebank 1 SR Svenska Handelsbanken Swedbank UK & Ireland Barclays HSBC Lloyds RBS Standard Chartered Bank of Ireland Source: Berenberg research, DataStream 71 European Banks Banking Figure 39. European bank valuation – consensus estimates Printed 11 Jun 13 Benelux ING KBC 2013E Consensus estimates change (%) 1m 3m 6m 12m YTD % up % down 1w 26 22 4% 14% 4% 23% -1% -2% -3% -3% -5% 1% -16% -10% -26% -15% -12% -3% -1% -1% -2% -1% -4% -1% -12% -13% -22% -19% -8% -6% Russia, C & Eastern Europe Erste Group Komercni Bank Pekao PKO BP OTP Bank Raiffeisen Bank International Sberbank VTB 21 16 23 22 14 22 6 4 0% 0% 9% 0% 14% 18% 17% 0% 14% 19% 26% 32% 36% 41% 17% 0% -1% -2% -2% -4% -2% -6% 0% 0% -5% -3% -1% -7% -3% -8% 0% 0% -8% -4% -2% -11% 0% -17% 4% 0% -12% -7% -8% -18% -12% -24% 5% 0% -28% -12% -18% -25% -19% -33% 7% 0% -12% -6% -7% -15% -3% -19% 4% 0% -1% -3% -2% -3% -3% -5% 0% 30% -1% -3% -3% -7% -4% -5% 0% 30% -3% -3% -3% -9% -16% -15% 3% 30% -6% -9% -11% -17% -27% -19% 2% 30% -18% -14% -20% -25% -31% -30% 3% 30% -5% -7% -9% -14% -18% -14% 4% 30% France BNP Paribas Credit Agricole Natixis Societe Generale 28 24 14 27 7% 8% 14% 30% 25% 4% 0% 22% -1% 0% 2% -2% -6% -7% -1% -8% -11% -10% -7% -12% -13% -14% -17% -14% -19% -13% -25% -22% -13% -13% -10% -14% -1% 0% 3% -3% -4% -6% 0% -2% -6% -8% -5% -4% -8% -9% -14% -7% -14% -10% -18% -13% -8% -8% -5% -7% Germany Commerzbank Deutsche Bank 28 28 25% 11% 54% 14% -1% 1% -36% 4% -55% 0% -63% -9% -79% -26% -58% -5% -5% -2% -21% -5% -41% -7% -47% -12% -66% -21% -43% -10% Italy Banca Monte Paschi Siena Banca Popolare di Milano Banco Popolare Intesa Sanpaolo Mediobanca UBI Banca Unicredit 19 12 17 28 10 17 31 16% 0% 12% 14% 0% 12% 23% 16% 17% 29% 36% 10% 18% 29% 0% -23% -6% -5% -5% -8% 1% 100% -23% 4% -13% -26% -17% -13% 0% -23% -22% -19% -41% -37% -34% -200% -23% -33% -25% -40% -42% -42% -150% -43% -48% -45% -53% -54% -62% -300% -23% -22% -25% -41% -37% -38% -10% 0% -4% 3% 0% -2% 0% -10% 0% 3% -4% -1% -8% -7% -55% -20% -9% -10% -5% -21% -18% -70% -20% -19% -15% -8% -25% -24% -85% -33% -30% -35% -23% -36% -42% -55% -20% -14% -15% -5% -21% -21% Portugal Millennium BCP Banco Espirito Santo Banco BPI 10 13 10 0% 0% 20% 0% 31% 0% -25% 0% 4% -25% -110% 4% -25% -108% 4% 50% -104% -9% -250% -103% -27% 50% -106% 4% 0% -9% 0% 0% -29% -9% 0% -29% -9% -60% -36% -9% -80% -51% -23% 0% -36% -9% Scandinavia Danske DNB Jyske Bank Nordea Pohjola SEB Sparebank 1 SR Svenska Handelsbanken Swedbank 29 30 7 28 6 29 7 28 27 14% 3% 0% 4% 0% 7% 0% 4% 7% 3% 10% 14% 7% 0% 3% 0% 7% 7% 2% 0% -1% 1% 0% 1% 0% 0% 0% -8% 1% 7% -1% 5% 1% 5% 1% 2% -11% 3% 4% 1% 4% 3% 9% 0% 2% -17% 6% -1% 2% -2% 7% 22% 0% 6% -25% 7% -18% 2% -5% 15% 16% 1% 11% -16% 6% 0% 2% -2% 8% 21% 0% 6% 2% 0% 0% 0% 0% 0% 0% 0% 0% -6% 3% 3% -1% 2% 0% 6% 0% 1% -6% 6% -1% 1% 3% 3% 15% 0% 3% -8% 11% 1% 4% -4% 8% 27% 0% 6% -14% 12% -17% 4% -3% 13% 20% 1% 12% -8% 11% -1% 4% -1% 8% 26% 0% 6% Spain Bankinter BBVA Banco de Sabadell Banco Popular Banesto Caixabank Santander 21 32 24 26 0 19 32 24% 13% 4% 4% na 0% 3% 10% 19% 17% 12% na 11% 22% 1% -3% -3% 50% 0% -3% -3% -4% -7% -13% -25% 0% 8% -13% -4% -5% -13% -63% 0% -12% -17% -4% -7% -35% -75% 0% -52% -20% -26% -16% -59% -90% 0% -67% -34% -4% -8% -29% -63% 0% -43% -17% -2% -2% -1% -1% 0% -2% -1% -2% -5% -12% -14% 0% -8% -9% -2% -11% -16% -23% 0% -11% -13% 2% -9% -20% -37% 0% -14% -14% -15% -8% -30% -62% 0% -28% -24% 2% -10% -20% -31% 0% -11% -14% Switzerland BCV Credit Suisse EFG International Julius Baer UBS Vontobel 6 27 9 21 30 8 0% 22% 0% 38% 20% 13% 0% 4% 22% 14% 7% 13% 0% 1% 2% 0% 0% 0% -6% -1% 1% 0% 4% -1% -6% 1% 12% 0% 1% 0% -7% 5% 11% -5% -17% 1% -7% -21% 4% -24% -37% -12% -7% 4% 6% -1% -7% 0% 0% 1% -2% 2% 1% -1% -7% 0% -4% 1% 4% 1% -7% 5% -1% -1% 10% 1% -10% 7% -3% -2% -9% 4% -9% -18% -5% -14% -24% -7% -10% 5% -5% 3% 1% 2% Turkey Akbank Garanti Bank Turkiye Is Bankasi Yapi Kredi 20 19 20 16 35% 37% 30% 19% 5% 0% 10% 19% 2% 3% 1% 0% 3% 5% 2% 5% 3% 4% 4% 7% 9% 4% 10% 11% 18% 7% 22% 11% 5% 2% 7% 9% 0% 1% -1% -1% 1% 1% 1% -1% 0% 0% 3% -3% 1% -4% 3% 4% 10% -1% 12% 2% -2% -5% 3% 0% UK & Ireland Barclays HSBC Lloyds RBS Standard Chartered Bank of Ireland 26 30 29 26 32 11 8% 17% 21% 0% 3% 9% 12% 23% 7% 23% 25% 0% 1% 0% 0% 1% 0% -15% 0% -1% 13% -20% -2% -15% 0% -3% 17% -24% -2% -15% -1% -3% 23% -21% -2% -15% 0% -4% 1% -33% -1% 0% -1% -4% 20% -22% -2% -15% 0% 0% 0% 0% 0% 0% 0% -2% 6% -9% -3% 0% 3% -5% 7% -16% -2% 0% 5% -7% 8% -16% -1% 0% 6% -10% 1% -29% -2% -60% 5% -6% 8% -15% -2% 0% Source: Berenberg research, DataStream 72 1w 2014E Consensus estimates change (%) 1m 3m 6m 12m YTD # ests European Banks Banking Company section 73 Barclays plc Banking Capital and leverage still lag peers • • • • • • • Challenging year ahead: We believe management is unlikely to hit its ambitious cost guidance whilst continuing to manage for revenue growth. With a Basel III CT1 ratio of 8.4% and the worst leverage ratio among the UK banks, we also remain concerned over capital and leverage. As a result, we do not expect significant cash dividends in the near term. 50p of earnings in 2015: The main area of pushback we receive on our negative recommendation is whether Barclays (BARC) can achieve 50p+ of EPS in 2015. We see three main areas of concern – revenues, costs and capital. Costs look achievable, but only at the expense of revenues: While BARC may achieve its cost target of £16.8bn in 2015, we believe this will more likely come from lower revenues and the consequent lower costs. Alongside this, we remain concerned about the additional oneoff costs that continue to hit the business and note that the 2015 costs will include £700m of “Costs to Achieve”. On top of this, Barclays is targeting a 55% cost income ratio in 2015, which assuming it can hit its £16.8bn cost target, implies 19% revenue growth versus FY 2012. Revenue headwinds come from derivative regulation and financial repression: The outcome of the proposed OTC derivative regulation could also be significant for BARC revenues, with the Investment Bank (IB) contributing 45% to the top line in Q1 2013. We forecast that regulation in its current form could hit IB revenues by as much as 20%. On its non-IB business, low rates and deleveraging are also likely to continue to erode margins and hence revenues. Leverage too high in UK context, better versus Europe: BARC’s Basel III CT1 ratio of 8.4% remains a concern and is compounded by being the worst leverage ratio among the UK listed banks. We estimate BARC’s “pain” ratio (ie tangible equity to tangible assets ratio including off balance sheet assets) at 2.3%. We would like to see BARC rebuild that ratio and as such believe that any meaningful cash dividend will be delayed until 2015 at the earliest. 160p price target points to significant downside: We calculate our price target using a capital allocation sum-of-the-parts analysis. Using this analysis, we believe BARC has a £5bn capital shortfall with the IB the main contributor. Sell Rating system Relative Current price Price target GBp 309 GBp 160 10/06/2013 London Close Market cap GBP 37,684 m Reuters BARC.L Bloomberg BARC LN Changes made in this note Rating Sell (no change) Price target GBp 160 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 28051 - 28107 - 27655 9219 9598 PPOP 8946 27.62 29.80 33.04 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 12,243 40,519,780 Performance data High 52 weeks (GBp) Low 52 weeks (GBp) Relative performance to SXXP 1 month 0.5 % 3 months -0.9 % 12 months 34.8 % 334 151 SX7P 1.9 % 0.4 % 26.7 % Risks to our view: The main risk to our view is that our revenue estimates are too low. For the retail and commercial businesses, this could be driven by interest rates rising or yield curves steepening. For IB revenues, this could be driven by higher client activity. Y/E 31.12., GBP m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 24.4 26.7 433.9 340.4 5.50 12,199 11.5x 0.90x 5.6 6.9 1.8 23 -5.1 -1.5 401.3 326.8 6.50 12,243 -205.4x 0.94x -1.2 -1.5 2.1 -127 28.5 27.6 422.6 349.6 6.50 12,243 11.1x 0.88x 6.7 8.2 2.1 23 30.7 29.8 446.1 373.1 6.50 12,243 10.3x 0.83x 6.9 8.2 2.1 21 34.1 33.0 472.8 399.8 6.50 12,243 9.3x 0.77x 7.2 8.5 2.1 19 74 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Barclays plc Banking Financials Market ratios; per share data (GBP) EPS (reported) EPS (Berenberg adjusted) 2011 24.4 26.7 2012 -5.1 -1.5 2013e 28.5 27.6 2014e 30.7 29.8 2015e 34.1 33.0 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 340.4 433.9 5.50 11.6x 326.8 401.3 6.50 -206.0x 349.6 422.6 6.50 11.2x 373.1 446.1 6.50 10.4x 399.8 472.8 6.50 9.3x 0.91x 0.71x 1.8% 23% 12,526 0.94x 0.77x 2.1% -127% 12,614 0.88x 0.73x 2.1% 23% 12,614 0.83x 0.69x 2.1% 21% 12,614 0.77x 0.65x 2.1% 19% 12,614 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 12,201 20,091 32,292 -20,886 11,406 -5,602 5,804 -34 5,770 -1,902 -944 2,924 11,654 13,355 25,009 -21,012 3,997 -3,340 657 140 797 -616 -805 -624 12,035 16,016 28,051 -19,105 8,946 -3,245 5,701 18 5,719 -1,430 -805 3,484 12,254 15,853 28,107 -18,888 9,219 -3,153 6,066 19 6,085 -1,521 -805 3,759 12,131 15,525 27,655 -18,057 9,598 -2,988 6,611 19 6,630 -1,657 -805 4,167 -4.5% -33.5% -22.6% 0.6% -65.0% -40.4% -88.7% 3.3% 19.9% 12.2% -9.1% 123.8% -2.8% 767.8% 1.8% -1.0% 0.2% -1.1% 3.1% -2.8% 6.4% -1.0% -2.1% -1.6% -4.4% 4.1% -5.2% 9.0% -86.2% -67.6% -14.7% -121.3% 617.6% 132.1% 0.0% -658.4% 6.4% 6.4% 0.0% 7.9% 8.9% 8.9% 0.0% 10.9% 1.19% 2.0x 64.7% 1.37% 1.30% 45.9% 32.8% 6.9% 5.6% 0.19% 36.0x 0.74% 1.17% 1.2x 84.0% 1.38% 0.78% 28.7% 93.8% -1.5% -1.2% -0.04% 36.4x -0.16% 1.19% 2.8x 68.1% 1.27% 0.74% 27.0% 25.1% 8.2% 6.7% 0.23% 35.2x 0.89% 1.19% 2.9x 67.2% 1.25% 0.69% 25.7% 25.1% 8.2% 6.9% 0.25% 33.2x 0.94% 1.16% 3.2x 65.3% 1.19% 0.64% 24.6% 25.1% 8.5% 7.2% 0.27% 31.2x 1.02% -0.03% 0.02% 0.00% -0.02% 19.3% 0.01% -0.52% -17.25% 61.0% -8.4% -6.7% -0.23% -15.9% -0.10% -0.04% -1.70% -68.7% 9.7% 7.9% 0.27% -0.9% -0.03% -0.05% -1.23% 0.0% 0.1% 0.2% 0.02% -1.9% -0.06% -0.05% -1.10% 0.0% 0.3% 0.3% 0.03% -0.90% 1.05% 0.05% 0.08% 2011 2012 2013 2014 2015 11/12 12/13 13/14 14/15 431,934 1,562,083 999,374 366,032 154,606 9,607 54,352 46,506 43,066 390,999 423,906 1,488,335 996,644 385,411 143,543 9,371 50,615 42,700 41,722 386,858 455,726 1,512,317 1,028,464 454,215 143,543 9,371 53,304 45,389 42,838 394,510 463,553 1,518,095 1,036,291 466,680 143,543 9,371 56,267 48,352 40,952 406,167 474,465 1,523,686 1,047,203 480,035 143,543 9,371 59,638 51,723 44,323 408,729 -1.9% -4.7% -0.3% 5.3% -7.2% -2.5% -6.9% -8.2% -3.1% -1.1% 7.5% 1.6% 3.2% 17.9% 0.0% 0.0% 5.3% 6.3% 2.7% 2.0% 1.7% 0.4% 0.8% 2.7% 0.0% 0.0% 5.6% 6.5% -4.4% 3.0% 2.4% 0.4% 1.1% 2.9% 0.0% 0.0% 6.0% 7.0% 8.2% 0.6% 25.0% 27.7% 118% 12.9% 11.0% 26.0% 28.5% 110% 13.2% 10.8% 26.1% 30.1% 100% 13.3% 10.9% 26.8% 30.5% 99% 12.4% 10.1% 26.8% 31.1% 99% 13.2% 10.8% 1.0% 0.8% -8.0% 0.3% -0.2% 0.1% 1.7% -9.7% 0.0% 0.1% 0.7% 0.4% -1.0% -0.8% -0.8% 0.1% 0.6% -0.5% 0.7% 0.8% P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Market Cap Bloomberg ticker Reuters ticker Share price Analyst 37,788 BARC LN GBp BARC.L 308.65 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (GBPm) Net interest income (NII) Non-interest income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (GBPm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 75 BBVA SA Banking Spain tarnishes Mexican jewel • • • BBVA is well capitalised by Spanish and European standards and it owns a highly attractive franchise in Mexico. Our core concern is with its exposure to Spain. BBVA is a well-run bank but the macro uncertainties in Spain remain material – principally the length and depth of the recession, and thus the outlook for asset quality. BBVA remains strongly preferred to Santander. Capital materially stronger than Santander: BBVA has the fifthstrongest “plain” equity-to-assets ratio among European commercial banks and ranks seventh overall. The deficit to fill to meet a 6% “plain” equity-to-assets is a mere €2bn (or €0.4 per share), easily manageable. While a 9% year-end Basel III fully-loaded ratio lags the 10% of many key peers, we believe disposals – eg at least a third of its 15% stake in China CITIC Bank – can close the gap. Macro risks in Spain matter: Spain may only account for a third of group revenues, but the macro risks are material and threaten credit quality. These include further asset deflation, prolonged recession driven by deleveraging and government austerity, the net international investment position, and renewed disruption to wholesale funding. • Turkey shows risks of conglomeracy: BBVA owns a 25% stake in Guaranti Bank, which has fallen in value by 30% from €5.0bn to €3.5bn in just three weeks on the back of the demonstrations in Turkey. Our point is not that such assets are risky (risks are higher but so are returns), but that in a large diversified structure, a bank will invariably have exposure at any one time to geographies/products where the market has concerns. • Mexico is the jewel: We remain bullish about Mexico (26% of group revenues) and BBVA’s market-leading franchise in the country. Longterm growth prospects are improving, given the bipartisan support for structural reforms (ie the government’s “Pact for Mexico”) and nearsourcing by US companies as Chinese labour costs converge with Mexico’s. • Valuation full: Consensus = 1.1x P/TNAV for a 12% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. • Key risks to view: Spanish economic miracle; risk-on rally. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 0.64 0.64 7.94 6.26 0.40 4,668 10.8x 1.11x 7.7 9.9 5.8 62 0.32 0.32 7.81 6.09 0.40 5,176 21.4x 1.14x 4.1 5.3 5.8 124 0.99 0.99 8.85 7.20 0.40 5,449 7.0x 0.96x 12.2 15.3 5.8 40 0.83 0.83 9.35 7.73 0.41 5,527 8.4x 0.90x 9.2 11.2 5.9 49 0.96 0.96 9.56 7.99 0.47 5,687 7.2x 0.87x 10.3 12.4 6.8 49 76 Sell Rating system Relative Current price Price target EUR 6.94 EUR 7.00 10/06/2013 Madrid Close Market cap EUR 37,832 m Reuters BBVA.MC Bloomberg BBVA SM Changes made in this note Rating Sell (no change) Price target EUR 7.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 23797 -3.0 24474 -2.0 25535 -1.8 Income PPOP 12465 -6.0 12671 -3.9 13362 -3.2 0.99 0.0 0.83 0.0 0.96 0.0 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 5,449 35,493,000 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -5.0 % 3 months -9.4 % 12 months 7.6 % 8 4 SX7P -3.7 % -8.1 % -0.5 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] BBVA SA Banking Financials Market ratios and per share data EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPOP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Discontinued Operations Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/Average Assets PPOP/LLC (x) Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (%) RoA Asset Tangible Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 2011 0.64 0.64 6.26 7.94 0.40 10.8 1.11 0.87 5.8 62% 4,668 2012 0.32 0.32 6.09 7.81 0.40 21.4 1.14 0.89 5.8 124% 5,176 2013e 0.99 0.99 7.20 8.85 0.40 7.0 0.96 0.78 5.8 40% 5,449 2014e 0.83 0.83 7.73 9.35 0.41 8.4 0.90 0.74 5.9 49% 5,527 2015e 0.96 0.96 7.99 9.56 0.47 7.2 0.87 0.73 6.8 49% 5,687 2011 2012 2013e 2014e 2015e 13,152 4,031 1,481 1,363 20,028 -9,737 10,290 -4,226 6,064 -2,618 0 3,446 -206 246 -481 3,004 3,004 15,122 4,353 1,767 1,199 22,441 -10,786 11,655 -7,981 3,674 -2,015 0 1,659 276 393 -651 1,676 1,676 15,017 4,393 2,544 1,137 23,091 -11,369 11,722 -5,478 6,244 -544 0 5,700 -1,172 1,588 -700 5,416 5,416 16,145 4,527 1,915 1,390 23,977 -11,798 12,179 -4,835 7,345 -560 0 6,785 -1,497 0 -694 4,593 4,593 17,024 4,646 1,900 1,500 25,070 -12,136 12,934 -4,535 8,399 -360 0 8,039 -1,826 0 -754 5,458 5,458 2.29% 2.4x 48.6% 1.69% 1.22% 32.1% 6.0% 9.9% 7.7% 0.52% 18.5x 0.93% 2.45% 1.5x 48.1% 1.75% 2.26% 52.8% -16.6% 5.3% 4.1% 0.27% 20.2x 0.51% 2.36% 2.1x 49.2% 1.79% 1.54% 36.5% 20.6% 15.3% 12.2% 0.85% 16.2x 1.61% 2.52% 2.5x 49.2% 1.84% 1.34% 29.9% 22.1% 11.2% 9.2% 0.72% 15.1x 1.35% 2.61% 2.9x 48.4% 1.86% 1.23% 26.6% 22.7% 12.4% 10.3% 0.84% 14.5x 1.58% 2011 2012 2013e 2014e 2015e 351,900 597,688 523,754 282,173 81,930 1,893 40,952 32,275 34,160 330,771 352,930 637,860 547,878 292,716 87,198 2,373 40,449 31,537 35,451 329,033 358,582 634,166 551,341 338,370 83,813 2,362 48,205 39,253 36,612 344,217 365,079 645,995 561,693 332,288 85,490 2,409 51,650 42,698 40,057 338,408 370,954 657,309 571,500 346,407 87,199 2,457 54,379 45,427 42,786 350,635 55.3% 58.9% 125% 10.3% 10.3% 4.0% 61% 51.6% 55.3% 121% 10.8% 10.8% 5.1% 72% 54.3% 56.5% 106% 10.6% 10.6% 52.4% 56.5% 110% 11.8% 11.8% 53.3% 56.4% 107% 12.2% 12.2% Source: Berenberg research, company data 77 Market Cap (EURm) Bloomberg ticker Reuters ticker Share price (EUR) Analyst Phone email: 37,832 BBVA SM BBVA.MC 6.94 Nick Anderson +44 20 3207 7838 [email protected] 11/12 12/13 13/14 Year-on-year change (%) 15.0 -0.7 7.5 8.0 0.9 3.0 19.3 44.0 -24.7 -12.1 -5.2 22.3 12.1 2.9 3.8 10.8 5.4 3.8 13.3 0.6 3.9 88.9 -31.4 -11.7 -39.4 70.0 17.6 14/15 5.4 2.6 -0.8 7.9 4.6 2.9 6.2 -6.2 14.4 -51.9 -233.6 243.6 -525.3 19.0 27.7 18.5 22.0 35.3 -44.2 -44.2 7.4 223.2 223.2 -0.7 -15.2 -15.2 8.6 18.8 18.8 11/12 12/13 13/14 Year-on-year change (%) 0.3 1.6 1.8 6.7 -0.6 1.9 4.6 0.6 1.9 3.7 15.6 -1.8 6.4 -3.9 2.0 25.3 -0.4 2.0 -1.2 19.2 7.1 -2.3 24.5 8.8 3.8 3.3 9.4 -0.5 4.6 -1.7 14/15 1.6 1.8 1.7 4.2 2.0 2.0 5.3 6.4 6.8 3.6 BNP Paribas SA Banking Complex conglomeracy increases risks • • • • • • • Basel ratio masks leverage concerns: While BNP appears relatively strong in terms of regulatory capital (Basel III CT1: 10%), we believe a leverage ratio of 2.3% tells a different story. Our Sell rating is driven by two factors: first, our belief that BNP is a complex conglomerate; and second, pressure on revenues and loan provisions. Headwinds from France remain: Our EPS estimates are 20% below consensus, which is driven by our view of the weak outlook. In particular, we are 5% below consensus on revenues and 20% above consensus on provisions. This is driven by our view that we are in a period of low rates, subdued economic growth and asset deleveraging which will continue to affect bank profitability. Recent French data continues to support this view. Leverage ratio shows the true risk: While BNP’s Basel III CT1 ratio of 10% ranks well against peers, once the subjectivity of riskweights is removed, we see a different result. Our simple tangible equity to tangible assets ratio (which includes off balance sheet items) ranks BNP in the bottom half of European banks at 2.3%. In order to reach a more acceptable level of 3%, BNP would need to increase capital by €16bn. On a “pain” ratio, leverage is comparable to US peers: The large off balance sheet assets of its US peers means BNP has a similar ratio to them (Bank of America 2.0%, JP Morgan 2.2%, Citigroup 2.6%) on our “pain” ratio. While some would see that as a positive, we believe all these ratios are too low and need to rise. Complexity highlighted by US merger: According to the Financial Times, BNP is planning to merge its retail banking subsidiary BancWest with its US corporate and investment banking operations in preparation to meet potential US proposals on foreign banking organisations. We see this as highlighting the complexity within the business and the lack of economies of scope emerging within the organisation. Price target of €25 points to c45% downside: We have revised our estimates to reflect the weak start to the year; however, our core view of profitability remains broadly unchanged. Our price target is calculated using a capital allocation sum-of-the-parts analysis, allocating tangible capital to each core division based on our preferred equity/assets ratio. On this basis, we believe BNP has a €10bn capital shortfall driven by its CIB business. We believe this is likely to delay any material dividend return as it looks to rebuild capital. Risks to our view: The main risk to our view is that BNP is able to rebuild capital faster than expected. This would come from earnings surprising positively or BNP choosing to abandon growth and scale back its CIB balance sheet and ambitions. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 4.82 5.01 57.1 45.5 1.20 1,208 9.1x 0.96x 8.6 10.6 2.7 25 5.16 5.28 63.5 52.8 1.50 1,242 8.5x 0.83x 9.2 9.6 3.4 29 4.43 4.64 66.4 55.8 1.50 1,242 9.9x 0.79x 6.8 7.9 3.4 34 4.19 4.40 68.9 58.3 1.50 1,242 10.5x 0.75x 6.2 7.2 3.4 36 4.46 4.67 71.8 61.2 1.50 1,242 9.8x 0.72x 6.3 7.3 3.4 34 78 Sell Rating system Relative Current price Price target EUR 43.90 EUR 25.00 10/06/2013 Paris Close Market cap EUR 54,537 m Reuters BNPP.PA Bloomberg BNP FP Changes made in this note Rating Sell (no change) Price target EUR 25.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 38276 3.2 38406 2.6 38442 2.6 PPOP 13453 -1.6 13416 -3.6 13437 -0.6 4.62 0.3 4.54 -3.2 4.64 0.6 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,242 4,177,239 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 0.6 % 3 months -1.1 % 12 months 29.7 % 48 26 SX7P 2.0 % 0.2 % 21.6 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] BNP Paribas SA Banking Financials Market ratios; per share data (EUR) 2011 2012 2013e 2014e 2015e EPS (reported) 4.82 5.16 4.43 4.19 4.46 Market Cap TBVPS (reported) 45.5 52.8 55.8 58.3 61.2 Bloomberg ticker TBVPS (Berenberg adjusted) BVPS (reported) DPS P/E (Berenberg adjusted) 46.3 57.1 1.20 9.1x 49.8 63.5 1.50 8.5x 52.8 66.4 1.50 9.9x 55.3 68.9 1.50 10.5x 58.2 71.8 1.50 9.8x Reuters ticker 0.96x 0.77x 2.7% 25% 1,197 0.83x 0.69x 3.4% 29% 1,215 0.79x 0.66x 3.4% 34% 1,239 0.75x 0.64x 3.4% 36% 1,239 0.72x 0.61x 3.4% 34% 1,239 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 42,384 -26,116 16,268 -6,797 9,471 100 80 9,651 -2,757 -844 6,050 -282 5,768 39,072 -26,543 12,529 -3,941 8,588 1,302 489 10,379 -3,061 -754 6,564 -293 6,271 39,510 -26,278 13,232 -4,351 8,881 0 488 9,369 -2,811 -800 5,758 -275 5,483 39,396 -26,461 12,935 -4,447 8,488 4 454 8,946 -2,684 -800 5,462 -275 5,187 39,433 -26,071 13,363 -4,392 8,971 4 454 9,429 -2,829 -800 5,800 -275 5,525 -7.8% 1.6% -23.0% -42.0% -9.3% 1.1% -1.0% 5.6% 10.4% 3.4% -0.3% 0.7% -2.2% 2.2% -4.4% 0.1% -1.5% 3.3% -1.2% 5.7% 7.5% 11.0% -9.7% -8.2% -4.5% -4.5% 5.4% 5.4% 8.5% -12.3% -5.1% 6.2% 8.7% -12.6% -5.4% 6.5% 2.14% 2.4x 61.6% 1.32% 1.01% 16.0% 28.6% 10.6% 8.6% 0.29% 36.2x 0.94% 2.02% 3.2x 67.9% 1.37% 0.61% 10.1% 29.5% 9.6% 9.2% 0.33% 29.1x 1.14% 2.08% 3.0x 66.5% 1.38% 0.69% 11.0% 30.0% 7.9% 6.8% 0.29% 27.4x 0.91% 2.09% 2.9x 67.2% 1.40% 0.71% 11.3% 30.0% 7.2% 6.2% 0.28% 25.9x 0.86% 2.11% 3.0x 66.1% 1.39% 0.69% 11.1% 30.0% 7.3% 6.3% 0.30% 24.5x 0.91% -0.12% 0.06% 0.01% 0.02% 6.3% 0.05% -0.40% -5.95% 0.9% -1.1% 0.6% 0.04% -1.4% 0.01% 0.09% 0.93% 0.5% -1.6% -2.4% -0.04% 0.7% 0.02% 0.02% 0.27% 0.0% -0.8% -0.6% -0.01% -1.1% -0.01% -0.02% -0.15% 0.0% 0.1% 0.1% 0.02% 0.20% -0.22% -0.05% 0.05% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 665,834 1,965,283 1,786,516 546,284 177,469 10,256 68,109 54,231 62,337 614,000 630,520 1,907,290 1,730,421 539,513 188,421 8,536 78,645 65,469 58,048 552,000 623,702 1,891,048 1,715,685 536,142 187,244 8,536 82,265 69,089 61,720 599,417 629,049 1,877,087 1,703,019 530,999 185,447 8,536 85,589 72,413 65,044 602,282 635,375 1,863,802 1,690,966 525,955 183,686 8,536 89,250 76,074 68,705 604,794 -5.3% -3.0% -3.1% -1.2% 6.2% -16.8% 15.5% 20.7% -6.9% -10.1% -1.1% -0.9% -0.9% -0.6% -0.6% 0.0% 4.6% 5.5% 6.3% 8.6% 0.9% -0.7% -0.7% -1.0% -1.0% 0.0% 4.0% 4.8% 5.4% 0.5% 1.0% -0.7% -0.7% -0.9% -0.9% 0.0% 4.3% 5.1% 5.6% 0.4% 31.2% 33.9% 122% 11.6% 10.2% 28.9% 33.1% 117% 13.6% 10.5% 31.7% 33.0% 116% 12.0% 10.3% 32.1% 33.5% 118% 12.5% 10.8% 32.4% 34.1% 121% 13.0% 11.4% -2.3% -0.8% -5.0% 2.1% 0.4% 2.8% -0.1% -0.5% -1.6% -0.2% 0.4% 0.5% 2.1% 0.5% 0.5% 0.4% 0.6% 2.3% 0.6% 0.6% P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 54,537 BNPP.PA Share price Analyst BNP FP EUR 43.90 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net banking income (NBI) Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Associated companies Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Dividends on preference shares Adj. attributable profit Income Ratios (%) NBI/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NBI Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 79 Commerzbank AG Banking Capital problems unresolved • • • • • • • • • Commerzbank’s recent rights issue can be likened to repainting the hull of the Titanic. The structural problems remain unresolved. Given the high and uncertain exit costs in the non-core asset book and a deteriorating outlook for Poland, the bank needs still more capital as its disingenuous Basel III guidance shows. A growth-oriented strategy compounds the risks. It is a value trap lacking capital. Sell. Capital deficit remains material post-rights issue: Our new analysis confirms our long-held concerns about the bank’s capital position. €9bn of additional capital is needed to achieve a 6% “plain” ratio and a 4% “pain” ratio, adjusting for the recent rights issue. This reflects deferred tax assets and off balance sheet exposures but ignores inadequate loan loss provisions. Commerzbank ranks in the bottom quartile of our “plain”/”pain” ratio analysis. Fully-loaded Basel III guidance misleading: Management quotes a post-rights issue fully-loaded Basel III ratio of 8.4% based on €235bn of RWAs. Guidance buried in the rights issue prospectus guides to RWAs of up to €240bn, however, implying a Basel III ratio of only 8.2%. Non-core exit costs high and uncertain: Non-core assets account for 29% of group exposure at default with just under half of these in the stressed commercial real estate and shipping segments. Given the losses other banks have endured running off such assets (especially in the latter stages), the likely anaemic economic growth post-crisis and the exit plans’ dependence on finding “strategic investors”, we believe exit costs will be higher than expected. Polish slowdown compounds uncertainties: Accounting for 8% of group revenues, the Polish economy was unique among EU27 states in escaping a recession during the crisis. However, the economy is now slowing rapidly despite aggressive monetary easing, raising the risk of a rapid deterioration in credit quality. Flaws in new strategy revealed by Q1 top-line weakness: Management’s four-year plan targets 4-5% pa revenue growth in what it calls the “new normal”. Both the CEO and CFO appear ignorant of what is really meant by this term. When Pimco coined the phrase “new normal”, it meant a world of “muted growth”. The Q1 profits warning shows the way. Estimates updated for 20-for-21 rights issue: Only EPS changes. Valuation: Consensus = 0.4x P/TNAV for a 4% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. Key risks to view: Successful disposals of non-core assets; sustained economic recovery in the Eurozone; regulatory forbearance. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.8 1.8 41.9 37.8 0.0 346 4.1x 0.20x 2.4 10.5 0.0 0 -0.1 -0.1 39.6 36.0 0.0 561 -122.2x 0.21x -0.1 -0.6 0.0 0 0.3 0.3 22.8 20.9 0.0 930 22.1x 0.36x 1.2 1.4 0.0 0 0.8 0.8 23.6 21.8 0.0 1,138 9.0x 0.35x 3.7 4.0 0.0 0 1.0 1.0 24.6 22.7 0.0 1,138 8.0x 0.34x 4.0 4.3 0.0 0 80 Sell Rating system Relative Current price Price target EUR 7.63 EUR 6.00 10/06/2013 XETRA Close Market cap EUR 8,675 m Reuters CBKGk.DE Bloomberg CBK GY Changes made in this note Rating Sell (no change) Price target EUR 6.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 9984 10161 10262 Income 3104 3226 PPOP 2765 0.55 -37.3 1.65 -48.8 1.86 -48.8 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,138 17,544,000 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -24.5 % 3 months -47.2 % 12 months -71.4 % 17 7 SX7P -23.2 % -45.9 % -79.4 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Commerzbank AG Banking Financials Market ratios; per share data (EUR) EPS (reported) EPS (Berenberg adjusted) 2011 1.85 1.85 2012 -0.06 -0.06 2013e 0.34 0.34 2014e 0.85 0.85 2015e 0.95 0.95 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 37.81 41.89 0.00 4.1x 36.01 39.57 0.00 -122.8x 20.94 22.77 0.00 22.2x 21.79 23.62 0.00 9.0x 22.74 24.57 0.00 8.0x Reuters ticker CBKG.DE Share price EUR 7.66 Analyst Nick Anderson [email protected] P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 0.20x 0.18x 0.0% 0% 346 0.21x 0.19x 0.0% 0% 561 0.37x 0.34x 0.0% 0% 930 0.35x 0.32x 0.0% 0% 1,138 0.34x 0.31x 0.0% 0% 1,138 +44 20 3207 7838 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 6,725 3,495 1,986 -2,316 9,890 -7,992 1,898 -1,390 508 0 0 508 240 -109 639 639 6,487 3,249 89 50 9,875 -7,030 2,845 -1,660 1,185 0 0 1,185 -806 -103 276 -35 5,477 3,313 1,292 -99 9,984 -7,219 2,765 -1,643 1,121 0 0 1,121 -208 -100 813 320 5,516 3,388 1,200 57 10,161 -7,058 3,104 -1,685 1,419 0 0 1,419 -355 -100 964 964 5,549 3,456 1,200 57 10,262 -7,036 3,226 -1,649 1,577 0 0 1,577 -394 -100 1,083 1,083 -3.5% -7.0% -95.5% -102.2% -0.2% -12.0% 49.9% 19.4% 133.3% -15.6% 2.0% 1351.7% -298.0% 1.1% 2.7% -2.8% -1.0% -5.4% 0.7% 2.3% -7.1% -157.6% 1.8% -2.2% 12.3% 2.5% 26.5% 0.6% 2.0% 0.0% 0.0% 1.0% -0.3% 3.9% -2.2% 11.2% 133.3% -5.4% -435.8% -74.2% -5.5% -2.9% -56.8% 194.7% -105.5% -1015.0% 26.5% 70.4% 0.0% 18.5% 201.0% 11.2% 11.2% 0.0% 12.4% 12.4% 0.95% 1.4x 80.8% 1.13% 0.44% 20.7% -47.2% 10.5% 2.4% 0.11% 99.6x 0.30% 0.97% 1.7x 71.2% 1.05% 0.57% 25.6% 68.0% -0.6% -0.1% 0.01% -57.9x 0.03% 0.85% 1.7x 72.3% 1.12% 0.59% 30.0% 18.6% 1.4% 1.2% 0.07% 20.8x 0.20% 0.87% 1.8x 69.5% 1.12% 0.62% 30.5% 25.0% 4.0% 3.7% 0.17% 23.6x 0.52% 1.05% 2.0x 68.6% 1.08% 0.86% 29.7% 25.0% -12.1% -11.1% -0.43% 28.2x -1.36% 0.01% -0.11% 0.02% 0.18% -9.6% -0.08% 0.13% 4.9% 115.3% -11.1% -2.6% -0.10% 1.1% 0.08% 0.03% 4.4% -49.5% 1.9% 1.4% 0.06% -2.9% -0.01% 0.03% 0.5% 6.4% 2.6% 2.4% 0.10% -0.9% -0.03% 0.24% -0.8% 0.0% -16.1% -14.8% -0.60% -0.27% 0.17% 0.32% -1.87% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 296,586 661,763 278,546 636,012 276,023 637,797 271,469 627,275 267,745 618,669 -6.1% -3.9% -0.9% 0.3% -1.6% -1.6% -1.4% -1.4% 255,344 118,958 699 24,104 22,016 20,756 236,600 265,842 91,648 886 25,441 23,361 22,610 208,135 25,902 23,822 22,204 206,558 26,866 24,786 23,168 202,823 27,949 25,869 24,251 199,750 4.1% -23.0% 26.8% 5.5% 6.1% 8.9% -12.0% 1.8% 2.0% -1.8% -0.8% 3.7% 4.0% 4.3% -1.8% 4.0% 4.4% 4.7% -1.5% 35.8% 44.8% 116% 11.1% 8.8% 6.64% 44.0% 32.7% 43.8% 105% 13.1% 10.9% 6.79% 42.8% 32.4% 43.3% 32.3% 43.3% 32.3% 43.3% -0.3% -0.5% -0.1% 0.0% 0.0% 0.0% 10.7% 11.4% 12.1% -3.0% -1.0% -11% 2.0% 2.1% 0.15% -1.2% -0.1% 0.7% 0.7% Market Cap Bloomberg ticker EURm 4463 CBK GY Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Source: Berenberg research, company data 81 Crédit Agricole SA Banking Leverage and revenue the key issues • • • • • • • • Too much leverage despite parent: Our key concern remains leverage despite Crédit Agricole Group reporting a fully-loaded Basel III CT1 ratio of 9.6%, as it is the equity shareholders of Crédit Agricole SA (CASA) who will bear any losses and are exposed to the leverage. Leverage high on both absolute and relative basis: On our “pain” and “plain” ratios CASA has the weakest ratios among peers at 1.0% and 1.6% respectively. Some may be heartened by the backing of the regional banks, but equity shareholders are exposed to the losses. Even if we adjust for intercompany balances, the leverage ratio is still 1.9% on our “plain” ratio and 1.2% on our “pain” ratio. New strategy leads to simplification: While the new strategy appears to deliver a simpler business and €650m of cost savings, we are slightly puzzled as to the continuing commitment to a corporate/investment bank (CIB) business that has €433bn of assets. Ideally we would like to see CASA downsize this dramatically and focus on the core retail/savings space. Revenue headwinds persist: Our 20% below consensus EPS forecasts are driven by our view of the revenue headwinds in the business. In particular, CASA’s significant exposure to the French economy and CIB business point to significant headwinds. We see three main impacts – subdued economic growth, low rates and deleveraging – leading to lower revenues and higher impairments. Low rates will impact margins and revenues: Despite management noting improved net interest margins for both loans and deposits in its French retail division, the low interest rate environment is likely to continue squeezing margins, in our view. The recent interest rate cut by the ECB will further exacerbate this issue and limit the potential capital generation to reduce the leverage within the business. CIB capital remains key: CASA shareholders remain exposed to the losses on €433bn of assets within the CIB. CASA holds only €7.7bn of capital against these assets, giving it an equity/assets ratio of just 1.8%, far below the 5% we would like to see, and based on this shortfall it would take 10 years’ profits to reduce the capital deficit. Price target unchanged: Our price target is unchanged at €3.00 and is calculated using a capital allocation SOTP analysis. We split Crédit Agricole into its core divisions and allocate tangible capital to them based on our preferred equity/assets ratio. On this basis we believe there is a €12bn capital shortfall. CASA trades on 6.1x 2014 consensus EPS and 0.6x TBV for a consensus forecast 10.6% ROTE. Risks to our view: The main risk to our view is that CASA is able to rebuild capital faster than expected. This would come from earnings surprising positively or CASA choosing to abandon growth and scale back its CIB balance sheet and ambitions. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -0.61 -0.61 17.13 9.37 0.00 2,498 -11.5x 0.75x -3.3 -6.1 0.0 0 -2.58 -2.58 15.90 9.63 0.00 2,498 -2.7x 0.73x -15.5 -26.9 0.0 0 0.99 0.99 16.91 10.62 0.00 2,498 7.0x 0.66x 6.0 9.7 0.0 0 0.95 0.95 17.85 11.56 0.00 2,498 7.4x 0.61x 5.4 8.5 0.0 0 1.05 1.05 18.89 12.60 0.00 2,498 6.7x 0.56x 5.7 8.6 0.0 0 82 Sell Rating system Relative Current price Price target EUR 7.01 EUR 3.00 10/06/2013 Paris Close Market cap EUR 17,503 m Reuters CAGR.PA Bloomberg ACA FP Changes made in this note Rating Sell (no change) Price target EUR 3.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 16849 -3.7 16742 -1.0 16629 0.0 PPOP 5126 -3.9 5060 5.8 4999 9.0 0.93 7.5 0.92 3.2 0.89 18.4 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2,498 12,614,740 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 3.7 % 3 months -2.6 % 12 months 103.7 % 8 3 SX7P 5.1 % -1.3 % 95.6 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Crédit Agricole SA Banking Financials Market ratios; per share data (EUR) EPS (reported) TBVPS (reported) TBVPS (Berenberg adjusted) BVPS (reported) DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 2011 -0.61 9.4 2012 -2.58 9.6 2013e 0.99 10.6 2014e 0.95 11.6 2015e 1.05 12.6 9.9 17.1 - 8.9 15.9 - 9.9 16.9 7.0x 10.8 17.8 7.4x 11.8 18.9 6.7x 0.75x 0.41x 2,498 0.73x 0.44x 2,498 0.66x 0.41x 2,498 0.61x 0.39x 2,498 0.56x 0.37x 2,498 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 19,385 -12,393 6,992 -4,252 2,740 -3 230 -1,575 16,440 -12,037 4,403 -3,736 667 188 503 -3,395 16,229 -11,302 4,927 -3,064 1,862 20 1,023 0 16,573 -11,222 5,351 -2,892 2,459 20 990 0 16,621 -11,129 5,492 -2,596 2,897 0 978 0 -15.2% -2.9% -37.0% -12.1% -75.7% -1.3% -6.1% 11.9% -18.0% 2.1% -0.7% 8.6% -5.6% 32.0% 0.0% -3.2% 0.3% -0.8% 2.6% -10.3% 17.8% 1,392 -885 -272 -1,705 -1,470 -2,037 -403 42 -3,991 -6,389 2,905 -577 -320 456 2,464 3,468 -800 -323 0 2,346 3,875 -930 -302 0 2,643 19.4% 38.7% 0.8% 11.7% 16.3% -6.4% -4.8% 12.7% 1.17% 1.6x 63.9% 0.75% 1.06% 21.9% 63.6% -5.9% -3.3% -0.09% 69.0x -0.28% 0.92% 1.2x 73.2% 0.68% 0.88% 1.6x 69.6% 0.61% 0.90% 1.9x 67.7% 0.61% 0.90% 2.1x 67.0% 0.60% -21.1% -28.3% 14.5% -9.7% -4.5% 36.4% -4.9% -9.1% 2.1% 15.1% -2.8% -0.7% 0.3% 14.4% -1.1% -0.8% 22.7% -19.8% -27.3% -15.5% -0.35% 78.7x -1.33% 18.9% 19.8% 10.2% 6.0% 0.13% 76.6x 0.49% 17.5% 23.1% 8.8% 5.4% 0.13% 69.4x 0.46% 15.6% 24.0% 9.2% 5.7% 0.14% 63.8x 0.52% 3.6% -16.9% 14.0% -2.7% -7.6% 16.2% -13.7% -10.1% -4.8% -9.4% -5.3% -10.5% 4.1% 3.5% 4.8% 12.7% -8.1% 12.1% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 399,381 1,723,608 1,525,342 525,636 148,320 6,495 42,797 24,964 62,100 522,200 329,756 1,842,361 1,637,692 483,638 150,390 5,505 39,727 23,401 61,700 480,000 1,842,400 1,842,400 1,842,400 5,562 42,232 24,044 62,340 503,400 5,562 44,578 26,532 65,837 505,800 5,562 47,177 28,878 69,441 508,400 -17.4% 6.9% 7.4% -8.0% 1.4% -15.2% -7.2% -6.3% -0.6% -8.1% 6.3% 2.7% 1.0% 4.9% 5.6% 10.3% 5.6% 0.5% 5.8% 8.8% 5.5% 0.5% 30.3% 23.2% 76% 9.6% 11.9% 26.1% 17.9% 68% 10.9% 12.9% 27.3% 27.5% 27.6% 10.5% 12.4% 11.2% 13.0% 11.8% 13.7% 1.3% 1.0% -0.4% -0.5% 0.6% 0.6% 0.7% 0.6% Market Cap Bloomberg ticker 17,510.98 ACA FP Reuters ticker CAGR.PA Share price Analyst EUR 7.01 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net banking income (NBI) Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Associated companies Change in the value of goodwill Reported profit before tax Taxation Minorities + Preferences Net income from disc'd operations Adj. attributable profit Income Ratios (%) NBI/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NBI Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA -89.4% -54.5% 43.1% -1.2% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 83 Credit Suisse Group AG Banking Model still needs to change • • • Model still needs to change: Credit Suisse’s (CS) share price has risen 25% ytd but with Wealth Management (WM) margins continuing to fall and leverage issues still to address, we see little reason to be optimistic given the market and regulatory headwinds that CS faces. Sell “Pain” ratio of 0.9% worst amongst peers: CS is the least capitalised bank in our universe if we apply our “pain” ratio. According to this ratio, CS held just CHF20bn of equity against CHF2.1trn of assets at the end of 2012, giving it a capital ratio of just 0.9%. The ratio rises 18bp including the CHF3.8bn of MACCS. However, this is the lowest in our universe and based on our estimates CS would need to raise an additional CHF29bn to have a ratio comparable to UBS at 2.3%. While CS points to the low-risk nature of its assets, we are less reassured as Level 3 assets are 133% of TBV. 10/06/2013 SIX Swiss Close Market cap CHF 45,011 m Reuters CSGN.VX Bloomberg CSGN VX Basel III leverage issues persist: While CS reports double-digit returns, we believe this is driven by the leverage. The Basel III leverage ratio was 1.9% at the end of Q1 2013, meaning CS needs to retain nearly five years’ worth of profits to reach a 3% ratio. • WM margins remain under pressure. Gross margins within WM were 4bp below consensus at 108bp at the end of Q1 2013. We believe that the falling margin trend will continue, with lower client risk appetite and the shift to lower-margin mandates supported by our view that interest rates will remain lower for longer. • Our below consensus forecasts are driven by revenues: Although CS may hit its cost targets, we believe that revenues will continue to disappoint in both the Private and Investment Bank. Our 2014 EPS estimates are 35% below consensus, driven by our view of continuing lack of investor risk appetite, low rates further impacting margins, derivatives regulation and high yield/leverage lending normalising. • CS expensive given market headwinds: CS trades on 14.1x 2014 estimates (which are 35% below consensus) and 1.3x TBV, while the European banks trade on 10.2x 2014 estimates and 0.9x TBV. • Our price target is unchanged at CHF13: Our price target of CHF13 is calculated using our divisional capital allocation pricing model, which is based on ROTE, and a 12% cost of capital. On this basis, we believe CS has a CHF15bn capital shortfall. • Risks to our view: The main risk to our view is that our revenue estimates are too low. For both the private and investment banking businesses, this could be driven by higher client activity helped by better economic growth than expected. Y/E 31.12., CHF m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.36 1.81 27.59 20.32 0.75 1,220 14.9x 1.33x 5.2 7.1 2.8 55 0.80 2.66 27.44 20.77 0.75 1,294 10.2x 1.31x 3.2 4.3 2.8 94 1.74 1.74 25.96 20.64 0.75 1,660 15.5x 1.31x 7.5 9.6 2.8 43 1.92 1.92 26.52 21.32 0.75 1,700 14.1x 1.27x 7.3 9.2 2.8 39 2.16 2.16 27.32 22.23 0.75 1,740 12.5x 1.22x 8.0 9.9 2.8 35 84 Rating system Relative Current price Price target CHF 27.12 CHF 13.00 Changes made in this note Rating Sell (no change) Price target CHF 13.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 25066 - 24978 - 24695 5262 5498 PPOP 4926 1.74 1.92 2.16 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,660 6,239,293 Performance data High 52 weeks (CHF) Low 52 weeks (CHF) Relative performance to SXXP 1 month -2.5 % 3 months 3.9 % 12 months 13.2 % 29 16 SMI -0.2 % 3.5 % 7.8 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Credit Suisse Group AG Banking Financials Market ratios; per share data (CHF) EPS (reported) TBVPS (reported) 2011 1.36 20.3 2012e 0.80 20.8 2013e 1.74 20.6 2014e 1.92 21.3 2015e 2.16 22.2 TBVPS (Berenberg adjusted) BVPS (reported) DPS P/E (Berenberg adjusted) 18.2 27.6 0.75 14.9x 20.6 27.4 0.75 10.2x 20.6 26.0 0.75 15.5x 21.3 26.5 0.75 14.1x 22.2 27.3 0.75 12.5x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.33x 0.98x 2.8% 55% 1,207 1.31x 0.99x 2.8% 94% 1,307 1.31x 1.04x 2.8% 43% 1,683 1.27x 1.02x 2.8% 39% 1,680 1.22x 0.99x 2.8% 35% 1,720 2011 2012e 2013e 2014e 2015e Market Cap Bloomberg ticker 35,088 CSGN VX Reuters ticker CSGN:VX Share price Analyst CHF 27.12 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (m) 10/11 11/12 12/13 13/14 Year-on-year change (%) Net revenues Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Dividends on preference shares Adj. attributable profit 26,225 -22,577 3,648 -187 3,461 -671 -837 1,953 -216 1,737 23,966 -21,615 2,351 -170 2,181 -496 -336 1,349 -231 1,118 25,037 -20,140 4,897 -172 4,725 -1,226 -312 3,187 -250 2,937 24,978 -19,716 5,262 -203 5,059 -1,265 -312 3,482 -250 3,232 24,695 -19,197 5,498 -203 5,295 -1,324 -312 3,659 -250 3,409 Income Ratios (%) Net revenues/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NBI Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 2.52% 19.5x 86.1% -2.17% -0.08% 0.7% 19.4% 7.0% 5.2% 0.17% 42.3x 0.72% 2.43% 13.8x 90.2% -2.19% -0.07% 0.7% 22.7% 4.2% 3.1% 0.12% 34.4x 0.50% 2.68% 28.5x 80.4% -2.15% -0.07% 0.7% 25.9% 8.6% 6.8% 0.31% 27.6x 0.98% 2.62% 25.9x 78.9% -2.07% -0.08% 0.8% 25.0% 8.9% 7.2% 0.34% 26.6x 1.21% 2.54% 27.1x 77.7% -1.98% -0.08% 0.8% 25.0% 8.8% 7.2% 0.35% 25.3x 1.28% 2011 2012e 2013e 2014e 2015e -16.4% -5.8% -50.8% -336.7% -53.8% -56.7% -8.6% -4.3% -35.6% -9.1% -37.0% -26.1% 4.5% -6.8% 108.3% 1.2% 116.6% 147.1% -0.2% -2.1% 7.4% 18.0% 7.1% 3.2% -61.8% -30.9% 136.3% 9.2% -64.9% -35.6% 162.7% 10.0% 10/11 11/12 12/13 13/14 5.0% 2.4% 1.7% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (m) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research Year-on-year change (%) 6.7% 3.8% 1.7% -11.9% 233,413 1,049,165 242,223 924,280 254,334 946,618 254,334 962,347 254,334 978,863 313,401 188,771 7,411 33,674 24,795 25,953 241,753 308,312 166,775 6,786 35,498 26,866 34,768 224,296 320,644 165,384 7,121 43,088 34,248 50,344 299,616 320,644 165,384 7,121 45,075 36,235 36,235 267,305 320,644 165,384 7,121 47,522 38,682 32,782 267,305 9.0% -3.4% -23.9% 1.2% 1.7% -2.5% 10.5% -1.6% -11.7% -8.4% 5.4% 8.4% 34.0% -7.2% 21.4% 27.5% 44.8% 33.6% 4.6% 5.8% -28.0% -10.8% 23.0% 22.2% 74% 15.2% 10.7% 24.3% 26.2% 79% 19.4% 15.5% 31.7% 26.9% 79% 17.3% 16.8% 27.8% 26.4% 79% 14.1% 13.6% 27.3% 26.0% 79% 12.8% 12.3% 8.7% 4.9% -2.1% -11.7% -11.8% 5.3% 17.8% 5.5% 27.4% 44.4% 30.4% 2.5% 1.0% -10.8% 8.4% -12.2% -1.6% 85 4.0% -0.8% -18.4% -19.3% Danske Bank A/S Banking Time for a revolution • • • • • • • Danske is a value trap. Unlocking the material latent value requires a strategic revolution, not the current evolution. With capital inadequate and an anaemic Danish economy squeezing revenues and asset quality, the risks remain material without change. The market cannot continue to ignore the weak fundamentals forever, no matter what management promises in terms of re-pricing and dividends. Consider consensus estimates: over the last three months, these have seen the largest cuts outside of Italian/Spanish banks. A high-conviction Sell. Capital remains inadequate: Danske has the fifth-lowest “plain” equity-to-asset ratio in our coverage universe. The “pain” ratio implies a DKK34bn deficit just to reach 4%. The CEO dismissed the bank’s weak equity-to-assets ratio at Q1: “We are not so concerned about that at the moment…it’s not a specific problem for Danske Bank. I think you have that problem across Europe.” This raises concerns about Danske’s risk appetite and shows the scale of the problem in Europe – banks are managing only for Basel, ignoring true balance sheet risk. Loan losses to remain higher for longer: We stick with our core view that economic headwinds in Denmark will sustain anaemic economic growth and keep Danish loan losses higher for longer than the market assumes. This accounts for most of the divergence in our 25% below consensus estimates. Flaws in new strategy shown by Q1 revenue weakness: The driver of the 7% revenue miss in Q1 was unclear (weak economy or fallout from new strategy or both), but it does not matter. It shows that a strategy predicated on growth cannot deliver in the current economic environment. The 2015 RoE target of above 12% assumes 6-8ppt of uplift comes from growth/higher interest rates. This will not happen, in our view. Misleading disclosure: Are we alone in finding the bank’s “Highlights” reformatting of the income statement confusing? No other bank does it. The problem is compounded by reformatting the reformatting, limiting trends to just five quarters with no accompanying restatement of the new divisions on an IFRS basis to allow for reconciliation. A large black mark, in our view. Valuation full: Consensus = 0.9x P/TNAV for a 9% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. Key risks to view: Danish economic miracle; disposal of non-core Ireland; strategic U-turn. Y/E 31.12., DKK m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.9 2.5 135.7 115.6 0.0 879 45.7x 0.98x 1.5 2.2 0.0 0 5.0 5.5 137.9 119.4 0.0 1,003 20.7x 0.95x 3.7 4.7 0.0 0 8.3 8.7 146.3 127.8 0.0 1,000 13.0x 0.89x 5.8 7.0 0.0 0 8.8 9.2 152.4 133.9 2.6 1,000 12.3x 0.85x 5.9 7.0 0.0 0 9.2 9.7 158.9 140.3 2.8 1,000 11.7x 0.81x 5.9 7.1 0.0 0 86 Sell Rating system Relative Current price Price target DKK 113.50 DKK 82.00 10/06/2013 NASDAQ Copenhagen Close Market cap DKK 113,500 m Reuters DANSKE.CO Bloomberg DANSKE DC OMX Changes made in this note Rating Sell (no change) Price target DKK 82.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 47091 - 47811 - 48317 PPOP 19601 - 20320 - 20827 8.71 9.20 9.68 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,000 2,784,000 Performance data High 52 weeks (DKK) Low 52 weeks (DKK) Relative performance to SXXP 1 month 12.2 % 3 months 4.7 % 12 months 9.3 % 115 78 SX7P 13.6 % 6.0 % 1.3 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Danske Bank A/S Banking Financials Market ratios; per share data (DKK) EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Income Statement and Ratios Year to 31-Dec Income Summary (DKKm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (DKKm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 2011 1.95 2.48 115.59 135.69 0.00 45.1x 0.97x 0.83x 0.0% 0% 878.6 2012 4.73 5.48 119.39 137.87 0.00 20.4x 0.94x 0.81x 0.0% 0% 945.3 2013e 8.27 8.71 127.77 146.30 0.00 12.9x 0.88x 0.77x 0.0% 0% 1,000.3 2014e 8.76 9.20 133.88 152.41 2.63 12.2x 0.84x 0.73x 2.3% 30% 1,000.0 2015e 9.24 9.68 140.33 158.86 2.77 11.6x 0.80x 0.71x 2.5% 30% 1,000.0 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 23,537 8,298 7,325 4,217 43,377 -25,987 17,390 -13,185 4,205 0 0 4,205 -2,482 -11 1,712 2,181 24,788 8,782 8,901 5,215 47,686 -26,588 21,098 -12,529 8,569 0 0 8,569 -3,819 -4 4,746 5,185 25,039 8,815 6,770 4,868 45,491 -25,890 19,601 -8,117 11,484 0 0 11,484 -3,215 0 8,268 8,708 25,489 8,880 6,919 4,923 46,211 -25,890 20,320 -8,149 12,171 0 0 12,171 -3,408 0 8,763 9,203 25,927 8,948 6,919 4,923 46,717 -25,890 20,827 -7,990 12,837 0 0 12,837 -3,594 0 9,242 9,682 5.3% 5.8% 21.5% 23.7% 9.9% 2.3% 21.3% -5.0% 103.8% 1.0% 0.4% -23.9% -6.7% -4.6% -2.6% -7.1% -35.2% 34.0% 1.8% 0.7% 2.2% 1.1% 1.6% 0.0% 3.7% 0.4% 6.0% 1.7% 0.8% 0.0% 0.0% 1.1% 0.0% 2.5% -2.0% 5.5% 103.8% 53.9% 34.0% -15.8% 6.0% 6.0% 5.5% 5.5% 177.2% 137.7% 74.2% 68.0% 6.0% 5.7% 5.5% 5.2% 1.03% 1.3x 59.9% 0.86% 0.79% 56.0% 59.0% 2.2% 1.5% 0.05% 41.5x 0.20% 1.00% 1.7x 55.8% 0.81% 0.74% 50.5% 44.6% 4.7% 3.7% 0.14% 34.7x 0.54% 0.99% 2.4x 56.9% 0.78% 0.48% 32.4% 28.0% 7.0% 5.8% 0.24% 29.9x 1.00% 0.99% 2.5x 56.0% 0.77% 0.48% 32.0% 28.0% 7.0% 5.9% 0.25% 28.6x 1.05% 0.98% 2.6x 55.4% 0.76% 0.46% 30.8% 28.0% 7.1% 5.9% 0.26% 27.6x 1.09% -0.03% -0.01% 0.00% 0.00% -4.2% -0.05% -0.05% 1.2% -0.02% -0.26% -0.9% -0.01% -0.01% -0.6% -0.01% -0.02% -14.5% 2.5% -16.6% 2.4% 0.0% 0.0% 0.0% 0.0% 0.08% 0.10% 0.01% 0.01% 0.34% 0.46% 0.04% 0.04% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,698,025 3,424,403 1,674,390 3,485,181 1,695,788 3,529,720 1,722,476 3,585,271 1,750,306 3,643,197 -1.4% 1.8% 1.3% 1.3% 1.6% 1.6% 1.6% 1.6% 848,994 991,947 60 125,795 107,164 106,826 905,979 929,092 1,022,115 4 138,230 119,700 119,097 819,436 146,301 127,771 127,201 829,908 152,412 133,882 133,312 842,969 158,858 140,328 139,758 856,589 9.9% 11.7% 11.5% -9.6% 5.8% 6.7% 6.8% 1.3% 4.2% 4.8% 4.8% 1.6% 4.2% 4.8% 4.8% 1.6% 26.5% 49.6% 200% 16.0% 11.8% 4.93% 42.9% 23.5% 48.0% 180% 18.9% 14.5% 3.79% 52.0% 23.5% 48.0% 23.5% 48.0% 23.5% 48.0% -2.9% -1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 19.9% 15.3% 20.5% 15.8% 20.9% 16.3% 2.9% 2.7% 1.0% 0.8% 0.6% 0.5% 0.4% 0.5% Source: Berenberg research, company data 87 Market Cap DKKm 112,000 Bloomberg ticker DANSKE DC Reuters ticker DANSKE.CO Share price DKK 112 Analyst Nick Anderson [email protected] +44 20 3207 7838 Deutsche Bank AG Banking Capital welcome, but still too much leverage • • • • • • • Too much leverage: While the market took the capital raise at Deutsche Bank (DBK) positively, we still believe DBK depends on leverage to deliver double-digit returns. With retained profits unlikely to reduce these ratios in the near term, we still believe DBK is likely to need to resort to outside equity to reduce this as regulatory pressure continues to grow. Capital raise all well and good, but leverage issues remain: DBK’s capital raise was warmly received by the market and will add another 70bp to its Basel III CT1 ratio of 8.8% as of Q1 2013. However, we still remain concerned about the leverage in the business. On our estimates, DBK has a Basel III leverage ratio of 2.0%, post the €2.9bn raising. To get above the 3% level, required by 2019, requires four years’ worth of profits and, in our view, delays dividends. On our leverage ratios DBK is in the bottom three: On our “pain” and “plain” leverage ratios (tangible equity/tangible assets), DBK scores in the bottom three among US/European banks. While DBK might point to its assets being less risky than peers’, the fact that Level 3 assets equate to 96% of TBV does little to persuade us of the fact. Leverage and revenue headwinds make DBK expensive: DBK is trading on 7.6x 2014 consensus EPS, 0.75x TBV for a consensus forecast ROTE of 10.1% in 2014, which we believe is more than fully valued given the leverage in the model and the regulatory/market headwinds DBK faces. Estimates cut to reflect capital raise and revenue headwinds: We cut our EPS estimates to reflect the 10% dilutive €2.9bn capital raise completed in April and the structural revenue headwinds we believe the sector faces, particularly in FICC where revenues continue to fall. Price target of €23 points to 36% downside and €16bn capital shortfall: Our price target on DBK rises by €3 to €23 due to the €2.9bn capital raise completed in April. Our price target is calculated using a capital allocation sum-of-the-parts and this shows a €16bn capital shortfall, mainly driven by the Investment Bank. This is €4bn lower than our previous estimate, mainly due to the capital raising. Risks to our view: The main risk to our view is that our revenue estimates are too low. For the retail and commercial businesses, this could be driven by interest rates rising or yield curves steepening. For CIB revenues, this could be driven by higher client activity helped by better economic growth than expected. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 4.28 4.28 55.77 39.26 0.75 957 8.5x 0.92x 8.1 11.7 2.1 18 0.41 0.41 56.26 41.44 0.75 960 88.1x 0.88x 0.7 1.0 2.1 182 2.50 2.50 57.84 43.90 0.75 1,020 14.5x 0.83x 4.5 6.0 2.1 30 3.17 3.17 60.27 46.32 0.75 1,020 11.4x 0.78x 5.4 7.0 2.1 24 4.79 4.79 64.30 50.36 0.75 1,020 7.6x 0.72x 7.7 9.9 2.1 16 88 Sell Rating system Relative Current price Price target EUR 36.27 EUR 23.00 10/06/2013 XETRA Close Market cap EUR 36,972 m Reuters DBKGn.DE Bloomberg DBK GY Changes made in this note Rating Sell (no change) Price target EUR 23.00 (20.00) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 31957 3.0 31657 -1.1 31454 -1.7 Income PPOP 5198 -1.5 6587 -6.5 9036 -5.8 2.60 -4.1 3.79 -16.4 5.64 -15.1 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,020 6,994,427 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 2.5 % 3 months 6.0 % 12 months 0.5 % 39 23 DAX 0.8 % 5.0 % -3.1 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Deutsche Bank AG Banking Financials Market ratios; per share data (EUR) EPS (reported) TBVPS (reported) BVPS (reported) DPS P/E (Berenberg adjusted) 2011 4.28 39.3 55.8 0.75 8.5x 2012 0.41 41.4 56.3 0.75 88.1x 2013e 2.50 43.9 57.8 0.75 14.5x 2014e 3.17 46.3 60.3 0.75 11.4x 2015e 4.79 50.4 64.3 0.75 7.6x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 0.92x 0.65x 2.1% 18% 930 0.88x 0.64x 2.1% 182% 930 0.83x 0.63x 2.1% 30% 1,020 0.78x 0.60x 2.1% 24% 1,020 0.72x 0.56x 2.1% 16% 1,020 2011 2012 2013e 2014e 2015e Market Cap Bloomberg ticker Reuters ticker 33,708 DBK GY DBKGn.DE Share price Analyst EUR 36.27 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net revenues Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Income Ratios (%) Net revenues/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/Net revenues Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 10/11 11/12 12/13 13/14 -5.0% Year-on-year change (%) 33,228 33,863 32,925 31,294 30,913 16.3% 1.9% -2.8% -25,998 -31,200 -27,806 -25,136 -22,404 11.5% 20.0% -10.9% -9.6% 7,230 -1,840 5,390 2,663 -1,721 942 5,119 -1,364 3,755 6,157 -1,412 4,746 8,508 -1,378 7,131 37.7% 44.4% 35.6% -63.2% -6.5% -82.5% 92.2% -20.7% 298.6% 20.3% 3.5% 26.4% 5,390 -1,064 -194 4,132 942 -493 -54 395 3,755 -1,169 -40 2,546 4,746 -1,471 -40 3,234 7,131 -2,210 -40 4,880 35.6% -35.3% -82.5% -53.7% 298.6% 137.0% 26.4% 25.9% 78.9% -90.4% 544.6% 27.0% 1.63% 3.9x 78.2% 1.28% 0.45% 5.5% 19.7% 11.0% 8.1% 0.19% 57.6x 1.08% 1.62% 1.5x 92.1% 1.49% 0.42% 5.1% 52.3% 1.0% 0.7% 0.02% 50.8x 0.12% 1.63% 3.8x 84.5% 1.38% 1.55% 4.4x 80.3% 1.25% 1.53% 6.2x 72.5% 1.11% 4.1% 31.1% 5.7% 4.5% 0.13% 45.2x 0.79% 4.5% 31.0% 6.8% 5.4% 0.16% 42.7x 1.01% 4.5% 31.0% 9.5% 7.7% 0.24% 39.2x 1.56% 2011 2012 2013e 2014e 2015e 10/11 11/12 12/13 13/14 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research Year-on-year change (%) 412,514 2,164,103 601,730 228,772 1,270 53,390 37,588 36,313 381,246 17.6% 19.1% 69% 12.9% 10% 2,022,275 2,021,507 2,015,998 0 2,014,361 13.6% -6.6% 0.0% -0.3% 9.4% 13.1% 21.2% 10.1% 1.1% 5.8% 4.5% -12.4% 9.2% 12.5% 11.8% -3.8% 4.2% 5.5% 3.3% 0.1% 239 54,001 39,782 37,957 334,000 239 58,979 44,760 42,420 321,145 239 61,449 47,230 43,813 321,459 0 0 239 65,565 51,346 47,929 313,651 16.5% 0.0% 15.9% 0.0% 15.9% 0.0% 15.6% 0.0% 15.1% 11.4% 17.1% 13.2% 17.6% 13.6% 19.3% 15.3% 89 DNB ASA Banking Tough love from the regulator • • • DNB has one of the strongest balance sheets among European banks, yet the regulator wants more. This reflects, in our view, the unusual risk profile of the Norwegian economy and therefore the bank. Being a play on global liquidity, Norway/DNB is at risk from any tapering by the various expansionary central banks. For now, DNB’s near-term growth opportunities and Nordic virtues will sustain outperformance but longer-term, the risks remain material. Capital strength but regulator wants more: As per our analysis, DNB has the third-strongest balance sheet overall among European commercial banks, and on the “pain” ratio, it is one of only three to clear the 4% threshold. It also has the most liquid balance sheet. Transplanted to Sweden, it would report a c16% fully-loaded Basel III ratio. The regulator, however, remains concerned about the build-up of risk in Norway, most noticeably in the housing market, and so it does everything it can to force the Norwegian banks to hold more. Nordic virtues: DNB has demonstrated the classic Nordic virtues of a strong track record managing credit risk and its cost base. We also like its limited direct exposure to the Eurozone. • Growth opportunities are short-term: DNB also offers growth, albeit short-term, as an elevated oil price and demand for oil sustain economic activity and therefore demand for credit in Norway. Despite a more mixed outlook within its international book, it is one of the few banks with revenue growth; we estimate 7% in 2014 versus 2% on average for the other Nordics. • Global liquidity represents material long-term risk: This is the heart of the debate in our view, especially as the Federal Reserve begins to contemplate tapering its ultra-loose monetary policy. We see any reduction in global liquidity as a major risk to the Norwegian economy because of the likely effect on the demand for and price of oil. As ever, we would flag the seemingly random 90% correlation between crude oil prices and fine wine prices since 1998 as evidence of the global liquidity bubble. • Valuation full: Consensus = 1.1x P/TNAV for a 12% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. • Key risks to view: Weaker global demand sustains expansionary monetary policy; disruption to wholesale funding markets; regulatory forbearance. Y/E 31.12., NOK m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 8.0 8.2 72.3 69.2 2.0 1,629 11.2x 1.33x 11.4 12.4 0.0 0 8.4 8.5 78.6 75.7 2.1 1,629 10.8x 1.22x 11.2 11.9 0.0 0 8.4 8.4 84.2 81.3 2.8 1,629 11.0x 1.13x 10.2 10.6 0.0 0 9.6 9.6 90.6 87.7 3.2 1,629 9.6x 1.05x 11.0 11.3 0.0 0 10.0 10.0 95.6 92.7 5.0 1,629 9.2x 0.99x 10.7 11.1 0.1 1 90 Buy Rating system Relative Current price Price target NOK 92.00 NOK 88.00 10/06/2013 Oslo Close Market cap NOK 149,850 m Reuters DNB.OL Bloomberg DNB NO Changes made in this note Rating Buy (no change) Price target NOK 88.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 42815 45606 46822 Income PPOP 21794 - 24388 - 25407 8.37 9.59 10.01 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,629 1,837,000 Performance data High 52 weeks (NOK) Low 52 weeks (NOK) Relative performance to SXXP 1 month -1.5 % 3 months 1.9 % 12 months 37.5 % 98 55 SX7P -0.2 % 3.2 % 29.5 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] DNB ASA Banking Financials Market ratios; per share data (NOK) EPS (reported) EPS (Berenberg adjusted) 2011 7.97 8.21 2012 8.37 8.54 2013e 8.37 8.37 2014e 9.59 9.59 2015e 10.01 10.01 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 69.16 72.33 2.00 11.3x 75.71 78.61 2.10 10.8x 81.32 84.21 2.76 11.1x 87.74 90.64 3.17 9.6x 92.75 95.65 5.01 9.2x Reuters ticker DNB.OL Share price NOK 92.55 Analyst Nick Anderson [email protected] P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.34x 1.28x 2.2% 25% 1,629 1.22x 1.18x 2.3% 25% 1,629 1.14x 1.10x 3.0% 33% 1,629 1.05x 1.02x 3.4% 33% 1,629 1.00x 0.97x 5.4% 50% 1,629 +44 20 3207 7838 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 25,251 6,878 7,660 2,217 42,006 -19,789 22,217 -3,442 18,775 -380 13 18,408 -5,423 0 12,985 13,365 27,216 6,962 3,909 3,630 41,717 -20,693 21,024 -3,179 17,845 -287 95 17,653 -4,028 0 13,625 13,912 28,393 29,890 30,886 4.3% 5.3% 3.3% 14,422 42,815 -21,021 21,794 -3,380 18,414 0 0 18,414 -4,788 0 13,626 13,626 15,716 45,606 -21,217 24,388 -3,275 21,113 0 0 21,113 -5,489 0 15,624 15,624 15,936 46,822 -21,415 25,407 -3,370 22,037 0 0 22,037 -5,730 0 16,307 16,307 7.8% 1.2% -49.0% 63.7% -0.7% 4.6% -5.4% -7.6% -5.0% -24.5% 630.8% -4.1% -25.7% 297.3% 2.6% 1.6% 3.7% 6.3% 3.2% 9.0% 6.5% 0.9% 11.9% -3.1% 14.7% 1.4% 2.7% 0.9% 4.2% 2.9% 4.4% 4.3% 18.9% 14.7% 14.7% 4.4% 4.4% 4.9% 4.1% 0.0% -2.1% 14.7% 14.7% 4.4% 4.4% 1.18% 6.5x 47.1% 0.92% 0.29% 13.6% 28.9% 12.4% 11.4% 0.60% 20.5x 1.21% 1.15% 6.6x 49.6% 0.88% 0.25% 11.7% 22.6% 11.9% 11.2% 0.58% 20.7x 1.23% 1.22% 6.4x 49.1% 0.90% 0.26% 11.9% 26.0% 10.6% 10.2% 0.59% 18.0x 1.23% 1.24% 7.4x 46.5% 0.88% 0.24% 11.0% 26.0% 11.3% 11.0% 0.65% 17.5x 1.36% 1.24% 7.5x 45.7% 0.86% 0.24% 10.9% 26.0% 11.1% 10.7% 0.65% 17.0x 1.38% -0.02% 0.07% 0.02% 0.00% 2.5% -0.05% -0.04% -2.0% -6.3% -0.5% -0.2% -0.03% -0.5% 0.03% 0.01% 0.2% 3.4% -1.4% -1.0% 0.01% -2.6% -0.03% -0.02% -0.9% 0.0% 0.8% 0.8% 0.06% -0.8% -0.02% 0.00% 0.0% 0.0% -0.3% -0.2% 0.01% 0.02% 0.00% 0.13% 0.01% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,279,259 2,126,098 1,297,892 2,264,845 1,358,932 2,371,360 1,405,226 2,452,144 1,453,212 2,535,881 1.5% 6.5% 4.7% 4.7% 3.4% 3.4% 3.4% 3.4% 740,036 659,320 0 117,815 112,641 104,191 1,061,772 810,959 729,137 0 128,036 123,319 115,627 1,023,825 49.9% 60.2% 173% 10.4% 9.8% 2.27% 40.4% 45.2% 57.3% 160% 11.6% 11.3% 2.25% 40.4% Market Cap Bloomberg ticker NOKm 150,745 DNB NO Income Statement and Ratios Year to 31-Dec Income Summary (NOKm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (NOKm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 9.6% 10.6% 137,166 132,449 124,757 1,043,398 147,634 142,917 135,225 1,078,943 155,787 151,070 143,378 1,115,787 8.7% 9.5% 11.0% -3.6% 7.1% 7.4% 7.9% 1.9% 7.6% 7.9% 8.4% 3.4% 5.5% 5.7% 6.0% 3.4% 44.0% 57.3% 44.0% 57.3% 44.0% 57.3% -4.7% -2.9% -1.2% 0.0% 0.0% 0.0% 0.0% 0.0% 12.3% 12.0% 12.8% 12.5% 13.1% 12.8% 1.2% 1.5% 0.7% 0.7% 0.6% 0.6% 0.3% 0.3% Source: Company data, Berenberg research 91 EFG International AG Small/Mid-Cap: Banking Building capital • • • EFG remains our preferred mid-cap private bank: It is emerging as a bank with stronger capital and a lower cost base, focused on its core business of private banking. EFG’s perceived risk will continue to fall as new management delivers on the restructuring plan. Share price gains will be driven by: i) EPS upgrades; ii) a reduction of risk premium; and iii) the squeeze of still-material short interest, in our view. Capital: EFG has strengthened its capital buffers by 44% in the past 12 months through the sale of treasury shares to its parent company (CHF76m), the gain on EFG Financial Products’ (FP) IPO (CHF121m), and retained earnings and other gains (CHF121m). The “pain” ratio is now 3.6% versus 2.3% for UBS and 0.9% for Credit Suisse. Weak capital is no longer an investor concern. Management is delivering on the restructuring plan: The cost/income ratio has dropped to 79% from 92% in 2011 due to higher revenues (+8% yoy) and lower expenses (-8% yoy). EFG has reduced its headcount by 14% and exited 20 out of 30 international locations in 2012. Expenses should fall by a further 6% in 2013E. • Assets under management (AuM) are resilient, despite the headcount reduction, addressing yet another investor concern. AuM remained flat at CHF78.7bn (versus CHF78.4bn in 2011), as inflows from continuing businesses (CHF3bn) offset outflows from exiting locations. EFG should achieve 6% inflows (CHF5bn) from 2013. • We would continue to buy EFG: We believe share price gains will be driven by: i) EPS upgrades as consensus believes in EFG’s targets; ie CHF200m net profit by 2015 (versus consensus: CHF190m); and ii) the squeeze of short interest. • Risks: Apart from unfavourable industry regulatory changes, EFG is exposed to significant valuation risk through its life insurance portfolio (carrying value of CHF682m versus auditors’ fair value of CHF477m). EFG should also face revenue headwinds in H2 2013 given the sale of EFG FP and the non-recurring nature of some revenues reported in FY 2012 (CHF50m, 6% of total). • Valuation: EFG is trading at 10x 2014E EPS, a 50% discount to Julius Baer. Our price target is derived from a P/TBV multiple based on a 2014E RoTE and a CAPM-based CoE. Y/E 31.12., CHF m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) AuM (CHFbn) Net New Money (CHFbn) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -2.32 0.30 7.3 5.2 0.10 134 38.2x 2.18x 2.6 3.0 0.9 33 79 -1.7 0.70 0.62 8.3 6.7 0.10 146 18.5x 1.72x 5.8 6.4 0.9 16 79 0.2 0.85 0.88 11.4 9.8 0.10 146 13.0x 1.17x 8.0 8.6 0.9 11 87 5.7 1.17 1.19 12.4 10.9 0.10 146 9.6x 1.05x 10.6 11.0 0.9 8 95 6.2 1.41 1.44 13.7 12.2 0.10 146 8.0x 0.94x 12.5 12.5 0.9 7 104 7.8 92 Buy Rating system Relative Current price Price target CHF 11.45 CHF 13.50 10/06/2013 SIX Swiss Close Market cap CHF 1,679,248 m Reuters EFGN.S Bloomberg EFGN SW Changes made in this note Rating Buy (no change) Price target CHF 13.50 (no change) Chg 2013e 2014e old Δ% old Δ% 780 848 Income 168 223 Op Pr 0.88 1.19 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 930 267 1.44 - 146,659 89,285 Performance data High 52 weeks (CHF) Low 52 weeks (CHF) Relative performance to SXXP 1 month -8.2 % 3 months -12.6 % 12 months 59.3 % 13 5 SX7P -6.9 % -11.3 % 51.2 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] EFG International AG Small/Mid-Cap: Banking Financials EFG International Market ratios and per share data (CHF) EPS reported EPS (Berenberg adjusted) 2011 -2.32 0.30 2012 E 0.70 0.62 Tangible book value per share (TBVPS) 5.25 7.35 0.10 38.15 Book value per share (BVPS) DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend Yield (%) Payout ratio (%) Shares outstanding (m) Assets under management data and Ratios AuM data (CHFbn) Average assets under management Relationship managers 2013 E 0.85 0.88 2014 E 1.17 1.19 2015 E 1.41 1.44 6.66 9.79 10.88 12.21 Reuters ticker 8.26 0.10 18.46 11.37 0.10 13.02 12.43 0.10 9.61 13.74 0.10 7.96 Rating Analyst Share price (CHF) 2.18 1.56 3.0 0.9 33.3 134 1.72 1.39 6.4 0.9 16.1 146 1.17 1.01 8.6 0.9 11.4 146 1.05 0.92 11.0 0.9 8.4 146 0.94 0.83 12.5 0.9 7.0 146 Target price (CHF) Upside 2011 2012 E 2013 E 2014 E 2015 E 80.9 567 79.3 477 83.1 487 90.7 496 99.6 506 2011 2012 E 2013 E 2014 E 2015 E Market Cap (CHFm) Bloomberg ticker Phone email: 11/12 1,679 EFGN SW EFGN.S Buy Eleni Papoula 11.45 13.50 18% +44 20 3465 2741 [email protected] 12/13 Year-on-year change (%) -2.0 4.8 -15.9 2.0 13/14 14/15 9.2 2.0 9.7 2.0 13/14 14/15 4.5 9.2 9.2 36.1 8.7 2.2 32.2 0.0 na 4.0 11.8 9.7 20.1 9.6 6.0 19.9 0.0 na Income Statement and Ratios Year to 31-Dec 11/12 12/13 Income Summary (CHFm) Net Interest income (NII) Commission income Trading income Other income Total income Operating expenses Operating profit Amortisation of customer relationships Exceptionals Year-on-year change (%) 6.2 12.6 8.3 -8.8 -15.3 -29.2 -185.5 -330.9 1.5 0.8 -6.6 -6.3 90.0 39.0 -65.7 -22.4 -108.1 na 212 454 83 15 763 -699 64 -14 -339 225 492 70 -12 775 -653 121 -5 28 253 449 50 29 780 -612 168 -4 0 265 490 54 39 848 -626 223 -4 0 276 548 60 47 930 -663 267 -4 0 Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit -289 -2 -17 -311 40 144 -20 -13 98 91 165 -23 0 125 128 219 -31 0 170 174 263 -37 0 206 210 -149.7 857.1 -24.4 -131.6 124.8 14.5 14.7 na 26.8 41.7 32.9 32.9 na 36.6 35.5 20.2 20.2 na 21.2 20.7 Income Ratios (%) Commission income Total revenue Operating expenses Operating profit Attributable profits (reported) Adj. attributable profit -8.5 -5.6 1.6 -46.6 -58.1 -79.9 8.3 1.5 -6.6 90.0 -131.6 124.8 -8.8 0.8 -6.3 39.0 26.8 41.7 9.2 8.7 2.2 32.2 36.6 35.5 11.8 9.6 6.0 19.9 21.2 20.7 -197.5 -126.9 -523.3 -293.2 126.7 -256.2 -205.1 -49.3 -3.7 -56.7 -120.3 -66.6 -205.1 1,045.0 -134.9 -17.5 36.7 -14.9 27.9 10.8 169.7 -38.3 -42.2 -41.7 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15 4.0 0.0 2.0 4.0 14.8 16.8 11.6 16.8 2.0 4.0 0.0 2.0 4.0 14.4 17.7 12.7 17.7 2.0 0.0 2.0 0.0 14.5 14.5 0.0 2.0 0.0 15.4 15.4 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (CHFm) Customer loans Investments available for sale Total assets Customer deposits Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio 9,548 3,984 21,041 14,398 25 235 711 235 5,614 10,434 3,298 23,626 16,084 104 719 1,022 719 6,046 11,177 3,298 24,101 17,229 121 925 1,377 925 6,748 11,629 3,298 24,585 17,925 139 1,081 1,537 1,081 6,884 12,098 3,298 25,079 18,649 159 1,273 1,732 1,273 7,022 26.7 45.4 66.3 12.9 4.2 25.6 44.2 64.9 17.2 11.9 28.0 46.4 64.9 13.7 13.7 28.0 47.3 64.9 15.7 15.7 28.0 48.2 64.9 18.1 18.1 Source: Company data, Berenberg research 93 Year-on-year change (%) 9.3 7.1 -17.2 0.0 12.3 2.0 11.7 7.1 324.0 16.3 205.7 28.7 43.7 34.8 205.7 28.7 7.7 11.6 -4.1 -2.7 -2.2 33.2 183.9 9.4 5.0 0.0 -20.1 15.3 Erste Group Bank AG Banking High credit risk • • We reiterate our bear case on Erste because we believe the market underestimates the credit risk arising from its central and eastern European (CEE) exposure. The market expects a 20% reduction in loan losses in 2013 compared with 2012 (from €2.0bn to €1.6bn), driven mostly by Romania. This is too optimistic, in our view. Apart from asset-quality issues, Erste faces revenue headwinds due to falling interest rates in CEE that resulted in an 8% miss to its internal target of a “stable” operating result in Q1 2013. Besides, our capital analysis reveals that the relative advantage based on Basel ratios compared with its domestic peer is misleading. Valuation is full and we advise investors to take profits. Consensus loan loss charges (LLCs) of €1.6bn for FY 2013 are too optimistic: The Q1 level of €400m is artificially low due to a reversal of losses in Austria. Even if the asset quality in Romania (13% of loan book) improves in FY 2013, the Czech Republic is falling into a deeper recession than economists expected and Hungary remains challenging. We estimate LLCs of €1.8bn for FY 2013 (10% lower versus FY 2012), assuming there is no deterioration of the macro environment in H2 2013. Our estimate is in line with guidance. • Operating result should remain under pressure: It will be very difficult for Erste to make up for the lost ground in H2, because: i) net interest income (NII) will continue to decline as both loan volumes and lending rates drop (driven respectively by weak demand in most regions and rate cuts; ie in Hungary and Romania); ii) fee and trading income is as good as it gets (on a seasonally strong Q1); and iii) there is limited room for a further reduction of operating expenses. We estimate an operating result of €3.33bn for FY 2013, -6% yoy, -6% versus consensus and -6% on the company’s internal target of a flat operating result. • Capital – simpler ratios give a different story to Basel ratios: The Basel capital ratios of Erste are better than its domestic peer Raiffeisen (Basel III CT1 at 9.0% excluding state aid, versus 7.6% for Raiffeisen), but if we remove the subjectivity of risk weights, Erste’s “pain” ratio (which we define to exclude state aid) is 3.3%, matching Raiffeisen. • Valuation: Erste is trading at 1.0x TBV for a 2014E RoTE of 7.5%, a 50% premium to Raiffeisen. We believe the premium is based on the perception of Erste’s stronger capital, which is misleading based on our analysis. Valuation is more than full. We would continue selling. Our price target is derived from the Gordon growth model, based on a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -2.28 1.51 26.1 17.4 0.00 378 15.8x 1.37x -5.5 8.4 0.0 0 0.87 2.14 26.2 20.8 0.40 394 11.1x 1.15x 3.9 10.3 1.7 19 1.17 1.53 27.2 21.8 0.38 394 15.5x 1.09x 5.0 7.0 1.6 25 1.34 1.70 28.1 22.7 0.43 394 14.0x 1.05x 5.3 7.5 1.8 25 1.29 1.67 29.0 23.6 0.42 394 14.2x 1.01x 5.1 7.1 1.8 25 94 Sell Rating system Relative Current price Price target EUR 23.81 EUR 13.00 10/06/2013 Vienna Close Market cap EUR 9,395 m Reuters ERST.VI Bloomberg EBS AV Changes made in this note Rating Sell (no change) Price target EUR 13.00 (no change) Chg 2013e 2014e old Δ% old Δ% 6991 6938 Income 2919 PPOP 2919 1.53 1.70 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 6897 2882 1.67 - 395 691,543 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -0.1 % 3 months -4.7 % 12 months 41.2 % 27 13 SX7P 1.3 % -3.4 % 33.1 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Erste Group Bank AG Banking Financials Erste Market ratios and per share data (EUR) EPS (reported) New EPS (Berenberg adjusted) 2011 -2.28 1.51 2012 0.87 2.14 2013 E 1.17 1.53 2014 E 1.34 1.70 2015 E 1.29 1.67 Market Cap (EURm) Bloomberg ticker Old EPS (Berenberg adjusted) 1.51 1.48 1.65 1.76 1.77 Reuters ticker Change TBVPS BVPS DPS 0% 17.4 26.1 0.00 45% 20.8 26.2 0.40 -7% 21.8 27.2 0.38 -3% 22.7 28.1 0.43 -6% 23.6 29.0 0.42 Rating Analyst Share price (EUR) Target price (EUR) P/E (Berenberg adjusted) 15.8 11.1 15.5 14.0 14.2 Upside P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend yield (%) Payout ratio (%) Weighted avg. number of shares (m) 1.37 0.91 8.4 0.0 0.0 378 1.15 0.91 10.3 1.7 18.7 394 1.09 0.88 7.0 1.6 25.0 394 1.05 0.85 7.5 1.8 25.0 394 1.01 0.82 7.1 1.8 25.0 394 Phone email: 2011 2012 2013 E 2014 E 2015 E 9,395 EBS AV EBKOF.PK Sell Eleni Papoula 23.81 13.00 -45% +44 20 3465 2741 [email protected] Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Other results Pre-provision op. profits (PPOP) Loan loss charge (LLC) Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Exceptional items Adj. attributable profit Coupon of participation capital Income Ratios (%) NII/Average interest earning assets PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted RoE RoA Asset Tangible Leverage (x) RoRWA 5,569 1,787 122 0 7,479 -3,851 -1,683 1,945 -2,267 -322 -240 -156 -719 1,289 570 -141 5,235 1,721 273 0 7,230 -3,757 -692 2,781 -1,980 801 -170 -147 484 361 844 -141 4,919 1,742 330 0 6,991 -3,705 -367 2,919 -1,800 1,119 -277 -238 603 0 603 -141 4,766 1,784 388 0 6,938 -3,691 -328 2,919 -1,672 1,247 -349 -228 670 0 670 -141 4,714 1,795 388 0 6,897 -3,686 -329 2,882 -1,648 1,234 -347 -229 658 0 658 -150 2.88 0.9 51.5 1.9 1.70 40.7 -74.6 8.4 2.66 1.4 52.0 1.8 1.48 37.8 21.2 10.3 2.48 1.6 53.0 1.7 1.37 36.6 24.8 7.0 2.41 1.7 53.2 1.7 1.28 35.1 28.0 7.5 -5.5 0.27 16.8 6.3 3.9 0.40 14.7 8.9 5.0 0.28 14.4 5.9 2011 2012 2013 E 11/12 12/13 Year-on-year change (%) -6.0 -6.0 -3.7 1.2 123.5 20.6 na na -3.3 -3.3 -2.4 -1.4 13/14 14/15 -3.1 2.4 17.6 na -0.8 -0.4 -1.1 0.6 0.0 na -0.6 -0.1 43.0 -12.7 -348.7 -29.2 -5.7 -167.3 5.0 -9.1 39.6 63.0 61.6 24.7 0.0 -7.1 11.5 25.8 -4.1 11.0 -1.3 -1.4 -1.1 -0.6 0.1 -1.7 48.2 0.0 -28.5 0.0 11.0 0.0 -1.7 6.3 2.37 1.7 53.4 1.7 1.25 35.0 28.1 7.1 -7.7 63.7 0.9 -4.3 -12.5 -7.1 -128.5 21.9 -6.5 15.4 2.0 -2.2 -7.7 -3.2 16.7 -31.9 -3.2 7.7 0.4 -0.6 -6.9 -4.1 12.9 6.6 -1.4 0.2 0.5 -0.6 -1.9 -0.3 0.4 -5.4 5.3 0.31 14.1 6.4 5.1 0.31 13.8 6.0 -170.2 45.4 -12.4 41.7 30.1 -29.2 -2.3 -33.6 4.5 10.8 -2.0 7.7 -3.2 -2.2 -1.8 -4.9 2014 E 2015 E 11/12 12/13 13/14 14/15 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core Equity Tier 1 Capital (reported) Core (Equity) Tier 1 Capital (excl. participation capital) Risk Weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Retail Funds Tier 1 ratio Core (Equity) Tier 1 ratio (reported) NPL/loans Provision coverage Year-on-year change (%) 134,750 210,006 195,922 118,880 30,782 3,143 15,180 6,741 10,681 8,917 114,019 131,928 213,824 198,203 123,053 29,427 3,483 16,338 8,197 11,848 10,084 105,323 130,768 213,698 197,776 124,904 29,811 3,518 16,741 8,601 12,120 10,356 104,378 131,386 214,707 198,394 126,342 29,811 3,518 17,102 8,962 12,481 10,717 104,739 132,039 215,775 199,047 127,821 29,811 3,518 17,446 9,306 12,825 11,061 105,122 -2.1 1.8 1.2 3.5 -4.4 10.8 7.6 21.6 10.9 13.1 -7.6 -0.9 -0.1 -0.2 1.5 1.3 1.0 2.5 4.9 2.3 2.7 -0.9 0.5 0.5 0.3 1.2 0.0 0.0 2.2 4.2 3.0 3.5 0.3 0.5 0.5 0.3 1.2 0.0 0.0 2.0 3.8 2.8 3.2 0.4 54.3 64.2 113.3 13.3 9.4 7.8 8.5 49.3 61.7 107.2 15.5 11.2 9.6 9.2 48.8 61.2 104.7 16.0 11.6 9.9 8.5 48.8 61.2 104.0 16.3 11.9 10.2 8.1 48.7 61.2 103.3 16.6 12.2 10.5 8.0 -9.3 -3.8 -5.4 16.5 20.1 22.4 8.5 -0.8 -0.8 -2.3 3.4 3.2 3.6 -6.8 -0.1 0.0 -0.7 1.8 2.6 3.1 -5.4 -0.1 0.0 -0.7 1.6 2.4 2.8 -0.7 Source: Company data, Berenberg research 95 Svenska Handelsbanken AB Banking 20:20 vision • • • • • • • Handelsbanken demonstrates the clear benefits from a low-risk utility banking model, delivering sustainably higher returns and outperforming banks and the broader market over a prolonged period. Capital is for uncertainty and uncertainty is much lower than at peers given its business model. Valuation is the challenge, however. A premium is more than justified by the predictability of its earnings in an uncertain economic environment (such as the one Europe is likely to experience in the next decade) and the option on growth provided by the UK and the Netherlands. A Hold for now, but look to buy on further weakness. Capital – more than enough: The sixth-strongest commercial bank in our coverage universe on the “pain” ratio, Handelsbanken falls short of the 4% threshold. But as Walter Bagehot opined, “a well-run bank needs no capital”. No other bank in Europe has such a deeply ingrained credit culture; no other bank can boast such a 40-year track record of managing risk. It also has the second-most-liquid balance sheet. Poster child for utility banking: Handelsbanken has focused on RoE over growth since its new strategy was forged from its own crisis 40+ years ago. For 30+ years, its commitment to and delivery of low costs and low risk through a decentralised business model has sustained its superior RoE versus peers. Utility banking beats growth banking over time, in our view. The UK opportunity is huge: The CEO’s vision of the bank’s UK business being larger than Sweden one day (it is one-eighth of the size today) moves closer each quarter. The attractiveness is compounded by potential returns – the CFO notes that the oldest UK branches (8-9 years old) have, at 30%, cost-income ratios below the average Swedish branch and very high RoEs. Funding strategy vindicated: Handelsbanken is unique in disliking deposits (it is only sticky until they are not) despite the pressures from regulators bearing rules from Basel. Its preference for unsecured funding is validated by events in Cyprus in Q1. Valuation – how much to pay for growth? Consensus = 1.7x P/TNAV for a 14% 2014 RoTE. This appears expensive on the face of it – the key is how much to pay for UK and Dutch growth options, and stability. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. Key risks to view: Risk-on rally; severe dislocation in wholesale funding markets. Y/E 31.12., SEK m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 19.2 19.2 151.5 141.3 9.8 623 14.8x 2.01x 13.8 14.8 0.0 0 21.6 21.6 164.1 154.2 10.8 628 13.2x 1.84x 14.8 15.9 0.0 0 21.4 21.4 163.6 153.8 10.9 634 13.3x 1.85x 13.3 14.2 0.0 1 22.4 22.4 175.0 165.2 11.4 635 12.7x 1.72x 13.5 14.3 0.0 1 23.4 23.4 187.0 177.1 11.9 635 12.1x 1.60x 13.2 14.0 0.0 1 96 Hold Rating system Relative Current price Price target SEK 284.20 SEK 250.00 10/06/2013 NASDAQ Stockholm Close Market cap SEK 180,353 m Reuters SHBa.ST Bloomberg SHBA SS OMX Changes made in this note Rating Hold (no change) Price target SEK 250.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 35506 1.0 36817 1.7 38109 1.6 PPOP 19373 -1.6 20326 -0.2 21268 -0.2 21.36 0.1 22.36 0.0 23.39 0.1 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 635 1,143,000 Performance data High 52 weeks (SEK) Low 52 weeks (SEK) Relative performance to SXXP 1 month -1.5 % 3 months 1.0 % 12 months 8.7 % 302 209 SX7P -0.2 % 2.3 % 0.7 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Svenska Handelsbanken AB Banking Financials Market ratios; per share data (SEK) EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 2011 19.18 19.18 2012 21.60 21.60 2013e 21.38 21.38 2014e 22.37 22.37 2015e 23.40 23.40 Market Cap Bloomberg ticker 141.30 151.48 9.75 14.9x 154.20 164.11 10.75 13.2x 153.78 163.59 10.92 13.3x 165.20 175.01 11.42 12.7x 177.14 186.95 11.94 12.2x Reuters ticker SHBa.ST Share price SEK 284.9 Analyst Nick Anderson [email protected] 2.02x 1.88x 3.4% 49% 623.1 1.85x 1.74x 3.8% 48% 628.498 1.85x 1.74x 3.8% 50% 634.225 1.72x 1.63x 4.0% 50% 634.6 1.61x 1.52x 4.2% 50% 634.6 +44 20 3207 7838 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 23,613 7,673 1,016 507 32,809 -15,464 17,345 -816 16,529 7 159 16,695 -4,372 0 12,323 12,323 26,081 7,369 1,120 492 35,062 -16,700 18,362 -1,251 17,111 -3 22 17,130 -3,092 -1 14,037 14,037 26,584 7,540 1,182 553 35,859 -16,789 19,069 -1,427 17,643 1 15 17,659 -3,813 0 13,846 13,846 27,717 7,754 1,389 575 37,435 -17,154 20,281 -1,702 18,579 0 0 18,579 -4,087 0 14,492 14,492 28,827 7,943 1,371 585 38,726 -17,501 21,225 -1,792 19,432 0 0 19,432 -4,275 0 15,157 15,157 10.5% -4.0% 10.2% -3.0% 6.9% 8.0% 5.9% 53.3% 3.5% 1.9% 2.3% 5.5% 12.4% 2.3% 0.5% 3.9% 14.1% 3.1% 4.3% 2.8% 17.5% 4.0% 4.4% 2.2% 6.4% 19.3% 5.3% 4.0% 2.4% -1.3% 1.7% 3.4% 2.0% 4.7% 5.3% 4.6% 2.6% -29.3% 3.1% 23.3% 5.2% 7.2% 4.6% 4.6% 13.9% 13.9% -1.4% -1.4% 4.7% 4.7% 4.6% 4.6% 1.02% 21.3x 47.1% 0.67% 0.05% 3.5% 26.5% 14.8% 13.8% 0.53% 27.9x 2.35% 1.05% 14.7x 47.6% 0.67% 0.08% 4.8% 18.1% 15.9% 14.8% 0.57% 28.1x 2.83% 1.10% 13.4x 46.8% 0.70% 0.09% 5.4% 21.6% 14.2% 13.3% 0.57% 24.7x 2.85% 1.11% 11.9x 45.8% 0.69% 0.10% 6.1% 22.0% 14.3% 13.5% 0.58% 24.6x 2.90% 1.12% 11.8x 45.2% 0.68% 0.10% 6.2% 22.0% 14.0% 13.2% 0.59% 23.6x 2.94% 0.03% 0.05% 0.01% 0.01% 0.5% 0.01% 0.02% -0.8% 0.02% 0.01% -1.0% -0.01% 0.01% -0.6% -0.01% 0.00% -8.4% 1.1% 3.5% -1.7% 0.4% 0.1% 0.0% -0.4% 0.03% 0.01% 0.01% 0.01% 0.47% 0.03% 0.05% 0.04% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,591,128 2,454,366 1,680,479 2,383,951 1,699,565 2,453,145 1,750,027 2,525,983 1,805,279 2,605,733 5.6% -2.9% 1.1% 2.9% 3.0% 3.0% 3.2% 3.2% 724,888 1,175,391 0 94,524 88,172 79,384 508,317 682,223 1,172,593 2 103,848 97,575 87,207 486,588 20.7% 64.8% 219% 18.4% 15.6% 0.43% 60.7% 20.4% 70.5% 246% 20.4% 17.9% 0.43% 56.4% SEKm 180,798 SHBA SS Income Statement and Ratios Year to 31-Dec Income Summary (SEKm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (SEKm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage -5.9% -0.2% 2 103,817 97,588 89,797 492,490 2 111,063 104,834 97,043 507,113 2 118,641 112,412 104,621 523,123 9.9% 10.7% 9.9% -4.3% 0.0% 0.0% 3.0% 1.2% 7.0% 7.4% 8.1% 3.0% 6.8% 7.2% 7.8% 3.2% 20.1% 69.3% 20.1% 69.3% 20.1% 69.3% -0.3% 5.7% -0.3% 5.7% -0.3% -1.2% 0.0% 0.0% 20.6% 18.2% 21.4% 19.1% 22.2% 20.0% 2.0% 2.3% 2.0% 2.3% 0.2% 0.3% 0.8% 0.9% Source: Berenberg research, company data 97 HSBC Holdings plc Banking A management that “gets it” • • • Adapting to structural challenges: We reiterate our preference for HSBC over its European or large bank peers. We believe management “gets it”, recognising that the industry faces structural rather than cyclical challenges, and is focused on cost reduction and capital return. Buy Simplification generates cost savings: We believe HSBC is the only large bank which understands that without simplification and risk reduction it would be too big and complex to manage and control. This simplification is forecast to generate $7bn of total cost savings by 2015 and should also reduce risk volatility. 10/06/2013 London Close Market cap GBP 130,764 m Reuters HSBA.L Bloomberg HSBA LN Risk reduction delivers capital generation: The simplification of the business is further helped by the risk reduction in the loan book over the last 20 months towards secured lending. Alongside this, the investment in a best-in-class culture in risk/compliance enables HSBC to consider buybacks from 2014. This is a major shift and differentiator for HSBC among European banks, while also demonstrating that management is delivering on its strategy of change. Chg • Own HSBC over Standard Chartered (STAN): While STAN (4.4%) has a higher “pain” ratio than HSBC (3.7%) in our leverage analysis, we see the business models going in very different directions. STAN remains focused on growth to generate returns and will, in our view, inevitably take on more risk and cost in pursuit of targets, while HSBC focuses on simplification and costs to maximise returns. • Lower leverage than large-cap peers: Our leverage analysis ranks HSBC above all its large-cap banks peers except STAN. US peer ratios vary between 2.0% and 3.0%. This puts HSBC in a strong relative position, especially considering its liquidity ratios. • Price target remains unchanged at 790p: HSBC is one of the only banks where we currently see absolute upside to our price target (13%). We calculate our price target using a capital allocation sum-ofthe-parts analysis on both a country and divisional basis. • Risks to our view: The key risks to our view are that our revised revenue estimates are still too high or that HSBC is hit with additional regulatory requirements. Y/E 31.12., USD m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 91.7 91.7 885.6 708.5 41.0 17,868 11.9x 1.54x 10.6 13.1 3.8 45 74.2 74.2 959.1 804.9 45.0 18,476 14.7x 1.35x 8.1 9.8 4.1 61 96.5 96.5 995.8 845.2 50.0 18,675 11.3x 1.29x 9.9 11.7 4.6 52 106.4 106.4 1,046.0 896.2 55.0 18,675 10.3x 1.22x 10.4 12.2 5.0 52 116.9 116.9 1,107.4 957.6 60.0 18,675 9.3x 1.14x 10.8 12.5 5.5 51 98 Rating system Relative Current price Price target GBp 700 GBp 790 Changes made in this note Rating Buy (no change) Price target GBp 790 (no change) 2013e 2014e 2015e old Δ% old Δ% old Δ% 67067 68191 69938 Income PPOP 28253 - 29930 - 31924 95.80 0.7 106 0.7 116 0.7 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 18,675 18,685,830 Performance data High 52 weeks (GBp) Low 52 weeks (GBp) Relative performance to SXXP 1 month -3.6 % 3 months -4.7 % 12 months 4.0 % 770 511 SX7P -2.3 % -3.4 % -4.1 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] HSBC Holdings plc Banking Financials Market ratios; per share data (USD) EPS (reported) EPS (Berenberg adjusted) 2011 91.7 91.7 2012 74.2 74.2 2013e 96.5 96.5 2014e 106.4 106.4 2015e 116.9 116.9 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 708 886 41.00 11.9x 805 959 45.00 14.7x 845 996 50.00 11.3x 896 1,046 55.00 10.2x 958 1,107 60.00 9.3x 1.54x 1.23x 3.8% 45% 17,922 1.35x 1.14x 4.1% 61% 18,271 1.29x 1.09x 4.6% 52% 18,700 1.22x 1.04x 5.0% 52% 18,809 1.14x 0.98x 5.5% 51% 18,809 P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Market Cap Bloomberg ticker Reuters ticker Share price 130,764 HSBA LN GBp USD GBP-USD Analyst HSBA.L 700 1,090 1.56 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Income Summary (USDm) Net interest income (NII) Non-interest income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) 40,662 31,618 72,280 -41,545 30,735 -12,127 18,608 3,264 21,872 3,928 1,720 27,520 37,672 23,634 61,306 -42,927 18,379 -8,311 10,068 10,581 20,649 5,315 1,880 27,844 36,460 30,606 67,067 -38,814 28,253 -5,884 22,369 2,646 25,015 5,253 1,848 32,117 36,686 31,505 68,191 -38,261 29,930 -5,230 24,701 2,781 27,482 5,771 1,848 35,101 37,480 32,458 69,938 -38,014 31,924 -4,880 27,044 2,925 29,969 6,293 1,848 38,110 -7.4% -25.3% -15.2% 3.3% -40.2% -31.5% -45.9% 224.2% -5.6% 35.3% 9.3% 1.2% -3.2% 29.5% 9.4% -9.6% 53.7% -29.2% 122.2% -75.0% 21.1% -1.2% -1.7% 15.3% 0.6% 2.9% 1.7% -1.4% 5.9% -11.1% 10.4% 5.1% 9.9% 9.9% 0.0% 9.3% 2.2% 3.0% 2.6% -0.6% 6.7% -6.7% 9.5% 5.2% 9.0% 9.0% 0.0% 8.6% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 1.98% 2.5x 57.5% -1.66% 1.28% 29.8% -21.1% 13.1% 10.6% 0.65% 20.2x 1.40% 1.69% 2.2x 70.0% -1.64% 1.22% 22.1% -52.8% 9.8% 8.1% 0.51% 19.2x 1.15% 2.13% 4.8x 57.9% -1.44% 0.82% 16.1% -23.5% 11.7% 9.9% 0.66% 17.7x 1.55% 3.60% 5.7x 56.1% -1.41% 0.51% 14.3% -23.4% 12.2% 10.4% 0.73% 16.6x 1.69% 3.58% 6.5x 54.4% -1.37% 0.47% 13.0% -23.3% 12.5% 10.8% 0.79% 15.9x 1.84% -0.28% 0.44% 1.46% -0.02% 12.5% 0.02% -0.06% -7.76% -31.7% -3.2% -2.5% -0.13% -12.1% 0.20% -0.40% -5.92% 29.3% 1.9% 1.9% 0.15% -1.8% 0.03% -0.31% -1.88% 0.1% 0.4% 0.5% 0.07% -1.8% 0.04% -0.05% -1.23% 0.1% 0.4% 0.4% 0.05% -0.25% 0.40% 0.13% 0.15% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 940,429 2,555,579 2,041,799 1,253,925 161,619 7,368 158,725 129,691 122,496 1,209,514 421,101 2,692,538 2,409,414 1,340,014 148,940 7,887 175,242 145,389 138,789 1,123,943 1,006,829 2,707,420 1,006,829 1,375,919 1,032,183 2,730,511 1,032,183 1,455,387 1,060,200 2,828,823 1,060,200 1,499,241 139.1% 0.6% -58.2% 2.7% 2.5% 0.9% 2.5% 5.8% 2.7% 3.6% 2.7% 3.0% 8,281 186,210 156,357 149,706 1,183,841 8,695 196,735 166,882 162,660 1,172,260 9,130 208,291 178,438 176,630 1,201,705 -55.2% 5.4% 18.0% 6.9% -7.8% 7.0% 10.4% 12.1% 13.3% -7.1% 5.0% 6.3% 7.5% 7.9% 5.3% 5.0% 5.7% 6.7% 8.7% -1.0% 5.0% 5.9% 6.9% 8.6% 2.5% 47.3% 36.8% 75% 11.5% 10.1% 41.7% 15.6% 31% 13.4% 12.3% 43.7% 37.2% 73% 13.7% 12.6% 42.9% 37.8% 71% 15.0% 13.9% 42.5% 37.5% 71% 15.8% 14.7% -5.6% -21.2% -43.6% 1.9% 2.2% 2.0% 21.5% 41.7% 0.3% 0.3% -0.8% 0.6% -2.3% 1.2% 1.2% -0.5% -0.3% -0.2% 0.8% 0.8% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (USDm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company research Source: Companydata, data,Berenberg Berenberg research 99 ING Groep NV Banking Positive actions point to brighter future • • • Further value to be unlocked: ING is one of the few banks in our universe with double-digit upside to our price target (€8). Short-term catalysts remain key, with the recent ECB rate cut likely to hit core banking earnings but the impressive performance of ING US Insurance, combined with further potential asset sales in South Korea, likely to enable investors to focus on the value within the Group. Core bank earnings stability value driver: Despite reporting a 5bp increase in NIM to 1.38% at end-Q1 2013, the subsequent interest rate cut by the ECB is likely to put downward pressure on core bank earnings in Q2. However, we believe this will sharpen management’s focus on further deposit re-pricing to maintain momentum and ensure earnings stability at the bank. We believe that ING Bank could earn a ROTE of 6.6% in 2015 on a TBVPS of €14.10. Dutch housing market remains challenging: We believe the increase in provisions for Dutch housing exposure shows management’s realistic view of the challenge it faces. We expect high unemployment and falling house prices to mean that credit quality remains poor throughout 2013 and 2014. We believe that the reform of the Dutch tax system through a cap on LTV and lower tax deductibility of mortgages should go a long way to addressing some of the problems in the housing market but will take time to work. • Asset sales key to reducing double leverage: The IPO of ING US Insurance has surprised positively (share price is up over 50%), with ING’s remaining stake worth €4bn. We currently value it at €3bn and this additional upside could add €0.3 to our price target. Alongside this, the potential for the IPO of the European Insurance business to be brought forward to 2014 would be positive. The main near-term catalyst we see is the sale of the South Korean Insurance business, which we value at €1.2bn, but would view any disposal as positive. • ING is the cheapest bank across our coverage universe: ING trades on 6.3x consensus 2014 EPS estimates with the sector trading on 9.2x. ING trades on 0.5x TBV relative to the sector on 1.0x. We calculate our price target using a sum-of-the-parts analysis. • Risks to our view: 1) The market declines, reducing the valuation for future insurance sales or reducing interest in potential asset sales. 2) Significant deterioration in the Dutch housing market causes higher write-downs. 3) A further deterioration in Spain affects ING’s €33bn exposure. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.12 1.12 12.34 11.40 0.0 3,782 6.2x 0.61x 13.2 14.7 0.0 0 0.74 0.74 13.62 12.92 0.0 3,802 9.4x 0.54x 8.0 8.5 0.0 0 0.63 0.63 14.07 13.37 0.0 3,811 11.0x 0.52x 4.6 4.8 0.0 0 0.82 0.82 14.42 13.71 0.0 3,811 8.5x 0.51x 5.7 6.0 0.0 0 0.92 0.92 14.85 14.14 0.0 3,811 7.6x 0.49x 6.3 6.6 0.0 0 100 Buy Rating system Relative Current price Price target EUR 6.99 EUR 8.00 10/06/2013 Amsterdam Close Market cap EUR 26,639 m Reuters ING.AS Bloomberg INGA NA Changes made in this note Rating Buy (no change) Price target EUR 8.00 (no change) Chg 2013e 2014e old Δ% old Δ% Income PPOP 0.72 -11.6 0.82 -0.7 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 0.92 -0.7 3,811 17,822,230 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 5.2 % 3 months 8.0 % 12 months 16.9 % 8 5 SX7P 6.5 % 9.3 % 8.9 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] ING Groep NV Banking Financials Market ratios; per share data (EUR) EPS (reported) TBVPS (reported) BVPS (reported) DPS P/E (Berenberg adjusted) 2011 1.12 11.4 12.3 0.00 6.2x 2012 0.74 12.9 13.6 0.00 9.4x 2013e 0.63 13.4 14.1 0.00 11.0x 2014e 0.82 13.7 14.4 0.00 8.5x 2015e 0.92 14.1 14.8 0.00 7.6x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 0.61x 0.57x 0.0% 0% 3,782 0.54x 0.51x 0.0% 0% 3,802 0.52x 0.50x 0.0% 0% 3,811 0.51x 0.48x 0.0% 0% 3,811 0.49x 0.47x 0.0% 0% 3,811 2011 2012 2013e 2014e 2015e Net interest income (NII) 12,246 11,684 -4.6% Non-interest income 30,707 29,100 -5.2% Operating expenses -37,504 -34,672 -7.6% 5,449 6,112 12.2% -1,341 -2,124 58.4% -195 -346 77.4% Operating Profit 3,913 3,642 Other non-operating 2,944 1,253 -995 -350 0 6,857 -1,006 -83 5,768 -1,520 4,248 3,642 -844 -111 2,687 -1,125 1,562 4,898 -1,272 -216 3,409 -400 3,009 5,044 -1,311 -265 3,467 -400 3,067 1.22% 4.1x 61.7% 3.96% 0.23% 11.0% 14.7% 9.9% 1317.4% 0.33% 29.7x 1.43% 1.30% 2.9x 61.8% 3.86% 0.38% 18.2% 23.2% 3.2% 800.5% 0.13% 23.7x 0.56% 1.35% 2011 2012 602,525 1,279,228 1,150,303 467,547 168,403 777 46,663 43,105 31,772 297,241 563,404 1,166,193 1,046,069 455,003 168,945 1,081 51,777 49,138 31,494 278,656 23.2% 47.1% 129% 13.0% 10.7% 23.9% 48.3% 124% 13.7% 11.3% Market Cap Bloomberg ticker Reuters ticker Share price Analyst 26,576 INGA:NA ING.AS EUR 6.99 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec 11/12 12/13 13/14 14/15 -57.4% -179.4% -64.8% -100.0% 5,088 -1,311 -278 3,499 -400 3,099 -46.9% -16.1% 34.5% 50.7% 3.0% 3.1% 0.9% 0.0% -53.4% 26.9% 1.7% 0.9% -63.2% 92.7% 1.9% 1.0% 1.35% 1.35% 0.08% 0.05% 57.5% 56.9% 56.6% 0.1% -0.10% 0.15% -4.3% -3.86% -0.38% -0.5% -0.3% 26.0% 5.9% 458.0% 0.26% 22.5x 1.08% 26.0% 5.9% 574.1% 0.27% 21.9x 1.10% 25.8% 5.8% 627.4% 0.27% 21.3x 1.10% 8.5% -6.7% 2.8% 2.7% 0.0% 0.0% -0.2% -0.1% -0.20% 0.13% 0.01% 0.00% -0.87% 0.52% 0.01% 0.00% 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,146,464 1,146,093 1,145,825 -8.8% -1.7% 0.0% 0.0% 3,733 53,633 50,942 32,767 277,470 3,655 54,953 52,262 32,789 279,111 3,655 56,577 53,886 33,138 280,966 11.0% 14.0% -0.9% -6.3% 3.6% 3.7% 4.0% -0.4% 2.5% 2.6% 0.1% 0.6% 3.0% 3.1% 1.1% 0.7% 24.2% 24.4% 24.5% 14.3% 11.8% 14.2% 11.7% 14.3% 11.8% -5.0% 0.7% 0.6% 0.6% 0.5% -0.1% -0.1% 0.0% 0.0% Income Summary (EURm) Pre-provision op. profits (PPoP) Loan loss charge (LLC) Other expenses Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) IFRS state repayment value Adj. attributable profit Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA -6.9% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 101 Intesa Sanpaolo SpA Banking Preferred Italian bank • • • • Intesa is our preferred Italian and Eurozone periphery bank, even though we are sellers of all major periphery banks. We like Intesa better due to its stronger capital, higher cash dividend yield and more conservative provisioning policy versus its domestic peer. We therefore believe that it can outperform its peripheral peers. However, we remain bearish on the stock in the long run as we believe loan losses will stay higher for longer than consensus expects, depressing returns to shareholders. Capital: Intesa has stronger capital buffers than most Eurozone banks (including Unicredit) with a “pain” ratio of 3.0%. It is also ahead of peers in implementation of Basel III, with a fully-loaded CT1 ratio at 10.7% as at Q1 2013 (versus 9.6% for Unicredit). Even though its leverage ratio is still too high, in our view, it is stronger than peers, which supports our relative preference. Dividend: Intesa has a higher cash dividend yield than most Eurozone banks, at 3.7% (DPS €0.05), compared to 2.3% for Unicredit. Its relative capital strength could help sustain this yield, consistent with company guidance. Risk management: Intesa increased its NPL coverage ratio from 42.7% to 43.3% in Q1 2013, increasing risk provisions by 20% yoy, and has maintained conservative guidance on loan losses for the rest of the year. Its loan losses exhibit less seasonality versus those of Unicredit, implying a more consistent risk management policy. • Long-term bear case intact: We still believe that the loan losses of Intesa (like those of Unicredit) will remain higher for longer than consensus expects on poor asset quality (driven by an oversized SME sector). We also expect further pressure on net interest income, driven by weak debt demand and low re-investment yields (NII dropped by 7.3% qoq in Q1 2013, suffering larger erosion than peers). • Valuation: Intesa is trading at 0.6x TBV for a 2014E RoTE of 5.4% (consensus: 6.4%), a premium of 20% to Unicredit, supported by higher RoTE, dividend yield and capital. We recommend the following pair trades: long Intesa, short Unicredit or long Intesa, short Santander (as per our note of 7 June, Prefer Italian banks to Spanish peers). Our price target is based on a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE. We make minor changes to our numbers following the Q1 results. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -0.56 0.17 2.86 1.95 0.05 13,775 7.8x 0.70x -16.3 6.4 3.7 -9 0.11 0.14 3.02 2.11 0.05 13,775 9.5x 0.64x 3.4 4.8 3.7 44 0.11 0.14 3.06 2.17 0.06 13,775 10.1x 0.63x 3.3 4.6 4.4 53 0.13 0.15 3.11 2.22 0.07 13,775 9.1x 0.61x 3.9 5.4 5.1 52 0.15 0.16 3.16 2.28 0.08 13,775 8.5x 0.60x 4.2 5.7 5.9 54 102 Sell Rating system Relative Current price Price target EUR 1.36 EUR 1.00 10/06/2013 Milan Close Market cap EUR 21,098 m Reuters ISP.MI Bloomberg ISP IM Changes made in this note Rating Sell (no change) Price target EUR 1.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 16571 -0.2 16461 0.0 16501 -0.2 Income PPOP 7755 -0.4 7588 -0.1 7545 -0.5 0.14 -0.4 0.15 1.5 0.16 0.6 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 15,502 174,750,000 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to 1 month 3 months 12 months 2 1 SXXP MSCI Europe Banks -0.6 % 0.3 % 8.4 % 9.6 % 4.5 % -7.2 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Intesa Sanpaolo SpA Banking Financials Intesa Market ratios and per share data (EUR) EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend yield (%) Payout ratio (%) Weighted avg. number of shares (m) Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPOP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptional items Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/AIEAs PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (%) RoA Asset Tangible Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Retail Funds Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 2011 -0.56 0.17 1.95 2.86 0.05 7.8 0.70 0.48 6.4 3.7 -8.9 13,775 2012 0.11 0.14 2.11 3.02 0.05 9.5 0.64 0.45 4.8 3.7 44.0 13,775 2013E 0.11 0.14 2.17 3.06 0.06 10.1 0.63 0.44 4.6 4.4 53.1 13,775 2014E 0.13 0.15 2.22 3.11 0.07 9.1 0.61 0.44 5.4 5.1 52.0 13,775 2015E 0.15 0.16 2.28 3.16 0.08 8.45 0.60 0.43 5.7 5.9 54.2 13,775 2011 2012 2013E 2014E 2015E 9,780 5,466 920 619 16,785 -9,137 7,648 -4,243 3,405 -1,772 -10,720 -9,087 910 -13 -8,190 2,530 9,430 5,451 2,182 818 17,881 -8,913 8,968 -4,714 4,254 -644 -433 3,177 -1,523 0 1,654 2,087 9,244 5,134 1,380 785 16,543 -8,816 7,727 -4,261 3,465 -200 -321 2,945 -1,250 -50 1,645 1,966 9,180 5,109 1,390 775 16,454 -8,873 7,582 -3,673 3,909 -182 -210 3,518 -1,510 -50 1,958 2,168 9,173 5,125 1,390 775 16,463 -8,956 7,507 -3,429 4,078 -183 -197 3,698 -1,501 -50 2,146 2,343 1.67 1.8 54.4 1.4 1.12 43.4 10.0 6.4 3.3 0.4 21.6 0.8 1.58 1.9 49.8 1.4 1.25 50.0 47.9 4.8 3.3 0.3 19.7 0.7 1.51 1.8 53.3 1.3 1.14 46.1 42.4 4.6 3.8 0.3 19.1 0.7 1.50 2.1 53.9 1.3 0.98 40.0 42.9 5.4 4.1 0.3 18.6 0.7 1.50 2.2 54.4 1.3 0.92 37.4 40.6 5.7 4.1 0.3 18.1 0.8 2011 2012 2013E 2014E 2015E 376,974 639,451 578,453 325,300 32,110 718 47,040 31,999 32,797 325,206 376,625 673,472 612,948 349,082 28,276 586 49,613 34,745 33,469 298,619 373,469 668,502 609,792 345,560 26,119 636 50,272 35,604 34,128 295,248 374,234 670,142 610,557 346,343 26,119 686 51,079 36,511 34,935 295,560 375,149 672,032 611,472 347,351 26,119 736 51,911 37,443 35,767 296,081 50.9 59.0 115.9 11.5 10.1 11.1 45.4 44.3 55.9 107.9 12.1 11.2 13.2 44.5 44.2 55.9 108.1 12.4 11.6 13.3 45.0 44.1 55.8 108.1 12.7 11.8 13.3 45.0 44.1 55.8 108.0 12.9 12.1 13.2 45.0 Source: Company data, Berenberg research 103 Market Cap (EURm) Bloomberg ticker Reuters ticker Share price (EUR) Analyst Rating Target price (EUR) Upside Phone email: 23,200 ISP IM ISP.MI 1.36 Eleni Papoula Sell 1.00 -27% +44 20 3465 2741 [email protected] 11/12 12/13 13/14 Year-on-year change (%) -3.6 -2.0 -0.7 -0.3 -5.8 -0.5 137.2 -36.8 0.7 32.1 -4.0 -1.3 6.5 -7.5 -0.5 -2.5 -1.1 0.6 17.3 -13.8 -1.9 11.1 -9.6 -13.8 24.9 -18.5 12.8 -63.7 -69.0 -9.1 -96.0 -25.9 -34.6 -135.0 -7.3 19.5 -267.4 -17.9 20.8 -100.0 na 0.0 -120.2 -0.6 19.0 -17.5 -5.8 10.3 14/15 11/12 12/13 13/14 Year-on-year change (%) -0.1 -0.8 0.2 5.3 -0.7 0.2 6.0 -0.5 0.1 7.3 -1.0 0.2 -11.9 -7.6 0.0 -18.4 8.5 7.9 5.5 1.3 1.6 8.6 2.5 2.5 2.0 2.0 2.4 -8.2 -1.1 0.1 14/15 -0.1 0.3 0.0 0.0 0.1 0.9 -1.0 -6.6 4.3 1.0 -6.2 5.1 -0.6 0.0 9.6 8.1 0.2 0.3 0.1 0.3 0.0 7.3 1.6 2.6 2.4 0.2 Julius Bär Gruppe AG Small/Mid-Cap: Banking High execution risk • • • • • • We remain cautious on Julius Baer (Baer) as we believe the execution risk of the acquisition of Merrill Lynch’s (ML) wealth management business, with AuM of CHF81bn, remains high. Besides, we believe the erosion of Baer’s strong capital buffers – due to: i) the recognition of goodwill on the acquisition; and ii) a potential material fine to settle the US investigation – will put more pressure on the share price in the short term. Investors should continue taking profits. Execution risk of ML acquisition: Most wealthy individuals use more than one bank, so the main risk for Baer is the loss of key ML clients to competitors. However, we factor in a successful execution. We estimate that Baer will acquire CHF57bn (70%) of ML’s current AuM (CHF41bn in 2013 and CHF16bn in 2014), in line with the deal’s current progress. This forecast is within the company’s target range, but it may be optimistic given competition from other banks. Capital – from strength to weakness: Baer’s “pain” ratio is 5.9%, which is stronger than that of most European banks per our analysis (with the exception of Vontobel). However, the recognition of CHF860m of goodwill on the acquisition (over the next two years) and an estimated fine of CHF300m to settle the US tax probe will decrease this ratio to 3.9% per our estimates. This may no longer support a high trading premium. Assets under management: Baer reported a 16% rise in AuM from CHF189bn in December 2012 to CHF220bn at April 2013, driven mostly by assets acquired from ML in Q1 2013. However, reported AuM may be overstated as the figure includes CHF24bn of assets acquired from ML, of which CHF13bn have not yet been transferred to Baer’s platform. Gross margin (revenue/average AuM) stronger: Baer reported a gross margin of 98bp (consensus: 97bp) for the first four months of the year. This was flat yoy and seasonally better than H2 2012. Its gross margin development compares favourably with the trend seen among smaller peers (ie EFG, Vontobel) and Credit Suisse. Evidence suggests an increased risk appetite in May 2013 (higher turnover of structured products on Scoach), implying stronger gross margin for Q2 2013. Valuation: Baer is trading at 20x 2014E EPS, a 60% premium to domestic peers. Valuation is full. Our price target is based on a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE. Y/E 31.12., CHF m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) AuM (CHFbn) Net New Money (CHFbn) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.27 2.24 21.8 14.0 1.00 203 16.5x 2.65x 10.5 17.2 2.7 76 170 10.2 1.47 2.14 22.5 15.4 0.60 202 17.3x 2.41x 8.9 14.9 1.6 66 189 9.7 -0.91 1.52 21.0 10.9 0.00 222 24.3x 3.38x 7.2 12.0 0.0 0 243 5.8 0.91 1.90 21.9 12.5 0.00 222 19.5x 2.97x 8.6 16.2 0.0 0 280 12.4 1.55 2.32 23.5 14.6 0.50 222 16.0x 2.54x 9.8 16.7 1.4 32 302 13.7 104 Hold Rating system Relative Current price Price target CHF 37.03 CHF 39.00 10/06/2013 SIX Swiss Close Market cap CHF 8,287 m Reuters BAER.VX Bloomberg BAER VX Changes made in this note Rating Hold (no change) Price target CHF 39.00 (no change) Chg 2013e old Δ% 1970 - Total Income Op. Pr. 382 1.52 EPS 2014e old Δ% 2144 - 477 1.90 Source: Berenberg estimates - Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 2251 586 2.32 - 223,800 628,062 Performance data High 52 weeks (CHF) Low 52 weeks (CHF) Relative performance to SXXP 1 month -1.7 % 3 months -1.9 % 12 months -10.4 % 41 31 SX7P -0.3 % -0.6 % -18.4 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Julius Bär Gruppe AG Small/Mid-Cap: Banking Financials Julius Baer Market ratios and per share data (CHF) New EPS (adjusted) 2011 2012 2013 E 2014 E 2015 E 2.24 2.14 1.52 1.90 2.32 Bloomberg ticker 1.52 1.90 2.32 Market Cap (CHFbn) 0.00 0.91 12.5 0.00 1.55 14.6 Reuters ticker Share price (CHF) Analyst Rating Target price (CHF) Upside Old EPS BAER VX 8.2 Change in EPS (%) EPS reported Tangible book value per share (TBVPS) 1.27 14.0 1.47 15.4 0.00 -0.91 10.9 Book value per share (BVPS) DPS P/E (Berenberg adjusted) 21.8 1.00 16.5 22.5 0.60 17.3 21.0 0.00 24.3 21.9 0.00 19.5 23.5 0.50 16.0 P/TBV (x) P/BV (x) RoTE adjusted Dividend Yield (%) Payout ratio (%) Weighted avg. number of shares (m) 2.65 1.70 17.2 2.7 76 203 2.41 1.65 14.9 1.6 66 202 3.38 1.76 12.0 0.0 0 222 2.97 1.69 16.2 0.0 0 222 2.54 1.58 16.7 1.4 32 222 Assets under management data and Ratios 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15 AuM data (CHFbn) Assets under management Net New Money NNM/AuM (%) 170.3 10.2 6.0 189.3 9.7 5.7 242.8 5.8 3.1 279.5 12.4 5.1 302.3 13.7 4.9 11.2 -5.1 -5.5 28.3 -40.2 -46.2 15.1 114.8 67.5 8.2 10.3 -4.2 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15 431 942 370 9 1,753 -1,214 539 -92 -128 465 980 266 26 1,737 -1,216 521 -91 -57 487 1,167 307 10 1,970 -1,588 382 -136 -490 507 1,240 387 10 2,144 -1,667 477 -136 -100 557 1,278 406 10 2,251 -1,664 586 -136 -40 7.9 4.1 -28.1 172.3 -0.9 0.2 -3.2 -1.0 -55.7 4.6 19.0 15.3 -60.9 13.4 30.6 -26.7 49.7 na 4.2 6.2 26.3 0.0 8.8 5.0 24.8 0.0 -79.6 9.7 3.1 4.9 0.0 4.9 -0.2 22.9 0.0 -60.0 319 -61 0 258 453 374 -76 1 297 434 -244 41 0 -203 338 241 -40 0 201 422 410 -66 0 344 514 17.2 24.8 149.3 15.3 -4.4 -165.3 -154.3 na -168.2 -22.1 -198.7 -196.4 na -199.2 24.7 70.2 65.6 na 71.1 22.0 Phone email: BAER.VX 37.0 Eleni Papoula Hold 39.0 5% +44 20 3465 2741 [email protected] Income Statement and Ratios Year to 31-Dec Income Summary (CHFm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Operating Profit Amortisation of customer relationships Restructuring costs, fines Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) Gross margin (bps) Net interest income margin (bps) Commission income margin (bps) Trading income margin (bps) Cost/income ratio Tax rate RoE (stated) RoA Asset Leverage (x) RoRWA RoAUM 102.7 25.7 56.2 22.1 68.6 19.0 10.5 103.6 25.7 54.1 14.7 68.6 20.3 8.9 108.8 22.5 54.0 14.2 77.6 16.8 7.2 99.2 19.4 47.5 14.8 75.0 16.5 8.6 86.2 19.1 43.9 14.0 71.3 16.0 9.8 0.9 -0.1 -3.6 -33.5 0.0 6.5 -15.4 5.0 -12.4 -0.2 -3.4 13.2 -16.9 -19.4 -8.8 -13.8 -12.1 4.5 -3.4 -2.4 19.6 -13.2 -1.5 -7.5 -5.8 -4.9 -2.7 14.0 0.86 12.3 3.65 2.70 0.79 11.3 3.43 2.39 0.58 12.4 2.50 1.73 0.69 12.5 2.81 1.99 0.79 12.3 3.26 2.20 -7.7 -8.3 -5.8 -11.4 -26.9 10.3 -27.3 -27.8 18.8 0.7 12.6 15.0 15.6 -1.3 15.9 10.7 2011 2012 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15 16,408 12,168 52,929 34,841 2 4,308 3,191 2,564 12,811 19,783 11,775 54,868 39,104 2 4,872 3,755 3,175 12,451 21,811 12,492 58,518 41,880 2 4,709 3,189 2,347 14,630 24,047 13,253 61,451 43,572 2 4,910 3,390 2,743 15,363 26,511 14,060 64,873 45,332 2 5,255 3,735 3,283 16,218 20.6 -3.2 3.7 12.2 17.8 13.1 17.7 23.8 -2.8 10.3 6.1 6.7 7.1 0.0 -3.3 -15.1 -26.1 17.5 10.3 6.1 5.0 4.0 0.0 4.3 6.3 16.9 5.0 10.3 6.1 5.6 4.0 0.0 7.0 10.2 19.7 5.6 24.2 31.0 47.1 21.8 20.0 22.7 36.1 50.6 29.3 25.5 25.0 37.3 52.1 19.3 16.0 25.0 39.1 55.2 20.9 17.9 25.0 40.9 58.5 23.1 20.2 -6.2 16.3 7.4 34.5 27.4 10.2 3.4 2.9 -34.2 -37.1 0.0 5.0 6.0 8.6 11.3 0.0 4.4 6.0 10.6 13.4 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (CHFm) Customer loans Investments available for sale Total assets Customer deposits Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg research 105 KBC Groupe SA Banking Good earnings momentum, but tight capital ● We believe KBC will emerge as a long-term winner. It is downsizing, ● ● ● ● • focusing on its core business of bancassurance and gradually freeing itself from reliance on state aid, hence reducing its risk premium. In the short term, KBC must continue to strengthen its capital buffers. The strong earnings momentum in Q1 2013 suggests that KBC should be able to build its capital buffers organically, but the biggest hurdle remains the repayment of €1.75bn of state aid, which is due by end of June 2013. Repayment of state aid: KBC committed to repay €1.75bn to the Flemish state by June (€1.17bn principal plus €583m premium). This repayment will be funded by: i) H1 retained earnings (c€1bn); ii) capital release from divestments (€0.3bn); and iii) existing capital reserves (c€400m, versus the prior expectation of a potential equity issue). Capital: KBC’s “pain” ratio (which we define to exclude state aid) is 3.2%, marginally above the 3.0% average of European peers. Even though the local regulator will probably allow KBC to repay the next tranche of state aid without raising new equity, it must prioritise the strengthening of its capital (which implies, at a minimum, limited dividend payments, further deleveraging and no scope of early repayment of remaining state aid: €2.3bn principal plus €1.15bn penalty). Earnings momentum: IFRS net profit rose from €380m in Q1 2012 to €520m in Q1 2013, driven by stronger commission fees and trading/other income (on mark-up of the structured credit book and gains on domestic government bond sales) that more than offset the weaker net interest income. We believe trading income “gains” can recur in future quarters given current yields. KBC’s risks: KBC has low liquidity and funding risk (as signalled by the repayment of €8bn of LTRO loans in Q1). Our main concern is credit risk, driven by KBC’s Irish exposure. We expect LLCs (€295m in Q1, €99m from Ireland) to remain at their current high level in the next few quarters, in line with KBC’s cautious guidance. The valuation risk for the collateralised debt obligations (CDO) book is another factor, although the company has hedged its exposure. Buy Rating system Relative Current price Price target EUR 30.86 EUR 35.00 10/06/2013 Brussels Close Market cap EUR 12,866 m Reuters KBC.BR Bloomberg KBC BB Changes made in this note Rating Buy (no change) Price target EUR 35.00 (no change) Chg 2013e 2014e old Δ% old Δ% 7348 7065 Income 2963 PPOP 3235 3.34 3.51 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 7266 3086 3.61 - 417 1,509,607 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 2.1 % 3 months 2.8 % 12 months 88.9 % 33 14 SX7P 3.4 % 4.1 % 80.8 % Valuation: KBC is trading at 0.8x TBV (including state aid) for a 2014E RoTE of 9.8%. A potential catalyst for the stock would be the repayment of state aid in June, which should reduce further its risk premium. On the other hand, if it misses this deadline, we expect a short-term de-rating of the stock. Our price target is derived from the Gordon growth model, based on a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -1.93 3.23 47.8 43.8 0.01 340 9.6x 0.70x -6.0 7.6 0.0 1 -1.09 4.40 37.4 35.1 1.00 349 7.0x 0.88x 5.1 10.8 3.2 42 3.34 3.34 36.6 34.4 0.00 417 9.2x 0.90x 12.0 10.0 0.0 0 3.51 3.51 38.7 36.7 1.00 417 8.8x 0.84x 10.3 9.8 3.2 32 3.61 3.61 40.9 39.1 1.00 417 8.5x 0.79x 9.8 9.5 3.2 28 106 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] KBC Groupe SA Banking Financials KBC Market ratios and per share data (EUR) EPS (reported) EPS (Berenberg adjusted) 2011 -1.93 3.23 2012 -1.09 4.40 2013E 3.34 3.34 2014E 3.51 3.51 2015E 3.61 3.61 TBVPS 43.8 35.1 34.4 36.7 BVPS DPS P/E (Berenberg adjusted) 47.8 0.01 9.6 37.4 1.00 7.0 36.6 0.00 9.2 38.7 1.00 8.8 P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend yield (%) Payout ratio (%) Weighted avg. number of shares (m) 0.70 0.64 7.6 0.0 0.8 340 0.88 0.82 10.8 3.2 42.0 349 0.90 0.84 10.0 0.0 0.0 417 2011 2012 2013E Market Cap (EURm) Bloomberg ticker 12,155 KBC BB 39.1 Reuters ticker KBC.BR 40.9 1.00 8.5 Rating Analyst Share price (EUR) 0.84 0.80 9.8 3.2 32.3 417 0.79 0.75 9.5 3.2 27.7 417 Target price (EUR) Upside 2014E 2015E Phone email: Buy Eleni Papoula 30.86 35.00 13% +44 20 3465 2741 [email protected] Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Dividend income Total income Pre-provision op. profits (PPOP) Impairment Share in results of associated companies Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) 5,404 1,645 521 648 -37 8,181 -4,687 3,494 -1,335 2,159 -574 -57 1,528 -397 -35 1,096 4,533 1,326 366 1,276 40 7,541 -4,186 3,355 -1,070 2,285 -118 -33 2,134 -568 -29 1,537 4,226 1,558 247 1,269 49 7,348 -4,114 3,235 -1,053 2,182 -167 0 2,015 -598 -25 1,392 4,389 1,588 242 800 45 7,065 -4,102 2,963 -743 2,220 -168 0 2,052 -534 -56 1,462 4,546 1,617 258 800 45 7,266 -4,180 3,086 -764 2,322 -168 0 2,154 -560 -88 1,506 CDO losses and divestment provisions -1,443 -395 164 0 0 359 -530 0 0 0 Adj. attributable profit post-coupon 12 -670 426 612 -543 994 1,556 0 1,392 1,462 -170 1,292 Income Ratios (%) NII/AIEAs PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) 2.09 3.8 57.3 1.5 0.40 10.6 26.0 7.6 1.94 19.4 55.5 1.5 0.09 2.6 26.6 10.8 2.52 13.1 56.0 1.6 0.25 4.0 29.7 10.0 RoE (%) RoA (%) Asset Tangible Leverage (x) RoRWA (%) 5.1 0.14 19.0 6.0 12.0 0.37 17.4 12.9 2011 2012 Operating expenses Pre-provision profits Loan loss provisions CVA gains/(losses) Adj. attributable profit (IFRS) Coupon of stated aid 11/12 12/13 13/14 14/15 Year-on-year change (%) -16.1 -19.4 -29.8 96.9 -208.1 -7.8 -10.7 -4.0 -19.9 5.8 -79.4 -42.1 39.7 43.1 -17.1 40.2 -6.8 17.5 -32.5 -0.5 22.5 -2.6 -1.7 -3.6 -1.6 -4.5 41.5 -100.0 -5.6 5.3 -13.8 -9.5 3.9 2.0 -2.0 -37.0 -8.2 -3.9 -0.3 -8.4 -29.4 1.7 0.6 na 1.8 -10.8 124.0 5.1 3.6 1.8 6.6 0.0 0.0 2.9 1.9 4.2 2.8 4.6 0.0 na 5.0 5.0 57.1 3.0 1,506 0 1,506 5,000.0 154.2 -6.0 3.0 133.3 40.0 -7.1 16.5 4.05 13.2 58.1 1.6 3.21 3.8 26.0 9.8 4.20 13.8 57.5 1.6 3.21 3.7 26.0 9.5 -7.1 414.8 -3.1 -0.2 -77.6 -75.5 2.4 41.1 29.6 -32.5 0.8 3.2 184.5 51.8 11.6 -7.5 61.1 1.1 3.7 -0.7 1,165.8 -3.1 -12.4 -1.3 3.6 4.6 -0.9 1.2 0.0 -3.5 0.0 -3.0 10.3 0.54 18.0 15.9 9.8 0.50 16.8 13.3 9.5 0.58 16.0 13.7 138.0 160.8 -8.5 116.9 -14.2 47.0 3.3 22.9 -5.4 -7.5 -6.5 -16.2 -2.4 15.7 -4.5 2.6 2013E 2014E 2015E 11/12 12/13 13/14 14/15 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits & debt certificates Minorities Ordinary equity Tangible equity Core Equity Tier 1 Capital (reported) Core (Equity) Tier 1 Capital (excl. part capital) Risk Weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Retail Funds Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Year-on-year change (%) 138,284 285,382 239,265 165,226 516 9,756 14,358 13,413 6,913 126,333 126,510 256,886 227,522 165,226 362 12,099 14,271 11,951 8,451 102,148 5,235 259,536 108,270 102,493 383 12,923 13,964 11,381 9,051 105,000 5,235 258,794 108,270 106,654 439 14,157 14,868 12,348 10,348 105,000 5,235 263,224 108,270 110,985 527 15,405 15,786 13,359 11,689 105,000 -8.5 -10.0 -4.9 0.0 -29.8 24.0 -0.6 -10.9 22.2 -19.1 -95.9 1.0 -52.4 -38.0 5.8 6.8 -2.2 -4.8 7.1 2.8 0.0 -0.3 0.0 4.1 14.6 9.6 6.5 8.5 14.3 0.0 0.0 1.7 0.0 4.1 20.0 8.8 6.2 8.2 13.0 0.0 48.5 81.5 12.3 10.6 5.5 4.9 69.0 49.2 76.6 13.8 11.7 8.3 5.3 66.0 2.0 5.1 21.8 10.8 8.6 5.3 66.0 2.0 4.9 22.1 11.8 9.9 5.3 66.0 2.0 4.7 22.5 12.7 11.1 5.3 66.0 1.6 -6.0 12.0 10.2 51.2 8.2 -4.3 -95.9 -93.3 58.1 -7.4 4.2 0.0 0.0 0.3 -3.9 1.6 8.5 14.3 0.0 0.0 -1.7 -3.9 1.6 8.2 13.0 0.0 0.0 Source: Company data, Berenberg research 107 Lloyds Banking Group plc Banking Priced for a correction; revenues key concern • • • • • • • • Revenue and capital remain our key concerns: We believe consensus expectations of 4% pa revenue growth are unrealistic. Alongside this, we believe Lloyds is expensive, especially as it is still at least 100bp short of a 10% Basel III CT1 ratio. Revenue estimates too optimistic: Stripping out the gain on sale and earnings of SJP from Q1 results implies £17.6bn of annualised revenues. Current FY 2015 consensus of £18.3bn is post-Verde disposal, which contributes £600m to revenues. Stripping this out implies 4% pa revenue growth between 2013 and 2015, which we view as too optimistic. We forecast revenues to fall to £15.8bn due to lower interest-earning assets, flat rates and a decline in non-interest income. Capital remains the focus: We expect Lloyds to hit its FY 2013 Basel III CT1 target of 9% by H1 2013. The capital generated from a string of non-core disposals has seemingly satisfied the PRA, which confirmed that a capital raise will not be required. Our concern remains that the volatility of capital is not fully appreciated, particularly given the potential impact of the insurance business on the CT1 ratio. Leverage still too high: Although a “pain” ratio (tangible equity to tangible assets ratio including off balance sheet assets) of 3.1% ranks Lloyds in the middle of the European banks, it is still 125bp behind Swedbank, to which it is often compared. We therefore believe this ratio is still too low, especially as it undercapitalises the insurance business relative to peers. CT1 ratio of 10% needed to start dividends: For Lloyds to become a high dividend paying stock, we believe that it needs to have a significant cushion above 10%. Whilst we expect Lloyds to hit management’s capital targets early, we do not expect dividends to be paid before 2015. Re-privatisation update on 19 June: An update on re-privatisation strategy is expected in the Chancellor’s Mansion House speech. There is mounting belief that a sale is imminent, with the Financial Times reporting the Treasury is considering selling 10% of Lloyds this year. Target price unchanged at 24p: Our EPS increases due to the timing of one-off items and the Verde sale; however, our view of core profitability remains unchanged. As a result, our price target remains unchanged. We calculate it using a capital allocation sum-of-the-parts. Risks to our view: The main risk to our view is that our revenue estimates are too low, which could be driven by interest rates rising. Y/E 31.12., GBP m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -4.07 -4.07 66.8 55.2 0.00 68,727 -15.1x 1.12x -6.1 1.2 0.0 0 -2.10 -2.10 62.5 52.9 0.00 70,343 -29.3x 1.16x -3.3 14.8 0.0 0 3.59 3.59 63.5 54.0 0.00 71,113 17.1x 1.14x 5.7 7.9 0.0 0 2.81 2.81 66.3 56.8 0.00 71,113 21.9x 1.08x 4.3 8.1 0.0 0 3.63 3.63 67.9 58.4 2.00 71,113 17.0x 1.05x 5.4 7.1 3.2 55 108 Sell Rating system Relative Current price Price target GBp 62 GBp 24 10/06/2013 London Close Market cap GBP 43,777 m Reuters LLOY.L Bloomberg LLOY LN Changes made in this note Rating Sell (no change) Price target GBp 24 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 17996 0.3 16849 2.4 16385 -3.4 PPOP 8290 1.7 7688 3.9 7386 -2.1 0.48 650 3.24 -13.2 3.94 -7.9 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 71,113 117,380,800 Performance data High 52 weeks (GBp) Low 52 weeks (GBp) Relative performance to SXXP 1 month 6.8 % 3 months 23.1 % 12 months 88.8 % 63 28 SX7P 8.1 % 24.4 % 80.8 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Lloyds Banking Group plc Banking Financials Market ratios; per share data (GBP) EPS (reported) EPS (Berenberg adjusted) 2011 -4.07 -4.07 2012 -2.10 -2.10 2013e 3.59 3.59 2014e 2.81 2.81 2015e 3.63 3.63 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 55 67 0 -15.1x 53 63 0 -29.3x 54 63 0 17.1x 57 66 0 21.9x 58 68 2.00 17.0x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.12 0.92 0 0 68,470 1.16 0.98 0 0 69,841 1.14 0.97 0 0 70,921 1.09 0.93 0 0 70,921 1.06 0.91 3.2% 55% 70,921 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 12,210 8,836 21,046 -10,621 10,425 -9,787 638 -4,179 -3,541 828 -73 -2,786 10,335 8,051 18,386 -10,124 8,262 -5,697 2,565 -3,177 -612 -773 -84 -1,469 10,197 7,848 18,045 -9,610 8,435 -4,018 4,417 -694 3,723 -1,050 -125 2,548 10,060 7,202 17,262 -9,278 7,984 -3,599 4,385 -1,670 2,715 -597 -125 1,993 8,938 6,895 15,833 -8,602 7,231 -3,252 3,978 -520 3,458 -761 -125 2,573 -15.4% -8.9% -12.6% -4.7% -20.7% -41.8% 302.0% -1.3% -2.5% -1.9% -5.1% 2.1% -29.5% 72.2% -1.3% -8.2% -4.3% -3.5% -5.3% -10.4% -0.7% -11.2% -4.3% -8.3% -7.3% -9.4% -9.6% -9.3% -82.7% -193.4% -708.3% 35.8% -27.1% -43.1% 27.4% 27.4% -47.3% -273.4% -21.8% 29.1% 2.07% 1.1x 50.5% 1.08% 1.62% 80.2% -129.8% 1.2% -6.1% -0.28% -4.2x -0.73% 1.93% 1.5x 55.1% 1.07% 1.02% 55.1% 30.1% 14.8% -3.3% -0.16% -95.5x -0.44% 2.01% 2.1x 53.3% 1.05% 0.75% 39.4% 23.8% 7.9% 5.7% 0.28% 28.2x 0.85% 2.02% 2.2x 53.7% 1.05% 0.68% 35.8% 13.6% 8.1% 4.3% 0.23% 35.8x 0.70% 1.83% 2.2x 54.3% 1.01% 0.65% 36.4% 19.1% 7.1% 5.4% 0.30% 23.6x 0.96% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 565,638 970,546 585,400 413,906 220,148 674 45,920 40,708 37,991 352,341 517,225 924,552 543,300 426,912 151,461 685 43,999 39,191 37,193 310,299 502,469 901,578 511,950 440,459 486,668 866,728 502,700 448,428 459,588 831,508 492,600 428,284 -8.6% -4.7% -7.2% 3.1% -2.9% -2.5% -5.8% 3.2% -3.1% -3.9% -1.8% 1.8% -5.6% -4.1% -2.0% -4.5% 685 45,147 40,339 38,494 290,500 685 47,140 42,332 40,487 276,702 685 48,290 43,482 41,637 259,153 -4.2% -3.7% -2.1% -11.9% 2.6% 2.9% 3.5% -6.4% 4.4% 4.9% 5.2% -4.7% 2.4% 2.7% 2.8% -6.3% 36.3% 58.3% 137% 12.5% 10.8% 33.6% 55.9% 121% 13.8% 12.0% 32.2% 55.7% 114% 15.2% 13.2% 31.9% 56.2% 109% 16.6% 14.6% 31.2% 55.3% 107% 18.2% 16.0% Market Cap Bloomberg ticker Reuters ticker Share price Analyst 43,777 LLOY LN GBp LLOY.L 61.6 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (GBPm) Net interest income (NII) Non-interest income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (GBPm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company Berenberg. Source: Companydata, data, Berenberg research 109 Nordea Bank AB Banking “Something rotten in the state of Denmark” • • • The Nordea investment story is complex. It offers Nordic virtues and for now at least a focus on RoE over growth. But risks abound – capital is weak, disclosure is poor and the management of its balance sheet is more aggressive than (Nordic) peers. On top of this, there is exposure to Denmark and Norway, and the overhang of the Swedish government’s stake. For now, we fear Eurozone banks’ uncertainties more than Nordea’s, but strongly prefer the simpler Swedbank story. Capital weak versus Nordic peers: Unsurprisingly, given its weaker Basel III ratios, Nordea scores poorly in our analysis, being in the bottom tercile. Even on the “pain” ratio, where it scores relatively well, it would need €6bn to achieve a 4% ratio. We note its more aggressive balance sheet management with its focus on “RWA optimisation” and the least liquid balance sheet among Swedish banks. Nordic virtues: Born from the wreckage of Sweden’s banking crisis 20 years ago, Nordea has built a very strong risk management track record. It has built a similar track record in delivering its strategic plans and managing its costs. Moreover, its direct exposure to the more challenged parts of the Eurozone is limited. • European vices: In contrast, it has a greater appetite for trading risk and, as noted above, has more aggressively managed its balance sheet. Most of all, we are increasingly concerned about its selective disclosure. As noted with Q1, disclosure on FX effects, Basel III and disposal gains (taken through NII) was poor by Swedish standards. • Commitment to utility banking model questionable: Nordea was one of the first banks to focus on RoE over growth. We also note the chairman’s cautious view on growth in Europe financial services at the Sampo capital markets day. But questions remain. If there is no organic growth, would it target inorganic? What if there is a cyclical rebound in growth? • Danish/Norwegian exposure adds to uncertainties: As per our commentary on Danske and DNB, we remain concerned about risk in these two countries: near-term economic headwinds in Denmark could sustain higher loan losses for longer, and in Norway a reduction in global liquidity could have an effect in the longer term. • Valuation full: Consensus = 1.4x P/TNAV versus 14% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. • Key risks to view: Danish economic miracle; regulatory forbearance; risk-on rally. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 0.65 0.65 6.43 5.80 0.26 4,027 14.0x 1.57x 10.6 11.8 0.0 0 0.77 0.77 6.91 6.26 0.34 4,026 11.7x 1.45x 11.7 13.0 0.0 0 0.81 0.81 7.02 6.37 0.36 4,026 11.2x 1.43x 11.6 12.8 0.0 0 0.87 0.87 7.53 6.87 0.38 4,040 10.4x 1.32x 11.9 13.1 0.0 0 0.91 0.91 8.04 7.38 0.40 4,040 10.0x 1.23x 11.7 12.8 0.0 0 110 Buy Rating system Relative Current price Price target SEK 79.10 SEK 81.00 10/06/2013 NASDAQ Stockholm Close Market cap SEK 320,276 m Reuters NDA.ST Bloomberg NDA SS OMX Changes made in this note Rating Buy (no change) Price target SEK 81.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 10284 -0.4 10597 -0.5 10829 -0.6 PPOP 5083 -0.5 5410 -1.0 5632 -1.0 0.81 0.1 0.87 0.0 0.91 0.0 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 4,049 6,524,000 Performance data High 52 weeks (SEK) Low 52 weeks (SEK) Relative performance to SXXP 1 month 1.3 % 3 months 3.6 % 12 months 15.3 % 84 56 SX7P 2.6 % 4.9 % 7.3 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Nordea Bank AB Banking Financials Market ratios; per share data (EUR) EPS (reported) EPS (Berenberg adjusted) 2011 0.65 0.65 2012 0.77 0.77 2013e 0.81 0.81 2014e 0.87 0.87 2015e 0.91 0.91 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 5.80 6.43 0.26 14.3x 6.26 6.91 0.34 12.0x 6.37 7.02 0.36 11.4x 6.87 7.53 0.38 10.7x 7.38 8.04 0.40 10.2x Reuters ticker Share price P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.60x 1.44x 2.8% 40% 4,027 1.48x 1.34x 3.7% 44% 4,026 1.46x 1.32x 3.9% 44% 4,026 1.35x 1.23x 4.1% 44% 4,040 1.26x 1.15x 4.3% 44% 4,040 Analyst Market Cap Bloomberg ticker SEKm EUR SEK EUR-SEK 325,540 NDA SS NDA.ST 9.28 80.4 8.6661 Nick Anderson [email protected] +44 20 3207 7838 Income Statement and Ratios Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit 5,464 2,389 1,512 132 9,497 -5,223 4,274 -734 3,540 0 0 3,540 -913 -7 2,620 2,620 5,752 2,504 1,784 196 10,236 -5,186 5,050 -933 4,117 0 0 4,117 -991 -7 3,119 3,119 5,639 2,591 1,782 230 10,242 -5,185 5,057 -826 4,231 0 0 4,231 -952 -8 3,271 3,271 5,810 2,650 1,875 204 10,539 -5,186 5,354 -870 4,483 0 0 4,483 -959 -8 3,516 3,516 5,937 2,708 1,916 204 10,765 -5,191 5,574 -890 4,684 0 0 4,684 -1,002 -8 3,674 3,674 5.3% 4.8% 18.0% 48.5% 7.8% -0.7% 18.2% 27.1% 16.3% -2.0% 3.5% -0.1% 17.3% 0.1% 0.0% 0.1% -11.5% 2.8% 3.0% 2.3% 5.2% -11.3% 2.9% 0.0% 5.9% 5.4% 6.0% 2.2% 2.2% 2.2% 0.0% 2.1% 0.1% 4.1% 2.3% 4.5% 16.3% 8.5% 2.8% -3.9% 6.0% 0.8% 4.5% 4.5% 19.1% 19.1% 4.9% 4.9% 7.5% 7.5% 4.5% 4.5% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 0.87% 5.8x 55.0% 0.84% 0.22% 13.4% 25.8% 11.8% 10.6% 0.42% 28.1x 1.44% 0.82% 5.4x 50.7% 0.74% 0.27% 16.2% 24.1% 13.0% 11.7% 0.44% 29.2x 1.74% 0.85% 6.1x 50.6% 0.78% 0.23% 14.6% 22.5% 12.8% 11.6% 0.50% 25.8x 1.96% 0.87% 6.2x 49.2% 0.78% 0.24% 15.0% 21.4% 13.1% 11.9% 0.53% 24.9x 2.08% 0.87% 6.3x 48.2% 0.76% 0.24% 15.0% 21.4% 12.8% 11.7% 0.54% 23.6x 2.13% -0.06% 0.03% 0.02% 0.00% -4.3% -0.10% 0.05% 0.0% 0.05% -0.03% -1.4% -0.01% 0.01% -1.0% -0.01% 0.00% -1.7% 1.1% -1.6% -0.2% -1.1% 0.3% 0.0% -0.4% 0.02% 0.05% 0.03% 0.01% 0.30% 0.22% 0.12% 0.05% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 337,203 716,204 346,251 677,309 354,574 661,487 361,554 674,510 368,718 687,874 2.7% -5.4% 2.4% -2.3% 2.0% 2.0% 2.0% 2.0% 190,092 186,453 86 26,034 23,459 20,677 185,200 200,678 192,137 5 28,000 25,344 21,961 167,892 28,441 25,785 23,238 168,035 30,410 27,754 25,207 171,343 32,467 29,811 27,264 174,738 7.6% 8.0% 6.2% -9.3% 1.6% 1.7% 5.8% 0.1% 6.9% 7.6% 8.5% 2.0% 6.8% 7.4% 8.2% 2.0% 25.9% 47.1% 177% 12.2% 11.2% 1.31% 48.2% 24.8% 51.1% 173% 14.3% 13.1% 1.88% 41.2% 25.4% 53.6% 25.4% 53.6% 25.4% 53.6% -1.1% 4.0% 0.6% 2.5% 0.0% 0.0% 0.0% 0.0% 15.0% 13.8% 15.8% 14.7% 16.7% 15.6% 2.0% 1.9% 0.7% 0.7% 0.8% 0.9% 0.9% 0.9% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Source: Company data, Berenberg research 111 Raiffeisen Bank International AG Banking New CEO does not alleviate concerns • • • Raiffeisen (RBI) has appointed Karl Sevelda, an existing member of its Board, as the new CEO following the resignation of Herbert Stepic on 24 May in the midst of the internal compliance investigation on offshore transactions. We believe the new CEO will bring little change to the group strategy of opportunistic growth and Basel capital-light structure, so we would continue selling. New CEO to bring little change, in our view. Karl Sevelda has been a member of RBI’s board since 1998 and in charge of the corporate banking division. Mr Sevelda has been part of the decision-making process of RBI for the past 15 years. We therefore believe his leadership will not bring significant change to RBI’s priorities and strategy. We believe the minority 28% shareholders would have benefited more from an external CEO, as per our note of 30 May, A new external CEO is needed. We would therefore continue selling. Capital remains weak: RBI’s fully-loaded Basel III CT1 ratio is 7.5%, excluding participation capital of €2.5bn, which is the weakest among peers. The company cannot afford to repay the participation capital using the existing capital buffers. It will take RBI four years to accumulate €1.8bn in retained earnings based on current dividend policy. This is too little too late, in our view. The bank must raise equity. While its “pain” ratio of 3.3% matches Erste’s, it is still below the 4% level we deem the minimum for Eurozone banks. • RBI remains reliant on Russia, which contributes 48% to group net profit (despite accounting for only 12% of loans), driven by the release of provision reserves and a high interest margin. However, as we argued in our note on 17 April, Russia alone cannot save the day, this is not sustainable. The company is targeting expansion in riskier unsecured retail lending to maintain margins which will eventually increase its cost of risk (from -€1m in 2013 to €45m in 2014 per our estimates). • Asset quality continues to be challenging, and RBI is guiding for “stable” loan loss charges (LLCs) in 2013, which has a negative readacross to Erste. Non-performing loans rose to 9.9% of the total (versus 9.8% in December and 8.9% in March 2012) and LLCs of €220m (consensus: €245m) are 45% higher yoy. • Valuation: RBI is trading at 0.7x tangible book value (TBV) for a 7.2% 2014 RoTE, a 40% discount to Erste due to a weaker Basel capital ratio and concerns on governance. Our price target is based on a P/TBV multiple driven by 2014E RoTE and CAPM-based CoE. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 3.95 5.95 37.3 31.9 1.05 195 4.3x 0.80x 10.8 13.3 4.1 27 2.70 4.06 39.1 32.4 1.17 195 6.3x 0.79x 7.3 8.9 4.6 43 2.02 3.05 43.6 36.9 1.00 195 8.3x 0.69x 5.6 6.1 3.9 49 2.58 3.61 44.0 37.3 1.00 195 7.0x 0.68x 6.4 7.2 3.9 39 2.46 3.56 46.4 39.7 1.00 195 7.2x 0.64x 6.1 6.7 3.9 41 112 Sell Rating system Relative Current price Price target EUR 25.43 EUR 22.00 10/06/2013 Vienna Close Market cap EUR 4,971 m Reuters RBIV.VI Bloomberg RBI AV Changes made in this note Rating Sell (no change) Price target EUR 22.00 (no change) Chg 2013e 2014e old Δ% old Δ% 5061 5104 Income 1916 PPOP 1877 3.05 3.61 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 5017 1869 3.56 - 196 154,767 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -5.6 % 3 months -14.8 % 12 months -13.2 % 34 22 SX7P -4.3 % -13.5 % -21.3 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Raiffeisen Bank International AG Banking Financials Raiffeisen Market ratios and per share data (EUR) New EPS (reported) New EPS (Berenberg adjusted) 2011 3.95 5.95 2012 2.70 4.06 2013E 2.02 3.05 2014E 2.58 3.61 2015E 2.46 3.56 Old EPS (Berenberg adjusted) Change TBVPS 5.95 0.0% 31.9 4.37 -7.2% 32.4 3.12 -2.3% 36.9 3.63 -0.6% 37.3 3.38 5.1% 39.7 Reuters ticker Share price (EUR) Analyst BVPS DPS P/E (Berenberg adjusted) 37.3 1.05 4.3 39.1 1.17 6.3 43.6 1.00 8.3 44.0 1.00 7.0 46.4 1.00 7.2 Rating Target price (EUR) Upside P/TBV (x) P/BV (x) RoTE adjusted (%) 0.80 0.68 13.3 0.79 0.65 8.9 0.69 0.58 6.1 0.68 0.58 7.2 0.64 0.55 6.7 Phone email: Dividend yield (%) Payout ratio (%) Weighted avg. number of shares (m) 4.1 4.6 3.9 3.9 3.9 26.6 195 43.4 195 49.4 195 38.7 195 40.6 195 2011 2012 2013E 2014E 2015E Market Cap (EURm) Bloomberg ticker 4,971 RBI AV RAIFF.PK 25.43 Eleni Papoula Sell 22.00 -13% +44 20 3465 2741 [email protected] Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPOP) Loan loss charge (LLC) Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Exceptional items Adj. attributable profit Coupon of participation capital Adjusted attributable profit post coupon Income Ratios (%) NII/AIEAs PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted RoE RoA Asset Tangible Leverage (x) RoRWA 13/14 14/15 Year-on-year change (%) -5.3 -6.4 -3.0 1.8 -5.4 0.3 -40.8 32.8 3.5 173.0 -9.1 137.3 -4.6 -4.6 0.9 4.6 -2.4 0.1 -16.2 -8.0 2.1 -5.2 -3.3 -5.1 -24.8 -12.7 9.9 -28.9 -2.5 -5.8 282.0 31.1 -13.6 -25.1 -18.1 18.4 11/12 12/13 -3.0 0.5 0.0 0.0 -1.7 -1.3 -2.5 -4.7 -0.3 -0.6 36.2 -1.6 3,667 1,490 363 37 5,557 -3,120 2,437 -1,064 1,373 -399 -6 968 190 1,158 3,471 1,517 215 101 5,304 -3,263 2,041 -1,009 1,032 -284 -23 725 64 789 3,250 1,434 285 92 5,061 -3,185 1,877 -976 901 -277 -30 594 0 594 3,153 1,438 295 218 5,104 -3,188 1,916 -927 990 -261 -26 703 0 703 3,059 1,445 295 218 5,017 -3,148 1,869 -883 986 -259 -35 692 0 692 -31.8 -24.8 18.4 -200 -200 -200 -200 -213 0.0 0.0 0.0 6.3 958 589 394 503 479 -38.5 -33.2 27.7 -4.7 2.73 2.54 56.15 2.24 1.35 29.02 29.09 13.3 2.69 2.60 61.52 2.31 1.22 29.07 27.52 8.9 2.66 2.50 62.92 2.37 1.17 30.03 30.75 6.1 2.58 2.42 62.46 2.40 1.11 29.39 26.36 7.2 2.48 2.33 62.74 2.36 1.05 28.87 26.29 6.7 -1.2 2.5 9.6 2.8 -9.6 0.2 -5.4 -32.6 -1.3 -4.0 2.3 2.8 -4.3 3.3 11.8 -31.6 -3.1 -3.1 -0.7 1.3 -5.1 -2.2 -14.3 17.4 -3.9 -3.8 0.5 -1.8 -5.2 -1.8 -0.3 -6.0 10.8 1.0 14.6 19.8 7.3 0.6 14.0 12.6 5.6 0.4 12.5 8.7 6.4 0.5 12.3 10.3 6.1 0.5 11.9 9.9 -32.7 -43.1 -4.6 -36.4 -22.9 -25.1 -10.8 -30.6 13.3 16.3 -0.9 17.7 -3.9 3.7 -3.7 -3.9 2011 2012 2013E 2014E 2015E 11/12 12/13 13/14 14/15 2.2 -7.4 -4.2 -0.7 -7.5 -37.1 -0.6 1.2 -1.6 0.0 -2.5 -5.2 -1.7 -6.2 1.8 8.1 10.0 5.3 -1.6 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core Equity Tier 1 Capital (reported) Core (Equity) Tier 1 Capital (excl. participation capital) Risk Weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Retail Funds Tier 1 ratio Core (Equity) Tier 1 ratio reported Year-on-year change (%) 72,566 145,638 138,165 55,407 19,922 1,000 9,326 7,229 8,356 75,657 131,173 124,894 57,633 16,555 1,066 10,404 8,118 9,191 81,576 146,985 134,481 66,747 14,367 1,143 10,936 8,727 9,415 83,343 136,115 128,839 66,297 13,290 719 10,872 8,832 9,265 83,369 132,697 122,192 65,185 12,470 732 11,754 9,715 9,753 4.3 -9.9 -9.6 4.0 -16.9 6.5 11.6 12.3 10.0 7.8 12.1 7.7 15.8 -13.2 7.2 5.1 7.5 2.4 5,856 6,691 6,915 6,765 7,253 14.3 3.3 -2.2 7.2 89,210 88,800 95,300 82,825 85,179 -0.5 7.3 -13.1 2.8 64.8 55.5 122.2 9.2 9.9 60.8 61.2 125.7 10.7 11.2 63.9 62.8 127.9 11.5 11.4 63.9 62.8 128.1 11.5 12.1 63.8 62.8 129.3 12.0 12.6 -6.1 10.3 2.9 16.4 13.2 5.0 2.6 1.7 7.5 2.4 0.0 0.0 0.2 0.7 5.6 -0.2 0.0 1.0 4.0 4.1 Source: Company data, Berenberg research 113 RBS plc Banking Financially repressed • • • Between a rock and a hard place: Despite the best efforts of management, RBS continues to be financially repressed. On a fundamental basis we believe RBS is overvalued and until the capital structure/government shareholding is simplified it is hard to argue why investors would want to own the shares. Too much debt remains the problem, not its supply: As we have long argued, the problem in the UK is the lack of credit demand (due to debt/GDP in the UK being over 400%) rather than supply. Until policymakers realise that we cannot solve this crisis with more debt, RBS looks set to remain a government pawn, in our view. Leverage remains high despite PRA: Following the recent machinations of the FPC and PRA, RBS does not have to raise external capital and can rely on internal measures. On our “pain” and “plain” leverage ratios, RBS has a “pain” ratio of 2.4% and a “plain” ratio of 6.1%. This would leave it in the third quartile relative to peers, but above the majority of US/European large-cap peers. In order to hit a 3% “pain” ratio, RBS would require £9.0bn of capital. • PSC report and Mansion House speech key for future: The Chancellor’s Mansion House speech on 19 June should give an indication of the re-privatisation of RBS. Alongside this, the debate over whether RBS should be split into a good/bad bank needs to be resolved, with our view being a split achieves nothing new. • Dividends likely to be delayed as profits disappoint: We believe that earnings at all the UK banks will disappoint due to revenue headwinds and provisions normalising at higher levels. As a result, dividends at RBS will be delayed until 2015 at the earliest, in our view. • Valuation expensive even relative to the old days: RBS is trading on 15.4x 2013 consensus EPS and 0.7x TBV. This is expensive, as the long-term average P/E for the sector was 10-11x pre-crisis. Our EPS changes reflect the timing of one-offs and asset disposals. • Target price unchanged at 190p: We use a capital allocation sumof-the-parts analysis to value RBS. On this basis, RBS is c£1.9bn short of our optimal capital target. • Risks to our view: The main risk to our view is that our revenue estimates are too low. Y/E 31.12., GBP m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -18.45 -18.45 635.7 477.7 0.0 11,023 -18.1x 0.70x -2.8 -3.6 0.0 0 -55.04 -55.04 567.4 440.5 0.0 11,171 -6.1x 0.76x -9.1 -11.9 0.0 0 6.13 6.13 567.1 436.9 0.0 11,298 54.5x 0.76x 1.1 1.4 0.0 0 15.17 15.17 582.2 456.4 0.0 11,298 22.0x 0.73x 2.6 3.4 0.0 0 23.91 23.91 605.9 484.6 0.0 11,298 14.0x 0.69x 4.0 5.0 0.0 0 114 Sell Rating system Relative Current price Price target GBp 334 GBp 190 10/06/2013 London Close Market cap GBP 37,735 m Reuters RBS.L Bloomberg RBS LN Changes made in this note Rating Sell (no change) Price target GBp 190 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 22124 -5.2 20395 -0.2 20094 0.1 Income PPOP 8088 -10.4 7399 -5.4 7310 -4.9 4.40 39.3 17.35 -12.6 25.47 -6.1 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 11,298 10,687,520 Performance data High 52 weeks (GBp) Low 52 weeks (GBp) Relative performance to SXXP 1 month 13.9 % 3 months 10.8 % 12 months 23.6 % 368 197 SX7P 15.2 % 12.1 % 15.6 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] RBS plc Banking Financials Market ratios; per share data (GBP) EPS (reported) EPS (Berenberg adjusted) 2011 -18.45 -18.45 2012 -55.04 -55.04 2013e 6.13 6.13 2014e 15.17 15.17 2015e 23.91 23.91 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 478 636 0.00 -18.1x 441 567 0.00 -6.1x 437 567 0.00 54.5x 456 582 0.00 22.0x 485 606 0.00 14.0x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 0.70 0.53 0.0% 0% 10,822 0.76 0.59 0.0% 0% 11,002 0.76 0.59 0.0% 0% 11,220 0.73 0.57 0.0% 0% 11,220 0.69 0.55 0.0% 0% 11,220 Market Cap Bloomberg ticker Reuters ticker Share price Analyst 37,001 RBS LN GBp RBS.L 334 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Income Summary (GBPm) Net interest income (NII) Non-interest income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Other items Attributable profits (reported) 12,689 12,052 24,741 -15,478 9,263 -7,439 1,824 -2,590 -766 -1,127 -28 -76 -1,997 11,695 11,665 23,360 -14,731 8,629 -5,279 3,350 -8,759 -5,409 -441 -165 -41 -6,056 10,669 10,315 20,985 -13,735 7,250 -4,135 3,115 -858 2,257 -1,100 -598 129 688 10,449 9,897 20,347 -13,351 6,996 -3,277 3,719 -1,000 2,719 -625 -392 0 1,702 10,358 9,756 20,113 -13,162 6,952 -2,609 4,342 -400 3,942 -867 -392 0 2,683 -7.8% -3.2% -5.6% -4.8% -6.8% -29.0% 83.7% -8.8% -11.6% -10.2% -6.8% -16.0% -21.7% -7.0% -2.1% -4.1% -3.0% -2.8% -3.5% -20.7% 19.4% -0.9% -1.4% -1.1% -1.4% -0.6% -20.4% 16.8% 606.1% -60.9% -141.7% 149.4% 20.5% -43.1% 45.0% 38.7% 203.3% -111.4% 147.3% 57.7% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 1.88% 1.2x 62.6% 1.05% 1.55% 58.6% 61.8% -3.6% -2.8% -0.13% 27.0x -0.37% 1.85% 1.6x 63.1% 1.05% 1.19% 45.1% 13.2% -11.9% -9.1% -0.43% 27.7x -1.26% 1.84% 1.8x 65.5% 1.08% 1.01% 38.8% 35.3% 1.4% 1.1% 0.05% 25.9x 0.16% 1.92% 2.1x 65.6% 1.11% 0.86% 31.4% 16.8% 3.4% 2.6% 0.14% 23.7x 0.42% 1.97% 2.7x 65.4% 1.16% 0.71% 25.2% 20.0% 5.0% 4.0% 0.24% 21.4x 0.69% -0.03% 0.00% 0.08% 0.05% 0.5% 0.00% -0.36% 2.4% 0.03% -0.18% 0.2% 0.04% -0.15% -0.2% 0.04% -0.15% -48.6% -8.2% 22.1% 13.3% -18.5% 2.0% 3.2% 1.7% -0.29% 0.48% 0.09% 0.09% -0.89% 1.42% 0.26% 0.27% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 454,112 1,506,867 662,222 414,143 188,940 1,234 70,075 55,217 46,341 501,900 430,088 1,312,295 604,647 433,239 121,365 1,770 63,386 49,841 47,320 459,600 388,982 1,241,824 552,464 432,657 649,991 1,770 64,074 50,446 48,467 422,127 371,186 1,154,374 534,329 413,008 580,489 1,770 65,776 52,648 50,718 392,963 364,807 1,116,252 518,082 421,820 530,872 1,770 68,459 55,831 53,901 385,198 -5.3% -12.9% -9.6% -5.4% -4.6% -7.0% -1.7% -3.3% -9.5% -9.7% 2.1% -8.4% 1.1% 1.2% 2.4% -8.2% 2.7% 4.4% 4.6% -6.9% 4.1% 6.0% 6.3% -2.0% 33.3% 30.1% 110% 13.2% 10.7% 35.0% 32.8% 99% 12.4% 10.3% 34.0% 31.3% 90% 13.7% 11.5% 34.0% 32.2% 90% 15.3% 12.9% 34.5% 32.7% 86% 16.4% 14.0% -0.7% -0.4% 1.2% 1.2% 1.6% 1.4% 1.1% 1.1% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (GBPm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research. Source: Company data, Berenberg research 115 Banco Santander SA Banking It is all about the capital • • • Our high-conviction Sell rating on Santander reflects three concerns: material capital deficit, high and sustained macro risks in Spain, and a deteriorating outlook for credit quality in Brazil. The group strategy of selling parts of major subsidiaries may bring short-term earnings and capital relief, but it exacerbates long-term problems: it compounds the capital deficit in the Spanish parent and undermines the logic of the group. We cut our price target by 34% to €3.9, given the capital deficit. Capital problem #1 – capital ratios materially low: Meeting a 6% “plain” equity-to-assets ratio implies a €24bn shortfall; a 4% “pain” ratio implies a €36bn capital shortfall (given substantial deferred tax assets). That there is a capital deficit cannot be disputed – management forecasts a fully-loaded Basel III ratio of only 8% by year-end and it continues to focus on generating capital gains including listing subsidiaries. The debate is the scale. Capital problem #2 – it is in the wrong places: Major subsidiaries are well capitalised based on reported Basel ratios, implying that most of the deficit is in the Spanish parent. The group structure and local regulator demands mean that the parent cannot access capital in the subsidiaries. The strategy of listing units compounds this problem. • Macro risks in Spain matter: Spain may only account for 17% of group revenues but the macro risks are material and threaten credit quality. These include further asset deflation, prolonged recession driven by deleveraging and government austerity, the net international investment position and renewed disruption to wholesale funding. • Brazil – opportunity becomes risk: Brazil accounts for 46% of group revenues. Waning demand for its commodities reveals the lack of structural reform in the economy. Brazil risks returning to type – weaker growth and higher inflation – implying risks to asset quality. • Valuation full: Consensus = 1.2x P/TNAV versus 12% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. • • Key risks to view: Spanish/Brazilian macro; sustained risk-on rally. Sell Rating system Relative Current price Price target EUR 5.41 EUR 3.90 10/06/2013 Madrid Close Market cap EUR 64,730 m Reuters SAN.MC Bloomberg SAN SM Changes made in this note Rating Sell (no change) Price target EUR 3.90 (5.95) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 44042 46417 47942 Income PPOP 23179 - 25446 - 26350 0.51 0.58 0.61 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 11,961 67,528,000 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 0.8 % 3 months -8.3 % 12 months -15.3 % 7 4 SX7P 2.1 % -7.0 % -23.3 % Price target cut by 34%: After publishing our detailed sector report on capital, our price target includes the capital deficit for the first time. Based on a €24bn deficit, we cut our price target by €2.05. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 0.60 0.57 8.53 5.85 0.60 8,957 9.6x 0.93x 6.8 10.0 11.1 100 0.23 0.20 7.59 5.41 0.60 9,833 27.6x 1.00x 2.7 3.6 11.1 266 0.51 0.51 7.21 5.28 0.50 11,141 10.6x 1.02x 6.8 10.2 9.2 98 0.58 0.58 7.05 5.32 0.28 12,425 9.3x 1.02x 8.0 11.6 5.2 48 0.61 0.61 6.95 5.32 0.30 13,192 8.9x 1.02x 8.4 11.8 5.5 49 116 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Banco Santander SA Banking Financials Market ratios and per share data EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPOP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/Average Total Assets PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (%) RoA Asset Tangible Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 2011 0.60 0.57 5.85 8.53 0.60 9.7 0.94 0.64 11.0 99.7 8,957 2012 0.23 0.20 5.41 7.59 0.60 27.9 1.01 0.72 11.0 265.8 9,833 2013e 0.51 0.51 5.28 7.21 0.50 10.7 1.04 0.76 9.1 97.9 11,141 2014e 0.58 0.58 5.32 7.05 0.28 9.4 1.03 0.78 5.2 48.2 12,425 2015e 0.61 0.61 5.32 6.95 0.30 9.0 1.03 0.79 5.4% 49% 13,192 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 29,110 10,208 2,499 937 42,754 -19,559 23,195 -9,900 13,295 -2,984 0 10,311 -2,500 -766 5,351 5,071 30,147 10,307 2,698 523 43,675 -20,116 23,559 -12,666 10,893 -2,446 0 8,447 -2,299 -890 2,205 1,925 30,261 10,651 2,505 625 44,042 -20,864 23,179 -12,181 10,998 -1,828 0 9,171 -2,337 -1,146 5,688 5,688 32,254 11,050 2,480 633 46,417 -20,972 25,446 -12,172 13,274 -1,868 0 11,406 -2,861 -1,280 7,265 7,265 33,403 11,427 2,480 633 47,942 -21,592 26,350 -12,095 14,255 -1,709 0 12,546 -3,135 -1,373 8,038 8,038 3.6 1.0 8.0 -44.2 2.2 2.9 1.6 27.9 -18.1 0.4 3.3 -7.1 19.5 0.8 3.7 -1.6 -3.8 1.0 6.6 3.7 -1.0 1.2 5.4 0.5 9.8 -0.1 20.7 3.6 3.4 0.0 0.0 3.3 3.0 3.6 -0.6 7.4 -18.1 -8.0 16.2 -58.8 -62.0 8.6 1.7 28.7 158.0 195.5 24.4 22.4 11.7 27.7 27.7 10.0 9.6 7.3 10.6 10.6 2.36% 2.3x 45.7% 1.58% 1.31% 34.0% 24.2% 10.0% 6.4% 0.41% 23.9x 0.87% 2.39% 1.9x 46.1% 1.60% 1.67% 42.0% 27.2% 3.6% 2.4% 0.15% 23.9x 0.34% 2.37% 1.9x 47.4% 1.63% 1.63% 40.3% 25.5% 10.2% 6.8% 0.45% 21.8x 1.02% 2.49% 2.1x 45.2% 1.62% 1.61% 37.7% 25.1% 11.6% 8.0% 0.56% 19.8x 1.29% 2.53% 2.2x 45.0% 1.63% 1.57% 36.2% 25.0% 11.8% 8.4% 0.61% 19.0x 1.39% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 769,036 1,251,525 941,436 632,533 230,105 6,445 80,895 52,365 56,694 565,958 745,987 1,269,628 926,572 626,639 236,083 9,672 81,243 53,176 57,558 557,030 751,779 1,285,911 936,487 639,171 240,440 9,866 86,931 58,864 63,246 558,640 764,082 1,308,914 952,993 651,955 244,884 10,063 94,196 66,128 70,511 569,317 777,400 1,333,146 970,600 664,994 249,417 10,264 98,215 70,147 74,530 585,111 -3.0 1.4 -1.6 -0.9 2.6 50.1 0.4 1.5 1.5 -1.6 0.8 1.3 1.1 2.0 1.8 2.0 7.0 10.7 9.9 0.3 1.6 1.8 1.8 2.0 1.8 2.0 8.4 12.3 11.5 1.9 1.7 1.9 1.8 2.0 1.9 2.0 4.3 6.1 5.7 2.8 45.2% 61.4% 122% 11.0% 10.0% 3.89% 61.4% 43.9% 58.8% 119% 11.2% 10.3% 4.54% 72.6% 43.4% 58.5% 118% 12.2% 11.3% 5.03% 58.0% 43.5% 58.4% 117% 13.2% 12.4% 4.97% 60.0% 43.9% 58.3% 117% 13.5% 12.7% 4.73% 60.0% Source: Company data, Berenberg research 117 Market Cap (EURm) Bloomberg ticker Reuters ticker Share price (EUR) Analyst 56,426 SAN SM SAN.MC 5.47 Nick Anderson +44 20 3207 7838 [email protected] SEB AB Banking Focus on growth creates uncertainty • • • • • • • • We continue to rate SEB management, its risk management record and its disclosure among the best in Europe. However, we believe its commitment to growth is a mistake; we would prefer to see it focus on RoE by de-costing and de-risking the business further. Swedbank and Handelsbanken have shown the benefits of such a strategy, which we believe remains key to preserving value given the anaemic economic growth likely to endure in Europe in the next decade. Capital compares poorly to Nordic peers: One of the most surprising results of our analysis was SEB’s ranking: it is the lowest of the Nordics on the “pain” ratio (a function of its large off balance sheet commitments arising from its corporate focus); on the “plain” ratio, it ranks seventh from last out of all the banks, just ahead of Danske. While its reported Basel III fully-loaded ratio, at 13%, is one of the best in Europe, we note that of the 50 largest listed banks in Europe, SEB reported the 10th-largest drop in average risk weights since Q1 2011. On the positive side, we note SEB has one of the most liquid balance sheets of Europe’s 50 largest banks, and a very strong track record of managing credit risk. Swedish virtues: Like other Swedish banks, SEB’s corporate memory remains influenced by the early 1990s crisis. This manifests itself in a strong credit risk track record and stability of all key revenue lines – in other words, a low risk appetite. Best-in-class disclosure and transparency: SEB is among the best of its Nordic and EU peers in terms of disclosure. We would highlight detailed supplemental quarterly disclosures, openness on exceptional items/changes (in contrast to Nordea), be they FX effects or changes in accounting standards, and regular access to management. Commitment to growth is a concern: Our prime concern with SEB is its commitment to growth. As per the new three-year plan to 2015, it aims to grow revenues by c5% pa. The history of banking shows a very strong correlation between growth and increased risk. Cost commitment uncertain: Following an ambiguous answer to a question about costs in SEB’s Q4 results, we have a lingering doubt about the bank’s commitment to the cost cap to 2014 if activity rebounds. While management was “categorical” about the cap in Q1, it left open plans for 2015 – year three of the strategic plan. Valuation full: Consensus = 1.5x P/TNAV for a 13% 2014 RoTE. Our price target is based on a P/TNAV multiple derived from our 2014 RoTE and a CAPM-derived cost of equity. Key risks to view: Sustained Eurozone recovery; wholesale funding market dislocation; risk-on rally. Y/E 31.12., SEK m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 4.9 4.9 46.7 41.9 1.8 2,205 13.8x 1.62x 11.2 12.5 2.6 35 5.3 5.3 49.9 45.1 2.8 2,198 12.8x 1.50x 11.1 12.4 4.1 52 5.7 5.7 53.0 48.3 2.6 2,207 12.0x 1.40x 11.1 12.7 3.8 45 5.9 5.9 56.3 51.6 2.7 2,207 11.4x 1.31x 10.9 11.9 4.0 45 6.1 6.1 59.7 55.0 2.8 2,207 11.1x 1.23x 10.6 11.6 4.1 45 118 Hold Rating system Relative Current price Price target SEK 67.80 SEK 61.00 10/06/2013 NASDAQ Stockholm Close Market cap SEK 148,753 m Reuters SEBa.ST Bloomberg SEBA SS OMX Changes made in this note Rating Hold (no change) Price target SEK 61.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 39200 0.6 39930 0.6 40591 0.5 PPOP 16788 0.4 17507 0.7 18124 0.5 5.67 0.0 5.93 0.0 6.13 0.0 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2,194 5,022,000 Performance data High 52 weeks (SEK) Low 52 weeks (SEK) Relative performance to SXXP 1 month -0.6 % 3 months -0.8 % 12 months 33.3 % 72 42 SX7P 0.7 % 0.5 % 25.3 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] SEB AB Banking Financials Market ratios; per share data (SEK) EPS (reported) EPS (Berenberg adjusted) 2011 4.91 4.91 2012 5.29 5.29 2013e 5.67 5.67 2014e 5.93 5.93 2015e 6.13 6.13 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 41.95 46.73 1.75 13.9x 45.11 49.87 2.75 12.9x 48.29 53.01 2.57 12.0x 51.57 56.29 2.68 11.5x 54.96 59.68 2.78 11.1x Reuters ticker SEBa.ST Share price SEK 68.1 Analyst Nick Anderson [email protected] P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.62x 1.46x 2.6% 35% 2,205 1.51x 1.37x 4.0% 52% 2,198 1.41x 1.28x 3.8% 45% 2,207 1.32x 1.21x 3.9% 45% 2,207 1.24x 1.14x 4.1% 45% 2,207 +44 20 3207 7838 Market Cap Bloomberg ticker SEKm 149,411 SEBA SS Income Statement and Ratios Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Income Summary (SEKm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit 16,901 14,175 3,548 3,062 37,686 -23,513 14,173 778 14,951 0 -1,153 13,798 -2,942 -37 10,819 10,819 17,635 13,620 4,579 2,989 38,823 -23,652 15,171 -937 14,234 0 -487 13,747 -2,093 -22 11,632 11,632 18,161 13,803 4,179 3,307 39,450 -22,589 16,861 -1,252 15,609 0 10 15,619 -3,085 -18 12,516 12,516 18,553 14,081 4,240 3,315 40,189 -22,561 17,628 -1,243 16,385 0 0 16,385 -3,277 -20 13,088 13,088 18,796 14,332 4,245 3,405 40,779 -22,568 18,211 -1,268 16,943 0 0 16,943 -3,389 -20 13,534 13,534 4.3% -3.9% 29.1% -2.4% 3.0% 0.6% 7.0% -220.4% -4.8% 3.0% 1.3% -8.7% 10.6% 1.6% -4.5% 11.1% 33.6% 9.7% 2.2% 2.0% 1.5% 0.2% 1.9% -0.1% 4.5% -0.7% 5.0% 1.3% 1.8% 0.1% 2.7% 1.5% 0.0% 3.3% 2.1% 3.4% -0.4% -28.9% 13.6% 47.4% 4.9% 6.2% 3.4% 3.4% 7.5% 7.5% 7.6% 7.6% 4.6% 4.6% 3.4% 3.4% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 0.76% -18.2x 62.4% 1.05% -0.07% -4.6% 19.7% 12.5% 11.2% 0.49% 25.8x 1.60% 0.74% 16.2x 60.9% 1.00% 0.08% 5.3% 14.7% 12.4% 11.1% 0.49% 25.2x 1.84% 0.73% 13.5x 57.3% 0.91% 0.10% 6.9% 19.8% 12.7% 11.1% 0.50% 25.1x 2.13% 0.73% 14.2x 56.1% 0.89% 0.10% 6.7% 20.0% 11.9% 10.9% 0.52% 23.1x 2.18% 0.73% 14.4x 55.3% 0.88% 0.10% 6.7% 20.0% 11.6% 10.6% 0.53% 21.9x 2.23% -0.01% -0.01% 0.00% 0.00% -1.5% -0.06% 0.14% -3.7% -0.09% 0.02% -1.1% -0.02% 0.00% -0.8% -0.01% 0.00% -5.0% -0.1% 5.1% 0.3% 0.2% -0.7% 0.0% -0.4% 0.00% 0.01% 0.01% 0.01% 0.25% 0.29% 0.06% 0.05% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,186,223 2,359,381 861,682 614,982 261 102,478 91,991 93,097 678,841 1,236,088 2,453,456 862,260 686,132 90 109,423 98,963 88,389 585,839 1,268,446 2,517,681 1,283,013 2,546,595 1,299,347 2,579,016 4.2% 4.0% 2.6% 2.6% 1.1% 1.1% 1.3% 1.3% 116,307 105,947 92,804 596,642 123,505 113,145 100,002 603,494 130,949 120,589 107,446 611,177 6.8% 7.6% -5.1% -13.7% 6.3% 7.1% 5.0% 1.8% 6.2% 6.8% 7.8% 1.1% 6.0% 6.6% 7.4% 1.3% 28.8% 50.3% 138% 15.9% 13.7% 1.36% 64.2% 23.9% 50.4% 143% 17.5% 15.1% 1.01% 66.3% 23.7% 50.4% 23.7% 50.4% 23.7% 50.4% -4.9% 0.1% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 17.0% 15.6% 18.0% 16.6% 19.0% 17.6% 1.6% 1.4% -0.5% 0.5% 1.0% 1.0% 1.0% 1.0% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (SEKm) Customer loans Total assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Source: Company data, Berenberg research 119 Société Générale SA Banking Too much leverage and too little revenue • • • Risks remain to the downside. We have two main concerns for Société Générale (SocGen): the first is the leverage within the business, while the second is the lack of clarity with the strategy. The first drives our view that SocGen has a €10bn capital shortfall within the business, while the latter leaves us uncertain how that capital shortfall will be reduced. Leverage is our main concern. On both our “pain” and “plain” leverage ratios, SocGen is in the bottom quartile among European and US peers. On our “pain” ratio SocGen has a ratio of 2.1% and on our “plain” ratio it has a ratio of 3.2%. For SocGen to achieve a 3% “pain” ratio would require €13bn of capital. Our main concern on capital is the CIB business. SocGen has over €600bn of assets within CIB, but only allocates €9.6bn of capital to it. Even if we net off derivatives, assets within the division are still over €400bn, equating to an equity/assets ratio of 2.2%. This is low both on an absolute basis and also relative to peers. • Weak revenue outlook limits capital generation in the business. The continuing weak French economy and outlook for CIB revenues reduce revenues and hence internal capital generation for SocGen. This leaves management with few options to help reduce the leverage in the business bar reducing RWAs which starts a vicious circle. • New strategy needs to address core issues. While the new strategy provides short-term benefits in terms of €900m costs cuts, we wait to see whether it sets out a clearer sense of purpose for SocGen. We remain concerned that management is not addressing the structural challenges that we think SocGen faces. • Estimates cut to reflect weak outlook for revenues. We have cut our estimates to reflect, firstly, one-off impacts/restructuring charges and, secondly, our negative outlook for revenues. • Unchanged price target of €16 points to 46% downside. Our price target is calculated using a capital allocation sum-of-the-parts analysis. On this basis, we believe SocGen has a €10bn capital shortfall, driven by its CIB business. • Risks to our view. The main risk to our view is that SocGen is able to rebuild capital faster than expected. This would come from earnings surprising positively or SocGen choosing to abandon growth and scale back its CIB balance sheet and ambitions. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 2.82 2.81 54.68 43.84 0.00 747 10.5x 0.68x 5.2 6.9 0.0 0 0.64 0.64 56.95 44.70 0.45 754 46.4x 0.66x 1.1 1.5 1.5 70 2.86 2.85 58.48 47.32 0.45 764 10.4x 0.63x 4.9 6.1 1.5 16 3.71 3.69 61.29 50.21 0.45 769 8.0x 0.59x 6.1 7.4 1.5 12 4.04 4.03 64.43 53.42 0.45 774 7.3x 0.56x 6.4 7.6 1.5 11 120 Sell Rating system Relative Current price Price target EUR 29.72 EUR 16.00 10/06/2013 Paris Close Market cap EUR 22,690 m Reuters SOGN.PA Bloomberg GLE FP Changes made in this note Rating Sell (no change) Price target EUR 16.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 23962 -4.6 24043 -1.0 23925 -0.3 Income PPOP 8282 -17.5 8803 -7.0 8795 -3.3 3.77 -24.4 4.14 -10.8 4.02 0.1 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 764 5,867,483 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 1.2 % 3 months -3.9 % 12 months 47.9 % 34 15 SX7P 2.5 % -2.6 % 39.9 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Société Générale SA Banking Financials Market ratios; per share data (EUR) EPS (reported) TBVPS (reported) 2011 2.82 42.0 2012 0.64 45.6 2013e 2.86 48.3 2014e 3.71 51.2 2015e 4.04 54 TBVPS (Berenberg adjusted) BVPS (reported) DPS P/E (Berenberg adjusted) 43.8 54.7 0.00 10.5x 44.7 56.9 0.45 46.4x 47.3 58.5 0.45 10.4x 50.2 61.3 0.45 8.0x 53.4 64.4 0.45 7.3x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 0.68x 0.54x 0.0% 0% 739 0.66x 0.52x 1.5% 70% 752 0.63x 0.51x 1.5% 16% 758 0.59x 0.48x 1.5% 12% 758 0.56x 0.46x 1.5% 11% 763 2011 2012 2013e 2014e 2015e Market Cap Bloomberg ticker 22,338 GLE FP Reuters ticker SOGN.PA Share price Analyst EUR 29.72 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net banking income (NBI) Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit 25,636 -17,036 8,600 -4,330 4,270 23,110 -16,438 6,672 -3,935 2,737 22,866 -16,031 6,835 -3,560 3,275 23,804 -15,616 8,188 -3,525 4,663 23,852 -15,349 8,502 -3,481 5,022 Other non-operating 12 -507 563 152 152 Associated companies 94 154 39 0 0 -265 -842 0 0 0 4,111 -1,323 -701 1,542 -334 -727 3,877 -1,007 -702 4,815 -1,317 -688 2,087 481 2,168 2.22% 2.0x 66.5% 1.47% 1.18% 16.9% 32.2% 6.9% 5.2% 0.18% 39.0x 0.60% 1.90% 1.7x 71.1% 1.35% 1.12% 17.0% 21.7% 1.5% 1.1% 0.04% 38.0x 0.15% 2011 2012 Change in the value of goodwill Reported profit before tax Taxation Minorities + Preferences Adj. attributable profit Income Ratios (%) NBI/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NBI Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 10/11 11/12 12/13 13/14 14/15 Year-on-year change (%) -3.0% 3.0% -12.9% 4.1% -25.3% -9.9% -3.5% -22.4% -9.1% -35.9% -1.1% -2.5% 2.4% -9.5% 19.6% 4.1% -2.6% 19.8% -1.0% 42.4% 0.2% -1.7% 3.8% -1.2% 7.7% 5,174 -1,399 -688 -29.7% -14.2% -62.5% -74.8% 151.4% 201.5% 24.2% 30.8% 7.4% 6.2% 2,810 3,086 -41.7% -77.0% 350.6% 29.6% 9.8% 1.81% 1.9x 70.1% 1.27% 1.00% 15.6% 26.0% 6.1% 4.9% 0.17% 35.7x 0.69% 1.86% 2.3x 65.6% 1.22% 0.98% 14.8% 27.4% 7.4% 6.1% 0.22% 33.8x 0.89% 1.83% 2.4x 64.4% 1.18% 0.95% 14.6% 27.0% 7.6% 6.4% 0.24% 32.2x 0.96% -0.12% -0.32% -0.09% 0.05% -0.02% 3.8% 0.01% 0.06% 4.7% -0.12% -0.05% -1.0% -0.08% -0.12% -4.5% -0.05% -0.02% -1.2% -0.04% -0.03% 5.8% -5.9% -10.5% -5.4% 4.3% 4.6% 1.4% 1.3% -0.3% 0.2% -0.14% -0.14% 0.13% 0.05% 0.02% -0.47% -0.45% 0.55% 0.19% 0.07% 2013e 2014e 2015e 10/11 11/12 12/13 13/14 14/15 1.7% 1.7% 1.4% 1.4% 1.4% 1.4% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 367,517 1,181,372 1,074,906 340,172 108,583 3,443 47,067 37,463 31,547 349,275 350,241 1,250,696 1,144,931 337,230 135,744 3,513 49,809 40,498 34,608 324,092 356,345 1,272,494 1,164,886 344,098 138,509 3,634 51,525 41,377 35,455 312,500 361,395 1,290,527 1,181,393 348,488 140,276 3,807 53,981 43,833 37,911 316,809 366,631 1,309,224 1,198,510 352,988 142,087 4,000 56,712 46,564 40,642 322,559 29.6% 31.1% 108% 10.7% 9.0% 25.9% 28.0% 104% 12.5% 10.7% 24.6% 28.0% 104% 13.2% 11.3% 24.5% 28.0% 104% 13.8% 12.0% 24.6% 28.0% 104% 14.4% 12.6% 121 Year-on-year change (%) -1.2% -4.7% 4.4% 5.9% 0.8% -23.2% -0.9% 25.0% 1.4% 5.9% 13.4% 4.3% 5.8% 8.1% 9.7% -7.2% 3.4% 2.2% 2.4% -3.6% 4.8% 5.9% 6.9% 1.4% 5.1% 6.2% 7.2% 1.8% -2.2% 0.2% 0.7% -4.2% 1.8% 1.6% 0.7% 0.7% 0.6% 0.6% 0.6% 0.6% Standard Chartered plc Banking To change or not to change • • • • • • • • June pre-close key: We reiterate our Sell on STAN despite it trading close to our price target as uncertainty over revenue targets leaves it susceptible to disappointment. The June pre-close provides the next key data point and management communication will be key. Sell rating driven by rising risks: We downgraded STAN on 11 March 2013 as we felt that the continuing pursuit of double-digit growth would increase the risk and volatility of future returns. In particular, we continue to believe that STAN has become too big to grow at double digits without significant additional risk. By way of example, STAN had a $107.4bn balance sheet in 2001 versus a $636.5bn balance sheet today, thereby increasing sixfold the new assets that need to be generated to hit double-digit growth targets. June pre-close next catalyst: The pre-close update STAN will issue on 26 June is likely to be a key point for STAN. While April was in line with its expectations there seems little evidence to believe revenue growth has picked up and STAN may need to step away from its double-digit targets. How this is communicated will be key as consensus is still looking for 8-9% EPS in each of the next three years. Leverage ratios better relative to peers: On our “pain” and “plain” leverage ratios, STAN stands out relative to peers as it has a “pain” ratio of 4.4% and a “plain” ratio of 6.4%. This reflects the markets in which STAN operates and cushions the rising risk we see with the strategy that STAN is pursuing. Competition on the rise: The one factor that was new to our thinking after the Q1 2013 IMS was the impact of competition. It seems clear to us from the statement that STAN has enjoyed relatively benign competition in its markets over the last few years. However, this seems to have changed as every bank now looks to Asia for growth, utilising the liquidity benefits of QE. STAN highlights margins and spreads falling between 15% and 30%. Revenue headwinds not priced in: While management remains confident that it will still achieve consensus PBT of $8.2bn operating profit in 2013, we believe this comes with additional risks. We now forecast operating profit of $7.8bn due to our view of weaker revenues and higher impairments. This would see STAN trading on 11.5x 12-month forward earnings, in line with its 10-year average. Price target of 1,450p unchanged: We calculate our price target using a capital allocation sum-of-the-parts and a 9.5% cost of equity. Risks to our view: There are two main risks to our view: first, that provisions remain at current levels, which would cause our EPS to rise by 2% to 232c; and second, our revenue growth estimates are too low (7% in 2013): each 1% increase in revenue growth adds 1% to EPS. Y/E 31.12., USD m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 200.8 198.1 1,645.1 1,351.2 76.0 2,384 11.6x 1.71x 12.0 14.6 3.3 38 199.7 225.2 1,817.9 1,487.2 84.0 2,413 10.2x 1.55x 11.1 13.3 3.6 42 225.1 228.2 1,963.2 1,637.3 92.8 2,449 10.1x 1.41x 11.5 13.6 4.0 41 236.2 239.2 2,111.8 1,791.1 97.3 2,488 9.6x 1.29x 11.3 13.1 4.2 41 249.9 252.8 2,267.3 1,951.9 102.9 2,530 9.1x 1.18x 11.1 12.8 4.5 41 122 Sell Rating system Relative Current price Price target GBp 1,480 GBp 1,450 10/06/2013 London Close Market cap GBP 36,249 m Reuters STAN.L Bloomberg STAN LN Changes made in this note Rating Sell (no change) Price target GBp 1,450 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 20154 - 21411 - 22748 9855 10494 PPOP 9263 228 239 253 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2,449 3,765,065 Performance data High 52 weeks (GBp) Low 52 weeks (GBp) Relative performance to SXXP 1 month -4.1 % 3 months -18.8 % 12 months -17.4 % 1,838 1,229 SX7P -2.8 % -17.5 % -25.4 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Standard Chartered plc Banking Financials Market ratios; per share data (USD) EPS (reported) EPS (Berenberg adjusted) 2011 200.8 198.1 2012 199.7 225.2 2013e 225.1 228.2 2014e 236.2 239.2 2015e 249.9 252.8 TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 1,351 1,645 76.00 11.6x 1,487 1,818 84.00 10.2x 1,637 1,963 92.82 10.1x 1,791 2,112 97.32 9.6x 1,952 2,267 102.86 9.1x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.71 1.40 3.3% 38% 2,364 1.55 1.27 3.6% 37% 2,397 1.41 1.17 4.0% 41% 2,431 1.29 1.09 4.2% 41% 2,469 1.18 1.02 4.5% 41% 2,509 Market Cap Bloomberg ticker Reuters ticker Share price 36,249 STAN LN GBp USD GBP-USD Analyst STAN.L 1,480 2,305 1.56 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Income Summary (USDm) Net interest income (NII) Non-interest income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) 10,153 7,484 17,637 -9,917 7,720 -1,019 6,701 74 6,775 -1,842 -185 4,748 10,723 8,061 18,784 -10,722 8,062 -1,392 6,670 181 6,851 -1,866 -199 4,786 11,230 8,925 20,154 -10,891 9,263 -1,584 7,679 160 7,839 -2,156 -206 5,478 11,961 9,451 21,411 -11,556 9,855 -1,701 8,153 175 8,328 -2,290 -206 5,832 12,731 10,017 22,748 -12,254 10,494 -1,751 8,743 190 8,933 -2,456 -206 6,270 5.6% 7.7% 6.5% 8.1% 4.4% 36.6% -0.5% 4.7% 10.7% 7.3% 1.6% 14.9% 13.8% 15.1% 6.5% 5.9% 6.2% 6.1% 6.4% 7.4% 6.2% 6.4% 6.0% 6.2% 6.0% 6.5% 2.9% 7.2% 1.1% 1.3% 14.4% 15.5% 6.2% 6.2% 7.3% 7.3% 0.8% 14.4% 6.5% 7.5% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 2.21% 7.6x 56.2% 1.79% 0.40% 10.0% 27.5% 14.6% 12.0% 0.86% 17.1x 1.84% 2.08% 5.8x 57.1% 1.74% 0.51% 13.0% 28.0% 13.3% 11.1% 0.78% 17.1x 1.67% 2.00% 5.8x 54.0% 1.63% 0.54% 14.1% 28.1% 13.6% 11.5% 0.82% 16.7x 1.69% 1.95% 5.8x 54.0% 1.58% 0.54% 14.2% 28.1% 13.1% 11.3% 0.80% 16.5x 1.61% 1.87% 6.0x 53.9% 1.54% 0.52% 13.8% 28.1% 12.8% 11.1% 0.79% 16.2x 1.57% -0.13% -0.08% -0.05% -0.08% 0.9% -0.04% 0.10% -3.0% -0.12% 0.03% -0.1% -0.05% 0.00% -0.1% -0.04% -0.02% 0.5% -1.3% 0.1% 0.3% 0.0% -0.5% 0.0% -0.3% -0.08% 0.04% -0.02% -0.01% -0.17% 0.02% -0.09% -0.04% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 266,790 592,686 491,149 345,726 63,857 661 40,714 33,653 31,833 270,510 283,885 636,518 540,759 377,639 74,778 693 45,362 38,050 35,339 301,861 304,704 703,379 582,115 409,274 80,756 748 49,578 42,266 39,610 345,438 326,803 762,632 645,825 439,877 88,426 727 54,046 46,734 44,056 380,761 350,818 827,256 717,693 473,131 96,830 808 58,863 51,551 48,955 419,836 6.4% 7.4% 10.1% 9.2% 17.1% 4.8% 11.4% 13.1% 11.0% 11.6% 7.3% 10.5% 7.6% 8.4% 8.0% 8.0% 9.3% 11.1% 12.1% 14.4% 7.3% 8.4% 10.9% 7.5% 9.5% -2.9% 9.0% 10.6% 11.2% 10.2% 7.3% 8.5% 11.1% 7.6% 9.5% 11.2% 8.9% 10.3% 11.1% 10.3% 45.6% 45.0% 77% 13.7% 11.8% 1.52% 64.0% 47.4% 44.6% 75% 13.4% 11.7% 1.9% 56.7% 49.1% 43.3% 74% 13.0% 11.5% 1.6% 72.3% 49.9% 42.9% 74% 13.0% 11.6% 1.6% 79.8% 50.8% 42.4% 74% 12.9% 11.7% 1.6% 85.2% 1.8% -0.4% -2.0% -0.2% -0.1% 0.4% -7.3% 1.7% -1.3% -0.7% -0.4% -0.2% -0.3% 15.6% 0.8% -0.5% -0.2% 0.0% 0.1% 0.0% 7.5% 0.8% -0.4% -0.1% 0.0% 0.1% 0.0% 5.5% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (USDm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Source: Company data, Berenberg Research 123 Swedbank AB Banking Class act: the right strategy at the right time • • • • • • • What more is there to like? A utility banking strategy combined with one of the strongest balance sheets in the sector implies high and sustainable cash return to shareholders. We believe Swedbank should be a core holding in any portfolio, let alone within the allocation to banks. The dividend yield exceeds 6% and is growing. Buy. Capital strength: Swedbank is one of only three commercial banks to pass the 4% “pain” ratio (ie surplus capital when testing for a stressed, systemic crisis). The strength of its balance sheet is even more solid given its emerging “credit culture” and retail mortgage focus. Early adoption of utility banking pays dividends: Over the last four years, the new management team has sought to de-cost, de-risk and simplify the group’s structure and balance sheet, with a singular focus on RoE not growth. The move to a 75% dividend payout ratio earlier in the year completed the utility banking strategy. Quarterly result after quarterly result have shown to us that such a fundamental restructuring combined with managing for a secular decline is the most profitable strategy for any European bank to follow right now. Restructuring still producing benefits: Management has met or beaten cost expectations for at least nine straight quarters. The costincome ratio is now the lowest among Nordic peers, yet cost guidance was tightened yet further at Q1. Can this be sustained? Logically no, but the roll-out and exploitation of mobile banking should deliver further, incremental gains for a while longer. Should we be worried by the CEO’s comments on revenues? The CEO recently spoke of increasing revenue pressure from low rates/ activity and of drawing a line in the sand for market share. We are not concerned. The CEO’s strategy is all about managing for a world of declining revenue while market share defence will not be at the expense of price/RoE. We should be worried about the other European banks. Valuation – focus on yield: Conventional P/TNAV full: consensus = 1.7x for 16% 2014 RoTE. But a sustainable dividend yield shows upside: 2014 consensus = 7.1% with 5% dividend CAGR 2013-15. Our price target is based on a dividend discount model derived from our 2013 dividend yield, a CAPM-derived cost of equity and a 3% growth rate. Key risks to view: Swedish macro and SME (not housing) asset quality; political interference; wholesale funding/Baltic exposure in risk-off. Y/E 31.12., SEK m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 9.5 11.3 89.3 78.5 5.3 1,130 13.6x 1.95x 12.2 15.4 3.5 54 12.1 12.1 96.7 86.2 9.9 1,102 12.6x 1.77x 14.4 15.2 6.5 82 13.4 13.4 100.0 89.8 10.0 1,099 11.4x 1.70x 14.7 16.6 6.6 75 13.9 13.9 103.5 93.4 10.4 1,099 11.0x 1.64x 13.7 15.2 6.8 75 14.4 14.4 107.1 97.0 10.8 1,100 10.6x 1.58x 13.7 15.1 7.1 75 124 Buy Rating system Relative Current price Price target SEK 152.80 SEK 165.00 10/06/2013 NASDAQ Stockholm Close Market cap SEK 167,667 m Reuters SWEDa.ST Bloomberg SWEDA SS OMX Changes made in this note Rating Buy (no change) Price target SEK 165.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 35895 - 36428 - 36877 PPOP 19613 - 20371 - 20964 13.37 13.92 14.40 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 1,097 4,037,000 Performance data High 52 weeks (SEK) Low 52 weeks (SEK) Relative performance to SXXP 1 month -5.1 % 3 months -3.9 % 12 months 15.1 % 169 105 SX7P -3.8 % -2.6 % 7.0 % 12 June 2013 Nick Anderson Analyst +44 20 3207 7838 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Swedbank AB Banking Financials Market ratios; per share data (SEK) EPS (reported) EPS (Berenberg adjusted) 2011 9.52 11.25 2012 12.07 12.09 2013e 13.37 13.37 2014e 13.92 13.92 2015e 14.40 14.40 Market Cap Bloomberg ticker TBVPS BVPS (reported) DPS P/E (Berenberg adjusted) 78.55 89.26 5.30 13.6x 86.22 96.66 9.90 12.7x 89.83 100.01 10.04 11.5x 93.35 103.51 10.43 11.0x 96.95 107.11 10.80 10.6x Reuters ticker SWEDa.ST Share price SEK 153.3 Analyst Nick Anderson [email protected] 1.95x 1.72x 3.5% 54% 1129.6 1.78x 1.59x 6.5% 82% 1101.9 1.71x 1.53x 6.6% 75% 1099.1 1.64x 1.48x 6.8% 75% 1098.7 1.58x 1.43x 7.0% 75% 1100.0 +44 20 3207 7838 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 19,014 9,597 1,584 3,850 34,045 -18,399 15,646 1,911 17,557 20,361 9,614 3,073 3,220 36,268 -16,560 19,708 185 19,893 21,003 9,648 2,195 3,049 35,895 -16,283 19,613 -403 19,210 20,924 9,904 2,570 3,030 36,428 -16,057 20,371 -920 19,451 21,058 10,184 2,600 3,035 36,877 -15,913 20,964 -940 20,024 7.1% 0.2% 94.0% -16.4% 6.5% -10.0% 26.0% -90.3% 13.3% 3.2% 0.4% -28.6% -5.3% -1.0% -1.7% -0.5% -317.9% -3.4% -0.4% 2.6% 17.1% -0.6% 1.5% -1.4% 3.9% 128.4% 1.3% 0.6% 2.8% 1.2% 0.2% 1.2% -0.9% 2.9% 2.1% 2.9% Other non-operating Exceptionals Reported profit before tax -2,134 4 15,427 -427 -997 18,469 -310 -390 18,510 -200 0 19,251 -100 0 19,924 19.7% 0.2% 4.0% 3.5% Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit -3,669 -14 11,744 13,704 -4,157 -8 14,304 14,324 -3,811 -3 14,696 14,696 -3,956 -2 15,293 15,293 -4,085 -2 15,836 15,836 13.3% -8.3% 3.8% 3.3% 21.8% 4.5% 2.7% 2.6% 4.1% 4.1% 3.6% 3.6% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 1.07% -8.2x 54.0% 1.04% -0.16% -10.1% 20.9% 15.4% 12.2% 0.77% 19.9x 2.30% 1.09% -106.5x 45.7% 0.88% -0.02% -0.9% 20.9% 15.2% 14.4% 0.76% 19.9x 2.96% 0.00% 48.7x 45.4% 0.85% 0.03% 1.9% 19.8% 16.6% 14.7% 0.77% 21.5x 3.21% 0.00% 22.1x 44.1% 0.83% 0.07% 4.4% 20.3% 15.2% 13.7% 0.79% 19.2x 3.32% 0.00% 22.3x 43.2% 0.81% 0.07% 4.5% 20.4% 15.1% 13.7% 0.81% 18.7x 3.40% 0.02% -1.09% 0.00% 0.00% -8.4% -0.15% 0.15% -0.3% -0.03% 0.05% -1.3% -0.02% 0.04% -0.9% -0.02% 0.00% 0.0% -0.2% -1.1% 1.4% 0.5% -1.4% 0.1% -0.1% -0.01% 0.00% 0.02% 0.02% 0.66% 0.25% 0.11% 0.07% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 1,211,454 1,857,065 561,696 800,989 140 97,993 86,231 77,302 492,337 1,238,864 1,846,941 579,663 781,761 154 106,070 94,618 80,697 464,339 1,237,880 1,919,105 1,253,648 1,941,948 1,269,711 1,965,215 2.3% -0.5% -0.1% 3.9% 1.3% 1.2% 1.3% 1.2% 109,742 98,566 109,742 457,503 113,862 102,686 97,362 463,331 117,821 106,645 101,321 469,267 8.2% 9.7% 4.4% -5.7% 3.5% 4.2% 36.0% -1.5% 3.8% 4.2% -11.3% 1.3% 3.5% 3.9% 4.1% 1.3% 26.5% 65.2% 216% 17.2% 15.7% 1.87% 61.5% 25.1% 67.1% 23.8% 64.5% 23.9% 64.6% 23.9% 64.6% 18.7% 17.4% 1.05% 61.9% 24.0% 24.0% 22.6% 21.0% 23.2% 21.6% 1.5% 1.7% 5.3% 6.6% -1.4% -3.0% 0.6% 0.6% P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) SEKm 168,216 SWEDA SS Income Statement and Ratios Year to 31-Dec Income Summary (SEKm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (SEKm) Customer loans Total assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage Source: Company data, Berenberg research 125 UBS AG Banking Lots of leverage, but adjusting the model • • • • • • • • • Strategy delivery continues: We continue to believe that UBS is the only IB to own as it adapts its model as a wealth manager. We see this delivering two benefits: first, a re-rating to that of a wealth manager (ie from 8x to 14x P/E); and second, additional capital return. Q1 2013 results show strategy is working: We believe the Q1 2013 results mark an important point for UBS management in that they show that its new strategy can deliver. In particular, the 6bp rise in the gross margin and CHF24bn of net new assets add credibility to the strategy, in our view. Wealth Management (WM) is the key positive: While the Q1 trends in WM were positive, we do not expect this to continue as the retrocession fee changes will have an impact in Q2. This will see gross margins fall before the recent re-pricing should support the gross margin at c84bp. IB needs to keep delivering: The change in strategy appears to have had limited impact on the IB’s performance judging by Q1 2013. Whilst this has led to some re-hiring, Q3 2013 is likely to be the key quarter to judge whether the business is sized correctly. Capital position makes UBS the only IB to own: We believe this is the key area where UBS differentiates itself from peers and should allow it to trade at a premium as a result. Fully-loaded Basel III CT1 was 10.1% at the end of Q1 2013 and management targets 13% – 300bp above peers. Interestingly, the buffer it targets above 13%, before increasing the dividend payout, will be influenced by the leverage in the business. We believe UBS’s management is one of the few to recognise this as a key issue, adding to our view that it remains realistic on the operating outlook. Leverage ratios are low but changing: On our “pain” ratio UBS has a leverage ratio of 2.3%, while on our “plain” ratio it is 4.5%. While this is low among European banks, UBS is aiming to de-lever CHF430bn of assets; this would increase the “pain” ratio to over 3%. Estimate increases reflect lower losses on non-core business: Our 2013 estimates rise due to the higher profits from Q1 2013 and the lower losses than expected from the run-off businesses. Price target of CHF17 remains unchanged: We calculate our price target of CHF17 using a capital allocation sum-of-the-parts analysis. On this basis, UBS is one of only two European banks exposed to investment banking that are properly capitalised, in our view. Risks to our view: The main risk to our positive view on UBS is that the non-core run-off costs come in higher than the 1.5% of assets we estimate. Alongside this, we remain wary that regulators continue to demand ever-higher capital ratios and that litigation threats persist. Y/E 31.12., CHF m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.10 1.08 12.7 10.1 0.10 3,747 15.6x 1.66x 8.7 11.9 0.6 9 -0.66 -0.66 12.0 10.3 0.15 3,776 -25.5x 1.64x -6.0 -7.8 0.9 -23 0.70 0.69 12.7 11.0 0.20 3,758 24.6x 1.54x 5.6 7.0 1.2 29 0.92 0.90 13.4 11.7 0.60 3,758 18.7x 1.44x 6.9 8.5 3.6 65 1.06 1.03 13.9 12.1 0.70 3,758 16.3x 1.39x 7.6 9.3 4.2 66 126 Buy Rating system Relative Current price Price target CHF 16.86 CHF 17.00 10/06/2013 SIX Swiss Close Market cap CHF 63,357 m Reuters UBSN.VX Bloomberg UBSN VX Changes made in this note Rating Buy (no change) Price target CHF 17.00 (no change) Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% Income 26026 9.5 26560 5.9 27262 4.8 PPOP 2879 42.3 5056 -2.3 5700 -1.3 0.48 43.5 0.94 -4.6 1.07 -3.6 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 3,758 12,018,430 Performance data High 52 weeks (CHF) Low 52 weeks (CHF) Relative performance to SXXP 1 month -0.5 % 3 months 11.7 % 12 months 25.9 % 18 10 SMI 1.9 % 11.3 % 20.4 % 12 June 2013 James Chappell Analyst +44 20 3207 7844 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] UBS AG Banking Financials Market ratios; per share data (CHF) EPS (reported) EPS( adj) TBVPS (reported) 2011 1.10 1.08 10.1 2012 -0.66 -0.66 10.3 2013e 0.70 0.69 11.0 2014e 0.92 0.90 11.7 2015e 1.06 1.03 12.1 TBVPS (Berenberg adjusted) BVPS (reported) DPS P/E (Berenberg adjusted) 8.9 12.7 0.10 15.6x 9.5 12.0 0.15 -25.5x 10.2 12.7 0.20 24.6x 10.9 13.4 0.60 18.7x 11.4 13.9 0.70 16.3x P/TBV (x) P/BV (x) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) 1.66x 1.33x 0.6% 9% 3,774 1.64x 1.41x 0.9% -23% 3,747 1.54x 1.32x 1.2% 29% 3,755 1.44x 1.25x 3.6% 65% 3,755 1.39x 1.21x 4.2% 66% 3,755 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 Net interest income (NII) Operating expenses Pre-provision op. profits (PPoP) Loan loss charge (LLC) Operating Profit Other non-operating Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) 6,826 -22,482 -15,656 -84 -15,740 21,046 5,306 -900 -269 4,137 5,978 -27,219 -21,241 -117 -21,358 19,563 -1,795 -460 -223 -2,478 5,951 -24,410 -18,459 -63 -18,522 22,556 4,035 -1,200 -201 2,634 6,049 -23,181 -17,132 -65 -17,197 22,072 4,875 -1,219 -201 3,455 6,154 -22,941 -16,787 -66 -16,853 22,414 5,561 -1,390 -201 3,970 -12.4% 21.1% 35.7% 39.3% 35.7% -7.0% -133.8% -48.9% -17.1% -159.9% -0.5% -10.3% -13.1% -46.3% -13.3% 15.3% -324.8% 160.8% -9.9% -206.3% 1.7% -5.0% -7.2% 2.8% -7.2% -2.1% 20.8% 1.6% 0.0% 31.2% 1.7% -1.0% -2.0% 1.8% -2.0% Income Ratios (%) NII/ Average Total Assets PPoP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE adjusted (%) RoE (stated) (%) RoA Asset Leverage (x) RoRWA 0.50% 186.4x 3.3x -1.65% -0.03% 0.0x -17.0% 11.9% 8.7% 0.29% 40.7x 1.72% 0.45% 181.5x 4.6x -2.03% -0.04% 0.0x 25.6% -7.8% -6.0% -0.20% 39.5x -0.96% 0.49% 294.0x 4.1x -2.03% -0.02% 0.0x -29.7% 7.0% 5.6% 0.23% 30.3x 1.05% 0.54% 265.3x 3.8x -2.08% 0.58% 255.5x 3.7x -2.17% 0.0x -25.0% 8.5% 6.9% 0.32% 26.6x 1.47% 0.0x -25.0% 9.3% 7.6% 0.38% 24.1x 1.76% 2011 2012 2013e 2014e 2015e 11/12 12/13 13/14 14/15 342,409 1,416,962 342,409 140,617 4,405 48,529 38,834 29,098 240,962 373,459 1,259,797 373,459 104,837 3,151 45,949 39,488 33,095 258,113 1,147,183 1,079,157 1,031,919 -8.9% -5.9% -4.4% 3,213 48,885 42,085 28,563 250,098 3,213 51,588 44,788 32,486 235,499 3,213 53,303 46,503 35,591 225,439 2.0% 6.4% 6.6% -13.7% -3.1% 0.0% 5.5% 6.4% 13.7% -5.8% 3.3% 3.8% 9.6% 17.0% 24.2% 100% 13.8% 12.1% 20.5% 29.6% 100% 12.8% 12.8% 21.8% 21.8% 21.8% 11.4% 11.4% 13.8% 13.8% 15.8% 15.8% Market Cap Bloomberg ticker Reuters ticker Share price Analyst 63,357 UBSN VX UBSN:VX CHF 16.86 James Chappell [email protected] +44 20 3207 7844 Income Statement and Ratios Year to 31-Dec Income Summary (CHFm) 14.1% 14.1% 14.9% Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (CHFm) Customer loans Total assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Source: Company data, Berenberg Research 127 9.1% -11.1% 9.1% -25.4% -28.5% -5.3% 1.7% 13.7% 7.1% Unicredit SpA Banking High risk, low return • • • We reiterate our long-term bear case on Unicredit as we believe that loan losses will remain higher for longer than consensus expects, and net interest income will remain under pressure due to weak debt demand and low reinvestment yields. We believe that our bear case will most likely be triggered by Q4 2013 as opposed to Q2 results, given short-term optimistic guidance by the CEO. We would favour Intesa over Unicredit on capital, country risk and cash dividend yield. Sell Capital weaker than its peer. Unicredit lags Intesa on a simple leverage ratio. Its “pain” ratio is 2.2% as at 2012, compared to 3.0% for Intesa. This is despite Unicredit’s greater exposure to (riskier) CEE. Changes made in this note Rating Sell (no change) Price target EUR 2.50 (no change) Loan losses to remain high. We were disappointed that Unicredit reduced its NPL coverage ratio in Italy from 56% in Q4 2012 to 53% in Q1 2013, driving the reduction in group LLCs from €4.6bn in Q4 2012 to €1.2bn in Q1 2013 (-9% yoy). We believe Unicredit will aim to gradually rebuild its coverage ratio, and that loan losses will peak again in Q4 2013. We forecast group loan losses of €7.2bn in 2013, higher than consensus. • Weak demand for loans to put pressure on NII. As per the recent Bank Lending Survey, demand for loans by households and SMEs is expected to remain weak in 2013, which should put pressure on NII. Any potential reduction of wholesale funding costs as per the bullcase argument will be offset by lower reinvestment yields, and the inevitable repayment of LTRO money (€26.1bn) will exert further pressure on margins. We forecast NII of €13.9bn in 2013, -3% yoy. • CEE headwinds. Unicredit derives 26% of its revenues from CEE (of which c7% is from Poland). Its exposure in CEE (former driver of growth) may act as a headwind in the short term, in light of the recent slowdown of the Polish economy (resulting in another 25bp rate cut) and the steeper-than-expected recession in the Czech Republic. • Prefer Intesa to Unicredit. We prefer Intesa over Unicredit as it has stronger capital buffers, a higher dividend yield (4.4% compared to 2.5% for Unicredit in 2013E) and it is less exposed to CEE headwinds. • Valuation. Unicredit is trading at 0.5x TBV for a 2014E RoTE of 2.7%, a 20% discount to Intesa. Our price target is based on a P/TBV multiple driven by a 2014E RoTE and CAPM-based CoE. We make minor changes to our numbers following the Q1 results. Y/E 31.12., EUR m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E -5.11 -5.11 26.67 18.55 0.00 1,833 -0.8x 0.22x -17.9 -1.5 0.0 0 0.18 0.18 10.64 7.94 0.09 4,823 22.3x 0.50x 1.4 1.9 2.3 50 0.13 0.13 10.65 7.94 0.10 4,823 31.4x 0.50x 1.0 1.3 2.5 79 0.26 0.26 10.76 8.06 0.10 4,823 15.3x 0.50x 2.0 2.7 2.5 38 0.34 0.34 10.95 8.24 0.10 4,823 11.8x 0.48x 2.6 3.4 2.5 29 128 Rating system Relative Current price Price target EUR 3.99 EUR 2.50 10/06/2013 Milan Close Market cap EUR 23,114 m Reuters CRDI.MI Bloomberg UCG IM Chg 2013e 2014e 2015e old Δ% old Δ% old Δ% 24090 1.0 24225 1.5 23891 3.9 Income PPOP 9175 1.9 9310 2.9 8955 9.3 0.13 0.8 0.26 0.4 0.34 -0.1 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 5,787 111,294,000 Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to 1 month 3 months 12 months 5 2 SXXP MSCI Europe Banks -1.6 % -0.7 % 2.3 % 3.5 % 33.6 % 21.8 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Unicredit SpA Banking Financials Unicredit Market ratios and per share data (EUR) EPS (reported) EPS (Berenberg adjusted) TBVPS BVPS DPS P/E (Berenberg adjusted) P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend yield (%) Payout ratio Weighted avg. number of shares (m) Income Statement and Ratios Year to 31-Dec Income Summary (EURm) Net interest income (NII) Net fees & commissions Trading income Other income Total income Operating expenses Pre-provision op. profits (PPOP) Loan loss charge (LLC) Operating Profit Other non-operating Exceptionals Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit Income Ratios (%) NII/AIEAs PPOP/LLC Cost/income ratio Cost/avg. assets LLC/avg. loans LLC/NII Tax rate RoTE (%) adjusted RoE (%) RoA (%) Asset Tangible Leverage (x) RoRWA Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (EURm) Customer loans Total assets Interest earning assets Customer deposits Debt securities & other borrowings Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/Retail Funds Tier 1 ratio Core (Equity) Tier 1 ratio NPL/loans Provision coverage 2011 -5.11 -5.11 18.55 26.67 0.00 -0.78 0.22 0.15 -1.47 0.0 0.0 1,833 2012 0.18 0.18 7.94 10.64 0.09 22.28 0.50 0.38 1.95 2.3 50.2 4,823 2013E 0.13 0.13 7.94 10.65 0.10 31.41 0.50 0.38 1.33 2.5 78.6 4,823 2014E 0.26 0.26 8.06 10.76 0.10 15.32 0.50 0.37 2.70 2.5 38.3 4,823 2015E 0.34 0.34 8.24 10.95 0.10 11.78 0.48 0.36 3.43 2.5 29.5 4,823 2011 2012 2013E 2014E 2015E 15,252 8,048 1,099 613 25,012 -15,431 9,581 -5,733 3,848 -710 -9,756 -6,618 -1,414 -365 -9,205 551 14,285 7,793 2,808 657 25,543 -14,979 10,564 -9,613 951 -92 -742 118 1,539 -358 865 1,606 13,896 7,952 1,805 675 24,328 -14,983 9,345 -7,188 2,156 174 -650 1,681 -467 -200 613 1,263 14,125 7,991 1,805 675 24,597 -15,015 9,582 -6,310 3,272 194 -650 2,816 -958 -200 1,258 1,908 14,367 7,974 1,805 675 24,822 -15,036 9,786 -6,072 3,715 194 -650 3,259 -979 -244 1,636 2,286 1.64 1.67 61.7 1.66 1.03 37.6 14.8 -1.5 -17.9 -0.06 25.6 0.12 1.54 1.10 58.6 1.62 1.74 67.3 na 1.9 1.4 0.10 19.9 0.38 1.50 1.30 61.6 1.61 1.31 51.7 5.0 1.3 1.0 0.07 20.0 0.29 1.52 1.52 61.0 1.62 1.15 44.7 10.0 2.7 2.0 0.14 19.6 0.44 1.55 1.61 60.6 1.62 1.11 42.3 10.0 3.4 2.6 0.18 19.2 0.52 2011 2012 2013E 2014E 2015E 559,553 926,769 846,267 398,379 162,990 3,318 51,479 35,794 38,691 460,395 547,144 926,838 837,424 409,514 170,451 3,669 61,579 45,921 46,314 427,127 551,629 929,574 843,399 457,715 168,746 3,869 61,614 45,956 46,349 434,855 548,022 927,721 841,311 466,195 167,059 4,069 62,293 46,635 47,028 436,629 548,022 929,509 842,861 474,756 165,388 4,313 63,350 47,692 48,085 438,440 49.7 60.4 140.5 9.3 8.4 12.5 48.6 46.1 59.0 133.6 11.4 10.8 13.6 44.8 46.8 59.3 120.5 11.2 10.7 14.8 50.1 47.1 59.1 117.6 11.4 10.8 15.0 51.4 47.2 59.0 115.4 11.5 11.0 14.9 53.1 Source: Company data, Berenberg research 129 Market Cap (EURm) Bloomberg ticker Reuters ticker Share price (EUR) Analyst Rating Target price (EUR) Upside Phone email: 23,114 UCG IM CRDI.MI 3.99 Eleni Papoula Sell 2.50 -37% +44 20 3465 2741 [email protected] 11/12 12/13 13/14 Year-on-year change (%) -6.3 -2.7 1.6 -3.2 2.0 0.5 155.4 -35.7 0.0 7.2 2.8 0.0 2.1 -4.8 1.1 -2.9 0.0 0.2 10.3 -11.5 2.5 67.7 -25.2 -12.2 -75.3 126.7 51.7 -101.8 -208.9 -1.9 -109.4 191.4 1,326.6 -130.4 -44.1 -29.1 -21.4 14/15 1.7 -0.2 0.0 0.0 0.9 0.1 2.1 -3.8 13.5 67.6 105.1 0.0 105.1 51.0 15.7 2.1 22.2 30.1 19.8 11/12 12/13 13/14 Year-on-year change (%) -2.2 0.8 -0.7 0.0 0.3 -0.2 -1.0 0.7 -0.2 2.8 11.8 1.9 4.6 -1.0 -1.0 10.6 5.5 5.2 19.6 0.1 1.1 28.3 0.1 1.5 19.7 0.1 1.5 -7.2 1.8 0.4 14/15 0.0 0.2 0.2 1.8 -1.0 6.0 1.7 2.3 2.2 0.4 Vontobel Holding AG Small/Mid-Cap: Banking Strongest capital: a blessing and a curse • Vontobel has the strongest capital compared to domestic peers and the European commercial banks within our coverage, with a “pain” ratio of 6.6%. We would have been more positive on the stock if Vontobel committed to returning part of this excess capital to shareholders, but it aims to prioritise acquisition opportunities instead, which carry significant execution risk (as the history of EFG International has shown). Another reason for our cautiousness is that asset management cannot continue to offset the weakness of its private and investment banking divisions, in our view. Acquisition strategy – the curse. Vontobel wants to acquire a small private bank (AuM: CHF15bn-25bn), or a small asset manager (AuM: CHF25bn-35bn). It estimates that its excess capital is cCHF500m, which implies that the maximum goodwill on an acquisition that Vontobel is willing to take on is also CHF500m. Assuming successful execution, such a deal would erode the company’s tangible equity from 6.6% of its tangible assets to 4.3%, remaining ahead of peers. However, we would prefer it if Vontobel avoids such a risk and chooses instead to increase its payout ratio from 59% currently to 80% (yield of 5%), or pay a special dividend. We remain cautious on business mix. Asset management outperformance, driven by Vontobel’s US fund range (VUS), has continued to offset the weakness in private and investment banking, but we do not believe this is sustainable. Vontobel may have to close its top fund (Emerging Markets Equity) to old and new investors (it has already had a “soft close”), or the star fund manager, Rajiv Jain, may just leave or retire. • Valuation and dividend. Vontobel is relevant to income funds (DPS of CHF1.2, 4% recurring yield). It is trading at 15x 2014E EPS (a 50% premium to EFG) and 1.3x TBV for a 2014E RoTE of 8.7%. Its valuation is full, in our view. Our price target is derived from a P/TBV multiple based on a 2014E RoTE and a CAPM-based CoE. • What would make us buyers? i) Valuation (our price target of CHF25 is a good entry point); ii) a change in risk appetite among the wealthy clients of private banking (boosting its gross margin); iii) a change in Vontobel’s strategy away from growth through acquisitions and towards returning excess capital to investors. Y/E 31.12., CHF m EPS EPS (adj.) BVPS TBVPS DPS No. of Shares (m) P/E (adj.) P/TBV RoE (%) RoTE (%) Dividend Yield (%) Payout Ratio (%) AuM (CHFbn) Net New Money (CHFbn) Source: Company data, Berenberg 2011 2012 2013E 2014E 2015E 1.76 2.42 23.0 20.9 1.10 65 12.1x 1.41x 7.6 11.6 3.7 62 82 8.2 2.02 2.12 24.2 22.2 1.20 65 13.9x 1.33x 8.5 9.6 4.1 59 98 8.6 1.84 1.94 24.8 22.7 1.20 65 15.2x 1.30x 7.4 8.5 4.1 65 108 6.5 1.94 2.04 25.6 23.3 1.20 65 14.5x 1.26x 7.5 8.7 4.1 62 117 6.0 2.21 2.31 26.5 24.2 1.20 65 12.8x 1.22x 8.3 9.5 4.1 54 125 5.0 130 Hold Rating system Relative Current price Price target CHF 29.45 CHF 25.00 10/06/2013 SIX Swiss Close Market cap CHF 1,914 m Reuters VONN.S Bloomberg VONN SW Changes made in this note Rating Hold (no change) Price target CHF 25.00 (no change) Chg 2013e 2014e old Δ% old Δ% 759 775 Income 157 Op. Pr. 149 1.94 2.04 EPS Source: Berenberg estimates Share data Shares outstanding (m) Daily trading volume 2015e old Δ% 806 178 2.31 - 65 33,128 Performance data High 52 weeks (CHF) Low 52 weeks (CHF) Relative performance to SXXP 1 month -0.6 % 3 months -10.8 % 12 months 24.2 % 33 18 SX7P 0.7 % -9.5 % 16.2 % 12 June 2013 Eleni Papoula Analyst +44 20 3465 2741 [email protected] Iro Papadopoulou Specialist Sales +44 20 3207 7924 [email protected] Vontobel Holding AG Small/Mid-Cap: Banking Financials Vontobel Market ratios and per share data (CHF) EPS reported EPS (Berenberg adjusted) 2011 1.76 2.42 2012 E 2.02 2.12 2013 E 1.84 1.94 2014 E 1.94 2.04 Tangible book value per share (TBVPS) 20.9 22.2 22.7 23.3 24.2 Reuters ticker Book value per share (BVPS) DPS P/E (Berenberg adjusted) 23.0 1.10 12.1 24.2 1.20 13.9 24.8 1.20 15.2 25.6 1.20 14.5 26.5 1.20 12.8 Rating Analyst Share price (CHF) P/TBV (x) P/BV (x) RoTE adjusted (%) Dividend Yield (%) Payout ratio (%) Shares outstanding (m) 1.41 1.28 11.6 3.7 61.8 65.0 1.33 1.22 9.6 4.1 58.5 65.0 1.30 1.19 8.5 4.1 65.2 65.0 1.26 1.15 8.7 4.1 62.0 65.0 1.22 1.11 9.5 4.1 54.3 65.0 Target price (CHF) Upside 2011 2012 E 2013 E 2014 E 2015 E Assets under management data and Ratios AuM data (CHFbn) Assets under management Net New Money NNM/AuM (%) 2015 2015 E E 2.21 Market Cap (CHFbn) 2.31 Bloomberg ticker 82.2 8.2 10.4 98.4 8.6 10.5 108.5 6.5 6.6 117.2 6.0 5.5 125.3 5.0 4.3 2011 2012 E 2013 E 2014 E 2015 E Phone email: 11/12 1.9 VONN SW VONN.S Sell Eleni Papoula 29.45 25.00 -15% +44 20 3465 2741 [email protected] 12/13 Year-on-year change (%) 19.7 10.3 4.9 -24.1 0.3 -36.6 13/14 14/15 8.0 -8.3 -16.9 6.9 -15.6 -21.9 13/14 14/15 6.8 6.1 -15.5 na 2.1 1.4 4.9 0.0 na 1.6 4.3 4.0 na 4.0 1.6 13.5 0.0 na Income Statement and Ratios Year to 31-Dec Income Summary (CHFm) Net Interest income (NII) Commission income Trading income Other income Total income Operating expenses Operating profit Amortisation of customer relationships Exceptionals 11/12 12/13 Year-on-year change (%) -13.5 13.2 9.5 10.6 -17.8 -33.1 -32.5 na -2.4 -1.5 0.3 -0.1 -11.4 -7.0 -18.8 -22.0 -116.7 na 60 452 249 28 790 -609 181 -10 -24 52 495 205 19 771 -611 161 -8 4 59 547 137 16 759 -610 149 -6 0 63 581 116 16 775 -619 157 -6 0 64 606 120 16 806 -628 178 -6 0 Reported profit before tax Taxation Minorities + Preferences Attributable profits (reported) Adj. attributable profit 147 -33 0 114 157 156 -26 0 131 135 143 -26 0 117 124 150 -27 0 123 130 172 -31 0 141 147 6.3 -22.4 -100.0 14.9 -14.1 -8.6 0.1 na -10.3 -8.3 5.2 5.2 na 5.2 4.9 14.1 14.1 na 14.1 13.4 Income Ratios (%) Gross margin ex IB (trading income) (bp) Net interest income margin (bp) Commission income margin (bp) Cost/income ratio Tax rate RoTE adjusted 67.3 7.5 56.3 78.6 22.5 11.6 62.1 5.7 54.3 77.5 16.4 9.6 58.4 5.5 51.4 80.3 18.0 8.5 57.4 5.5 50.5 79.8 18.0 8.7 55.7 5.2 49.2 77.9 18.0 9.5 -7.7 -23.7 -3.5 -1.3 -26.9 -16.8 -5.9 -3.1 -5.4 3.6 9.5 -12.1 -1.8 -1.1 -1.7 -0.7 0.0 2.3 -3.0 -5.2 -2.7 -2.3 0.0 9.8 RoE (stated) RoA Asset Leverage (x) RoRWA RoAUM 7.6 0.6 13.7 2.9 0.2 8.5 0.7 14.5 2.7 0.1 7.4 0.6 14.6 2.4 0.1 7.5 0.6 14.0 2.4 0.1 8.3 0.7 13.5 2.8 0.1 12.0 14.2 6.3 -8.4 -24.4 -13.6 -11.1 0.5 -11.6 -21.5 2.4 4.8 -4.1 2.6 -2.8 10.4 14.1 -3.9 14.7 5.8 2011 2012 E 2013 E 2014 E 2015 E 11/12 12/13 13/14 14/15 Balance Sheet and Ratios Year to 31-Dec Balance Sheet Summary (CHFm) Customer loans Investments available for sale Total assets Customer deposits Minorities Ordinary equity Tangible equity Core (Equity) Tier 1 Capital Risk-weighted assets Balance Sheet Ratios (%) RWA/assets Loans/assets Loans/deposits Tier 1 ratio Core (Equity) Tier 1 ratio Year-on-year change (%) 1,370 1,040 18,692 7,539 0 1,497 1,356 1,159 4,969 2,479 901 21,089 8,659 0 1,574 1,441 1,364 5,019 2,479 1,356 21,705 13,036 0 1,614 1,476 1,405 5,339 2,479 1,356 21,402 13,036 0 1,661 1,516 1,452 5,246 2,479 1,356 21,354 13,036 0 1,725 1,574 1,516 5,216 80.9 -13.4 12.8 14.9 na 5.1 6.3 17.7 1.0 0.0 50.6 2.9 50.6 na 2.6 2.4 3.0 6.4 0.0 0.0 -1.4 0.0 na 2.9 2.7 3.3 -1.7 0.0 0.0 -0.2 0.0 na 3.9 3.8 4.4 -0.6 26.6 7.3 18.2 23.3 23.3 26.6 11.8 28.6 27.2 27.2 26.6 11.4 19.0 26.3 26.3 26.6 11.6 19.0 27.7 27.7 26.6 11.6 19.0 29.1 29.1 0.0 60.3 57.5 16.6 16.6 0.0 -2.8 -33.6 -3.2 -3.2 0.0 1.4 0.0 5.2 5.2 0.0 0.2 0.0 5.0 5.0 Source: Company data, Berenberg research 131 European Banks Banking Appendices Figure 40. Standing the test of time EBA stress test results July 2011 – CT1 ratios, all 91 banks Name Code Banca March ES079 Irish Life And Permanent IE039 OTP Bank HU036 Sydbank DK010 Banque Et Caisse D'Epargne LU045 Danske Bank DK008 Jyske Bank DK009 PKO Bank Polski PL052 Op-Pohjola Group FI012 Rabobank NL048 SEB SE085 Landesbank Berlin DE027 Dexia BE004 Bank Of Valletta MT046 Kutxa ES077 KBC Bank BE005 Allied Irish Banks IE037 Hypo Real Estate DE023 Nordea SE084 Swedbank SE087 Unicaja ES073 Nykredit DK011 Dekabank DE028 ABN Amro NL049 BBVA ES060 DnB NOR NO051 Intesa Sanpaolo IT040 Grupo BBK ES075 WGZ Bank DE029 Vital ES080 ING Bank NL047 Handelsbanken SE086 Credit Agricole FR014 HSBC GB089 Santander ES059 Erste Bank AT001 NKBM dd SI058 BNP Paribas FR013 Raiffeisen Bank Int'l AT002 AVERAGE BANK Lloyds GB091 National Bank Of Greece GR031 UBI Banca IT044 Alpha Bank GR032 Barclays GB090 Espiga ES070 CT1% 2010 CT1 % 2012 Adverse Scenario With mitigating Supervisory Actual actions to 4/11 recognised ratio PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS 22.2% 10.6% 12.3% 12.4% 12.0% 10.0% 12.1% 11.8% 12.2% 12.6% 11.1% 14.6% 12.1% 10.5% 13.2% 10.5% 3.7% 28.4% 8.9% 8.7% 12.5% 8.8% 13.0% 9.9% 8.0% 8.3% 7.9% 10.2% 10.8% 12.5% 9.6% 7.7% 8.2% 10.5% 7.1% 8.7% 7.4% 9.2% 8.1% 8.9% 10.2% 11.9% 7.0% 10.8% 10.0% 8.2% 23.5% 20.4% 13.6% 13.6% 13.3% 13.0% 12.8% 12.2% 11.6% 10.8% 10.5% 10.4% 10.4% 10.4% 10.1% 10.0% 10.0% 10.0% 9.5% 9.4% 9.4% 9.4% 9.2% 9.2% 9.2% 9.0% 8.9% 8.8% 8.7% 8.7% 8.7% 8.6% 8.5% 8.5% 8.4% 8.1% 8.0% 7.9% 7.8% 7.7% 7.7% 7.7% 7.4% 7.4% 7.3% 7.3% Source: EBA, Berenberg research 132 27.8% 20.0% 13.6% 13.6% 13.8% 13.0% 12.8% 12.2% 11.6% 10.8% 10.5% 10.4% 10.4% 10.4% 10.5% 10.0% 11.7% 10.0% 9.5% 9.4% 12.2% 9.4% 9.2% 9.2% 10.2% 9.0% 9.2% 11.3% 8.7% 9.2% 8.6% 8.6% 8.5% 8.5% 8.9% 8.1% 8.0% 7.9% 7.8% 8.1% 7.7% 9.7% 8.1% 8.2% 7.3% 8.4% Capital deficit to 5% 6% 7% 8% 9% 10% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1,063 -197 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -42 -369 -67 -75 -21 -1,355 -394 -2,853 -5,684 -4,224 -1,145 -49 -8,296 -1,197 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -999 -492 -128 -485 -284 -960 -2,624 -1,218 -3,960 -360 -302 -84 -5,268 -1,447 -8,387 -16,254 -10,734 -2,476 -99 -15,529 -2,197 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1,562 -239 -561 -295 -4,551 -176 -7,045 -962 -1,536 -797 -11,125 -428 -12,528 -1,685 -2,511 -1,299 -17,699 -681 European Banks Banking Figure 41. EBA stress test results July 2011 – CT1 ratios, all 91 banks (cont’d) Name Code LBW DE019 Bayerische Landesbank DE021 Bank Of Ireland IE038 SNS Bank NL050 DZ Bank DE020 Effibank ES063 BPCE FR015 Ibercaja ES072 Unicredit IT041 Banco BPI PT056 Societe Generale FR016 Deutsche Bank DE017 La Caixa ES062 Commerzbank DE018 RBS GB088 Monte Dei Paschi IT042 Caixa Geral PT053 Pollensa ES082 Bank Of Cyprus CY007 Grupo BMN ES068 WestLB DE024 Banco De Sabadell ES065 Banco Popolare IT043 Banca Civica ES071 Ontinyent ES081 Norddeutsche Landesbank DE022 HSH Nordbank DE025 TT Hellenic Postbank GR035 Millennium BCP PT054 BFA-Bankia ES061 Novacaicagalicia ES067 Banco Popular Español ES064 NLB dd SI057 Marfin Popular CY006 Piraeus Bank GR033 Bankinter ES069 ESFG PT055 EFG Eurobank GR030 Catalunyacaixa ES066 Oesterreichische Volksbank AT003 Unnim ES076 Grupo Caja3 ES078 Banco Pastor ES074 CAM ES083 Agricultural Bank Of Greece GR034 CT1% 2010 CT1 % 2012 Adverse Scenario With mitigating Supervisory Actual actions to 4/11 recognised ratio PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS PASS NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL NEAR FAIL FAIL FAIL FAIL FAIL FAIL FAIL FAIL FAIL 8.2% 9.3% 8.4% 8.4% 8.2% 8.3% 7.8% 9.7% 7.8% 8.2% 8.1% 8.8% 6.8% 10.0% 9.7% 5.8% 8.5% 11.2% 8.1% 8.3% 8.7% 6.2% 5.8% 8.0% 8.9% 4.6% 10.7% 18.5% 5.9% 6.9% 5.2% 7.1% 5.2% 7.3% 8.0% 6.2% 6.4% 9.0% 6.4% 6.4% 6.3% 8.6% 7.6% 3.8% 6.3% 7.1% 7.1% 7.1% 7.0% 6.9% 6.8% 6.8% 6.7% 6.7% 6.7% 6.6% 6.5% 6.4% 6.4% 6.3% 6.3% 6.2% 6.2% 6.2% 6.1% 6.1% 5.7% 5.7% 5.6% 5.6% 5.6% 5.5% 5.5% 5.4% 5.4% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.1% 4.9% 4.8% 4.5% 4.5% 4.0% 3.3% 3.0% -0.8% TOTAL 7.5% 8.3% 8.7% 7.0% 6.9% 8.3% 6.8% 7.3% 7.2% 7.0% 6.6% 6.5% 9.1% 6.4% 6.3% 8.8% 6.5% 8.0% 9.5% 9.3% 6.1% 8.0% 6.2% 9.4% 7.2% 5.6% 9.1% 7.1% 6.2% 6.5% 6.5% 7.4% 5.4% 9.2% 6.3% 6.8% 6.3% 7.6% 6.3% 9.8% 6.2% 6.6% 5.6% 5.1% 6.0% Capital deficit to 5% 6% 7% 8% 9% 10% 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -58 -75 -160 -85 -140 -317 -947 -765 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -151 -313 -168 -3 -466 -339 -35 -397 -1,325 -361 -640 -106 -197 -278 -232 -716 -551 -573 -498 -257 -279 -501 -1,430 -899 0 0 0 -3 -83 -75 -1,245 -76 -1,745 -94 -1,966 -2,271 -976 -2,175 -4,780 -796 -618 -1 -223 -355 -598 -716 -1,292 -634 -9 -1,545 -1,054 -103 -1,086 -3,488 -911 -1,594 -263 -483 -670 -555 -1,484 -1,045 -1,070 -836 -429 -417 -686 -1,912 -1,032 -1,220 -1,180 -715 -254 -1,323 -402 -6,370 -317 -7,043 -363 -6,421 -7,270 -2,622 -5,641 -11,628 -1,927 -1,420 -3 -486 -760 -1,278 -1,281 -2,271 -1,101 -16 -2,623 -1,769 -172 -1,775 -5,652 -1,460 -2,548 -420 -769 -1,062 -877 -2,251 -1,538 -1,568 -1,175 -602 -556 -871 -2,395 -1,165 -2,627 -2,525 -1,514 -505 -2,564 -729 -11,495 -557 -12,342 -632 -10,876 -12,269 -4,269 -9,108 -18,475 -3,058 -2,222 -5 -749 -1,165 -1,958 -1,846 -3,251 -1,567 -23 -3,702 -2,484 -240 -2,464 -7,815 -2,010 -3,502 -577 -1,054 -1,453 -1,200 -3,018 -2,031 -2,065 -1,513 -774 -694 -1,055 -2,878 -1,298 -4,035 -3,871 -2,313 -756 -3,804 -1,056 -16,620 -797 -17,640 -900 -15,332 -17,268 -5,915 -12,574 -25,322 -4,189 -3,023 -7 -1,011 -1,570 -2,637 -2,411 -4,230 -2,034 -29 -4,781 -3,199 -308 -3,152 -9,978 -2,559 -4,456 -734 -1,340 -1,845 -1,522 -3,785 -2,525 -2,563 -1,851 -946 -833 -1,240 -3,361 -1,431 -2,547 -10,715 -41,395 -103,200 -195,819 -312,441 Source: EBA, Berenberg research 133 European Banks Banking Figure 42. Deposit insurance schemes, selected European countries Country Savings limit Coverage Who does it apply to? Pre-funded? Looking to Are funds move to ex- safe guarded? govt.? Backed by Costs to banks Other Comments ante? Austria €100,000 100% Individuals and all institutions except govt. Belgium €100,000 100% Denmark €100,000 * outstanding loans are deducted from balance Finland No No n/a Yes Individuals, SMEs and NPOs. Large Yes companies (those submitting full accounts) are excluded. n/a Yes Yes 100% Individuals and all institutions except banks and govt. Yes n/a No, can be No used in a dowry scheme (take over) €100,000 100% Individuals and all institutions except banks and govt. Yes n/a Yes No - Avg. 10bp fee on covered deposits. - Stronger capitalised banks pay lower fees. - Fund reached 1% of covered deposits by 2011. France €100,000 100% Individuals and all institutions except financial companies and govt. Yes n/a No, can do recaps Yes - All banks pays an annual fee of €4,000. - Banks are charged another levy based on size of covered deposits (20-25bp), adjusted for risk. - Fund can raise additional money, repaid by extra fees charges to the banks. Govt. funding a last resort. - Parliament clarifying mandate to guarantee deposits and bank resolutions. Germany (mandatory) €100,000 100% Individuals and all institutions except banks, insurers and govt. Yes n/a Yes Yes - Annual fee of 1.6bp of liabilities to customers (excl. deductibles such as covered bonds). Germany (voluntary) Banks set own limit (2/3 > €10m) 30% until 2014 20% until 2019 15% until 2024 8.75% thereafter Deposits held by non-banking institutions. Excludes deposits already covered by mandatory scheme. Yes n/a No, broad mandate No (although - Annual fee of 6bp of liabilities to did assist in customers (excl. deductibles such as 2008) covered bonds). Italy €100,000 100% Individuals and all institutions except financial companies and govt. No No n/a No Source: Berenberg research 134 - Raiffeisen banks will aid each other, as - Deposits must be in EEA ccy. will the savings banks. - If one group cannot cover the cost the other will step in. - If still short govt. will step in. - Annual fee of 8bp of all eligible deposits - Fund is currently €2bn, no limit to the (not just < €100k). size of the fund. - Written in law that deposits will be paid (guaranteed by govt.) - Deposits must be in EEA ccy. - Annual fee of 25bp of covered deposits. - Once fund reaches 1% payments will stop (expected in 2015). - Risk weighted contributions determined by splitting banks into 5 classes - Larger and riskier banks pay a higher contribution. European Banks Banking Figure 43. Deposit insurance schemes, selected European countries (cont’d) Country Savings limit Coverage Who does it apply to? Pre-funded? Looking to Are funds move to ex- safe guarded? govt.? Backed by Costs to banks Other Comments ante? Ireland €100,000 100% Individuals and small companies. Specific criteria excludes medium and large businesses. Govt. is also excluded. Netherlands €100,000 100% Norway Yes n/a Yes Individuals, SMEs and NPOs. Large No companies and banks are excluded. * When scheme goes ex-ante large businesses are included. Yes, initially Jul'13 now postponed. Likely 2015. n/a NOK2m (c.€270,000) 100% * EC wants Norway to lower limit to €100k. Individuals and all institutions except financial companies and govt. Yes n/a Spain €100,000 100% Individuals and all institutions except govt. Yes Sweden €100,000 100% Individuals and all institutions except member institutions, banks and govt. Yes Switzerland CHF100,000 (c.€80,000) * up to a maximum total payout of CHF6bn 100% * conditional on the size of total payout UK £85,000 (c.€100,000) 100% Yes - Annual fee of 20bp of all deposits. Yes, if contribution is above 5% of equity then govt. will loan to the bank No, fund has No formal a broad remit obligation - Contributions are based on share of guaranteed deposits. - In the ex-ante system this will be risk adjusted. - Change to ex-ante basis delayed as it would "burden banks" and "prevent lending to business". - Annual fee based on guaranteed deposits, RWA and capital ratio. - Fee = 10bp of GD + 5bp of RWA + capital ratio adjustment. n/a No, can be No used to recap banks - Annual fee of 20bp of covered deposits, with extra if needed. - Target size = 1.5% of total guaranteed deposits +0.5% of total RWA. - No longer an upper limit, pre-2013 fees were suspended above the target size. - Above target, 2.7% of covered deposits. - May suspend contributions when fund reaches 1% of covered deposits. n/a Yes Yes - Avg. annual fee of 10bp of covered deposits. - Range is 6-14bp, based on capital adequacy ratio relative to other banks. Individuals and all institutions No, however No except banks, securities dealers and banks are govt. forced to hold extra balance n/a No formal obligation - Contributions are based on share of guaranteed deposits. - There is no risk adjustment. Individuals, SMEs and NPOs. Larger businesses are generally excluded. n/a Yes - Borrows money from govt. then repays with levy on bank profits. - Levy is based on expected claims for the year, in 2013/14 it was £285m, only £7m is set aside for deposit insurance. No No Source: Berenberg research 135 - Potentially includes foreign deposits if these are not covered by their home country (govt. discretion). ' Fund is currently SEK28bn, with no limit to the size of the fund. - Foreign banks can participate in the scheme as long as they have a branch in Switzerland. European Banks Banking Contacts: Investment Banking Equity Research BANKS Nick Anderson James Chappell Andrew Lowe Eoin Mullany Eleni Papoula Michelle Wilson BEVERAGES Philip Morrisey Josh Puddle +44 (0) 20 3207 7838 +44 (0) 20 3207 7844 +44 (0) 20 3465 2743 +44 (0) 20 3207 7854 +44 (0) 20 3465 2741 +44 (0) 20 3465 2663 +44 (0) 20 3207 7892 +44 (0) 20 3207 7881 BUSINESS SERVICES William Foggon Simon Mezzanotte Arash Roshan Zamir Konrad Zomer +44 (0) 20 3207 7882 +44 (0) 20 3207 7917 +44 (0) 20 3465 2636 +44 (0) 20 3207 7920 CAPITAL GOODS Frederik Bitter Benjamin Glaeser William Mackie Margaret Paxton Alexander Virgo Felix Wienen +44 (0) 20 3207 7916 +44 (0) 20 3207 7918 +44 (0) 20 3207 7837 +44 (0) 20 3207 7934 +44 (0) 20 3207 7856 +44 (0) 20 3207 7915 CHEMICALS Asad Farid John Philipp Klein Jaideep Pandya +44 (0) 20 3207 7932 +44 (0) 20 3207 7930 +44 (0) 20 3207 7890 CONSTRUCTION Chris Moore Robert Muir Michael Watts +44 (0) 20 3465 2737 +44 (0) 20 3207 7860 +44 (0) 20 3207 7928 DIVERSIFIED FINANCIALS Pras Jeyanandhan +44 (0) 20 3207 7899 +44 (0) 20 3207 7889 +44 (0) 20 3207 7878 +44 (0) 20 3207 7822 FOOD MANUFACTURING Fintan Ryan Andrew Steele James Targett +44 (0) 20 3465 2748 +44 (0) 20 3207 7926 +44 (0) 20 3207 7873 REAL ESTATE Kai Klose Estelle Weingrod +44 (0) 20 3207 7888 +44 (0) 20 3207 7931 GENERAL RETAIL & LUXURY GOODS Bassel Choughari +44 (0) 20 3465 2675 John Guy +44 (0) 20 3465 2674 TECHNOLOGY Adnaan Ahmad Sebastian Grabert Daud Khan Ali Khwaja Tammy Qiu +44 (0) 20 3207 7851 +44 (0) 20 3207 7834 +44 (0) 20 3465 2638 +44 (0) 20 3207 7852 +44 (0) 20 3465 2673 TELECOMMUNICATIONS Wassil El Hebil Usman Ghazi Stuart Gordon Laura Janssens Paul Marsch Barry Zeitoune +44 (0) 20 3207 7862 +44 (0) 20 3207 7824 +44 (0) 20 3207 7858 +44 (0) 20 3465 2639 +44 (0) 20 3207 7857 +44 (0) 20 3207 7859 TOBACCO Erik Bloomquist Kate Kalashnikova +44 (0) 20 3207 7870 +44 (0) 20 3465 2665 UTILITIES Robert Chantry Andrew Fisher Oliver Salvesen Lawson Steele +44 (0) 20 3207 7861 +44 (0) 20 3207 7937 +44 (0) 20 3207 7818 +44 (0) 20 3207 7887 HEALTHCARE Scott Bardo Alistair Campbell Charles Cooper Louise Hinds Adrian Howd Tom Jones +44 (0) 20 3207 7869 +44 (0) 20 3207 7876 +44 (0) 20 3465 2637 +44 (0) 20 3465 2747 +44 (0) 20 3207 7874 +44 (0) 20 3207 7877 HOUSEHOLD & PERSONAL CARE +44 (0) 20 3207 7937 Jade Barkett Seth Peterson +44 (0) 20 3207 7891 INSURANCE Tom Carstairs Peter Eliot Kai Mueller Matthew Preston Sami Taipalus +44 (0) 20 3207 7823 +44 (0) 20 3207 7880 +44 (0) 20 3465 2681 +44 (0) 20 3207 7913 +44 (0) 20 3207 7866 MEDIA Robert Berg Emma Coulby Laura Janssens Sarah Simon +44 (0) 20 3465 2680 +44 (0) 20 3207 7821 +44 (0) 20 3465 2639 +44 (0) 20 3207 7830 E-mail: [email protected]; Internet www.berenberg.de Sales Specialist Sales BANKS Iro Papadopoulou +44 (0) 20 3207 7924 CONSUMER Rupert Trotter +44 (0) 20 3207 7815 INSURANCE Trevor Moss +44 (0) 20 3207 7893 HEALTHCARE Frazer Hall +44 (0) 20 3207 7875 INDUSTRIALS Chris Armstrong Kaj Alftan +44 (0) 20 3207 7809 +44 (0) 20 3207 7879 MEDIA Julia Thannheiser +44 (0) 20 3465 2676 TECHNOLOGY Jean Beaubois +44 (0) 20 3207 7835 TELECOMMUNICATIONS Julia Thannheiser +44 (0) 20 3465 2676 UTILITIES Benita Barretto Sales FRANKFURT Michael Brauburger Nina Buechs André Grosskurth Boris Koegel Joerg Wenzel E-mail: [email protected]; Internet www.berenberg.de MID-CAP GENERAL Gunnar Cohrs +44 (0) 20 3207 7894 Bjoern Lippe +44 (0) 20 3207 7845 Anna Patrice +44 (0) 20 3207 7863 +44 (0) 20 3465 2631 Stanislaus von Thurn und Taxis ECONOMICS Dr. Holger Schmieding Dr. Christian Schulz Robert Wood +44 (0) 20 3207 7829 +49 (0) 69 91 30 90 741 +49 (0) 69 91 30 90 735 +49 (0) 69 91 30 90 734 +49 (0) 69 91 30 90 740 +49 (0) 69 91 30 90 743 Sales LONDON John von Berenberg-Consbruch Matt Chawner Toby Flaux Karl Hancock Sean Heath David Hogg Zubin Hubner Ben Hutton James Matthews David Mortlock Peter Nichols Richard Payman George Smibert Anita Surana Paul Walker +44 (0) 20 3207 7805 +44 (0) 20 3207 7847 +44 (0) 20 3465 2745 +44 (0) 20 3207 7803 +44 (0) 20 3465 2742 +44 (0) 20 3465 2628 +44 (0) 20 3207 7885 +44 (0) 20 3207 7804 +44 (0) 20 3207 7807 +44 (0) 20 3207 7850 +44 (0) 20 3207 7810 +44 (0) 20 3207 7825 +44 (0) 20 3207 7911 +44 (0) 20 3207 7855 +44 (0) 20 3465 2632 +33 (0) 1 5844 9508 +33 (0) 1 5844 9510 +33 (0) 1 5844 9521 +33 (0) 1 5844 9512 ZURICH Stephan Hofer Carsten Kinder Gianni Lavigna Benjamin Stillfried +41 (0) 44 283 2029 +41 (0) 44 283 2024 +41 (0) 44 283 2038 +41 (0) 44 283 2033 (London) (Hamburg) (London) +44 (0) 20 3207 7808 +49 (0) 40 350 60 694 +44 (0) 20 3465 2670 SCANDINAVIA Ronald Bernette (London) Marco Weiss (Hamburg) +44 (0) 20 3207 7828 +49 (0) 40 350 60 719 LONDON Stewart Cook Simon Messman Stephen O'Donohoe +44 (0) 20 3465 2752 +44 (0) 20 3465 2754 +44 (0) 20 3465 2753 +33 (0) 1 5844 9509 SOVEREIGN WEALTH FUNDS Max von Doetinchem +44 (0) 20 3207 7826 CORPORATE ACCESS Patricia Nehring +44 (0) 20 3207 7811 EVENTS Natalie Meech Charlotte Kilby Charlotte Reeves Hannah Whitehead +44 (0) 20 3207 7831 +44 (0) 20 3207 7832 +44 (0) 20 3465 2671 +44 (0) 20 3207 7922 CRM Greg Swallow Laura Cooper +44 (0) 20 3207 7833 +44 (0) 20 3207 7806 E-mail: [email protected] US Sales BERENBERG CAPITAL MARKETS LLC Member FINRA & SIPC Andrew Holder +1 (617) 292 8222 Colin Andrade +1 (617) 292 8230 Cathal Carroll +1 (646) 445 7206 +49 (0) 40 350 60 563 +49 (0) 40 350 60 359 +49 (0) 40 350 60 571 +49 (0) 40 350 60 798 +49 (0) 40 350 60 596 +49 (0) 40 350 60 450 +49 (0) 40 350 60 576 +49 (0) 40 350 60 415 +49 (0) 40 350 60 346 PARIS Sylvain Granjoux PARIS Christophe Choquart Dalila Farigoule Clémence La Clavière-Peyraud Olivier Thibert BENELUX Miel Bakker Susette Mantzel Alexander Wace Sales Trading HAMBURG Paul Dontenwill Christian Endras Gregor Labahn Chris McKeand Fin Schaffer Lars Schwartau Marvin Schweden Tim Storm Philipp Wiechmann Burr Clark Julie Doherty Kelleigh Faldi +1 (617) 292 8282 +1 (617) 292 8228 +1 (617) 292 8288 136 Kieran O'Sullivan Emily Mouret Jonathan Saxon +1 (617) 292 8292 +1 (646) 445 7204 +1 (646) 445 7202 European Banks Banking Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investment-related disclosures” and the “Legal disclaimer” at the end of this document. For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document. Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) Company Barclays plc BBVA SA BNP Paribas SA Commerzbank AG Crédit Agricole SA Credit Suisse Group AG Danske Bank A/S Deutsche Bank AG DNB ASA EFG International AG Erste Group Bank AG Svenska Handelsbanken AB HSBC Holdings plc ING Groep NV Intesa Sanpaolo SpA Julius Bär Gruppe AG KBC Groupe SA Lloyds Banking Group plc Nordea Bank AB Raiffeisen Bank International AG RBS plc Banco Santander SA SEB AB Société Générale SA Standard Chartered plc Swedbank AB UBS AG Unicredit SpA Vontobel Holding AG (1) (2) (3) (4) (5) (6) Disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures 5 no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. The Bank acts as Designated Sponsor for this company. Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. The Bank holds a trading position in shares of this company. The Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this company, calculated by methods required by German law as of the last trading day of the past month. Historical price target and rating changes for Barclays plc in the last 12 months (full coverage) Date 31 October 12 Price target - GBp 160.00 Rating Sell 137 Initiation of coverage 17 February 11 European Banks Banking Historical price target and rating changes for BBVA SA in the last 12 months (full coverage) Date 17 July 12 28 January 13 19 April 13 Price target - EUR 5.20 6.80 7.00 Rating Sell Sell Sell Initiation of coverage 19 March 12 Historical price target and rating changes for BNP Paribas SA in the last 12 months (full coverage) Date 28 January 13 Price target - EUR 25.00 Rating Sell Initiation of coverage 28 January 13 Historical price target and rating changes for Commerzbank AG in the last 12 months (full coverage) Date 02 October 12 24 April 13 07 May 13 Price target - EUR 1.00 10.00 6.00 Rating Sell Sell Sell Initiation of coverage 02 October 12 Historical price target and rating changes for Crédit Agricole SA in the last 12 months (full coverage) Date 28 January 13 Price target - EUR 3.00 Rating Sell Initiation of coverage 28 January 13 Historical price target and rating changes for Credit Suisse Group AG in the last 12 months (full coverage) Date 20 July 12 Price target - CHF 13.00 Rating Sell Initiation of coverage 20 July 12 Historical price target and rating changes for Danske Bank A/S in the last 12 months (full coverage) Date 12 November 12 08 April 13 Price target - DKK 81.00 82.00 Rating Sell Sell Initiation of coverage 15 March 11 Historical price target and rating changes for Deutsche Bank AG in the last 12 months (full coverage) Date 20 July 12 12 June 13 Price target - EUR 20.00 23.00 Rating Sell Sell Initiation of coverage 20 July 12 Historical price target and rating changes for DNB ASA in the last 12 months (full coverage) Date 28 June 12 19 July 12 12 November 12 08 April 13 Price target - NOK 72.00 77.00 81.00 88.00 Rating Buy Buy Buy Buy Initiation of coverage 15 March 11 Historical price target and rating changes for EFG International AG in the last 12 months (full coverage) Date 26 July 12 22 January 13 12 February 13 Price target - CHF 9.30 13.00 13.50 Rating Buy Buy Buy Initiation of coverage 24 May 12 Historical price target and rating changes for Erste Group Bank AG in the last 12 months (full coverage) Date 30 November 12 Price target - EUR 13.00 Rating Sell 138 Initiation of coverage 15 April 11 European Banks Banking Historical price target and rating changes for Svenska Handelsbanken AB in the last 12 months (full coverage) Date 19 July 12 12 November 12 21 January 13 08 April 13 Price target - SEK 240.00 250.00 260.00 250.00 Rating Hold Hold Hold Hold Initiation of coverage 15 March 11 Historical price target and rating changes for HSBC Holdings plc in the last 12 months (full coverage) Date 15 May 13 Price target - GBp 790.00 Rating Buy Initiation of coverage 27 July 11 Historical price target and rating changes for ING Groep NV in the last 12 months (full coverage) Date 28 January 13 Price target - EUR 8.00 Rating Buy Initiation of coverage 28 January 13 Historical price target and rating changes for Intesa Sanpaolo SpA in the last 12 months (full coverage) Date 06 August 12 28 January 13 14 March 13 05 April 13 Price target - EUR 2.00 1.50 1.10 1.00 Rating Buy Hold Hold Sell Initiation of coverage 18 August 11 Historical price target and rating changes for Julius Bär Gruppe AG in the last 12 months (full coverage) Date 22 January 13 Price target - CHF 39.00 Rating Hold Initiation of coverage 24 May 12 Historical price target and rating changes for KBC Groupe SA in the last 12 months (full coverage) Date 30 November 12 15 February 13 17 May 13 Price target - EUR 28.00 30.00 35.00 Rating Buy Buy Buy Initiation of coverage 30 November 12 Historical price target and rating changes for Lloyds Banking Group plc in the last 12 months (full coverage) Date Price target - GBp Rating Initiation of coverage 17 February 11 Historical price target and rating changes for Nordea Bank AB in the last 12 months (full coverage) Date 19 July 12 12 November 12 21 January 13 08 April 13 Price target - SEK 74.00 77.00 80.00 81.00 Rating Buy Buy Buy Buy Initiation of coverage 15 March 11 Historical price target and rating changes for Raiffeisen Bank International AG in the last 12 months (full coverage) Date 30 November 12 17 April 13 Price target - EUR 27.00 22.00 Rating Sell Sell 139 Initiation of coverage 15 April 11 European Banks Banking Historical price target and rating changes for RBS plc in the last 12 months (full coverage) Date Price target - GBp Rating Initiation of coverage 17 February 11 Historical price target and rating changes for Banco Santander SA in the last 12 months (full coverage) Date 17 July 12 30 July 12 28 January 13 19 April 13 12 June 13 Price target - EUR 5.00 5.40 6.10 5.95 3.90 Rating Sell Buy Sell Sell Sell Initiation of coverage 19 March 12 Historical price target and rating changes for SEB AB in the last 12 months (full coverage) Date 12 November 12 21 January 13 31 January 13 08 April 13 Price target - SEK 56.00 60.00 60.00 61.00 Rating Buy Buy Hold Hold Initiation of coverage 15 March 11 Historical price target and rating changes for Société Générale SA in the last 12 months (full coverage) Date 28 January 13 Price target - EUR 16.00 Rating Sell Initiation of coverage 28 January 13 Historical price target and rating changes for Standard Chartered plc in the last 12 months (full coverage) Date 07 August 12 12 March 13 Price target - GBp 1450.00 1450.00 Rating Hold Sell Initiation of coverage 27 July 11 Historical price target and rating changes for Swedbank AB in the last 12 months (full coverage) Date 12 November 12 21 January 13 08 April 13 03 May 13 Price target - SEK 130.00 140.00 146.00 165.00 Rating Buy Buy Buy Buy Initiation of coverage 15 March 11 Historical price target and rating changes for UBS AG in the last 12 months (full coverage) Date 20 July 12 30 October 12 Price target - CHF 13.00 17.00 Rating Buy Buy Initiation of coverage 20 July 12 Historical price target and rating changes for Unicredit SpA in the last 12 months (full coverage) Date 07 August 12 28 January 13 05 April 13 Price target - EUR 5.20 4.50 2.50 Rating Buy Hold Sell Initiation of coverage 18 August 11 Historical price target and rating changes for Vontobel Holding AG in the last 12 months (full coverage) Date 30 July 12 22 January 13 07 March 13 Price target - CHF 17.00 19.00 25.00 Rating Sell Sell Hold 140 Initiation of coverage 24 May 12 European Banks Banking Berenberg distribution of ratings and in proportion to investment banking services Buy Sell Hold 41.10 % 20.16 % 38.75 % 50.00 % 12.50 % 37.50 % Valuation basis/rating key The recommendations for companies analysed by the Bank’s equity research department are either made on an absolute basis (“absolute rating system”) or relative to the sector (“relative rating system“), which is clearly stated in the financial analysis. For both absolute and relative rating system, the three-step rating key “Buy”, “Hold” and “Sell” is applied. For a detailed explanation of our rating system, please refer to our website at http://www.berenberg.de/research.html?&L=1 NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as described on our website may be breached temporarily. Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, 53117 Bonn and Marie-Curie-Str. 24-28, 60439 Frankfurt am Main, Germany. General investment-related disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by the Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” (updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1 Legal disclaimer This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“). This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. 141 European Banks Banking The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services. Analyst certification I, Nick Anderson, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, James Chappell, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, Eleni Papoula, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, Andrew Lowe, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, Eoin Mullany, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, Michelle Wilson, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. 142 European Banks Banking United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. United States of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information. Third-party research disclosures Company Disclosures Barclays plc BBVA SA BNP Paribas SA Commerzbank AG Crédit Agricole SA Credit Suisse Group AG Danske Bank A/S Deutsche Bank AG DNB ASA EFG International AG Erste Group Bank AG Svenska Handelsbanken AB HSBC Holdings plc ING Groep NV Intesa Sanpaolo SpA Julius Bär Gruppe AG KBC Groupe SA Lloyds Banking Group plc Nordea Bank AB Raiffeisen Bank International AG RBS plc Banco Santander SA SEB AB Société Générale SA Standard Chartered plc Swedbank AB UBS AG Unicredit SpA Vontobel Holding AG no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures no disclosures (1) (2) (3) (4) (5) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report. 143 European Banks Banking * For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above. Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent. © May 2013 Joh. Berenberg, Gossler & Co. KG 144
