Europe Retail Banks Seen Gaining Most From Lower Loan Losses
October 06 2009 - 1:15PM
Dow Jones News
As bad-loan provisions at European banks start getting smaller,
some analysts are betting that banks with strong retail franchises
will benefit the most and lead the next stage of the ongoing rally
in financial stocks.
That's at odds with the prevailing wisdom that banks
specializing in commercial and investment banking are in better
shape to keep beating earnings forecasts because of strong volumes
this year in areas including bond sales and currency trading.
"We think the real driver of earnings upgrades in the medium
term will be the provision line - which argues for an overweight
retail stance," Derek De Vries, an analyst at Bank of America
Merrill Lynch, wrote in a research note Tuesday, naming banks such
as Danske Bank A/S (DANSKE.KO), Nordea Bank AB (NDA.SK) and
Skandinaviska Enskilda Banken AB (SEB-A.SK) as big beneficiaries of
lower provisions.
Adding to his argument is the likelihood of stricter regulation
for investment banks that would require them to hold more capital,
and the assumption that a lot of good news is already priced into
wholesale bank shares.
JPMorgan analysts made a similar judgment in September, and
Monday highlighted HSBC Holdings PLC (HBC), UniCredit SpA (UCG.MI),
Societe Generale SA (GLE.FR) and Banco Bilbao Vizcaya Argentaria SA
(BBV) as some of the banks with potential for earnings upgrades
over the next 18 months if loan losses come in below
expectations.
"We expect P&L dynamics to improve significantly for
traditional credit banks, as loan losses start to improve sharply
from 2011 at the latest, more than offsetting any margin pressure
on revenues," JPMorgan said.
So far this year, wholesale banks such as Barclays PLC (BCS),
Credit Suisse Group (CS) and UBS AG (UBS) have rallied 27
percentage points more than their retail peers - rising by 87% vs.
57%, according to the BoA/Merrill note, citing Datastream. From low
expectations, analysts have lifted their collective forecasts on
wholesale banks by 30% so far in 2009, BoA/Merrill says, as high
client trading volumes and the positive effects of a steep yield
curve on margins helped to offset loan losses.
The good news isn't seen coming to an end - BoA/Merrill is
expecting another strong result from Credit Suisse and some of the
other wholesale banks when Europe's third-quarter reporting season
starts this week - but the prospect that loan losses have peaked,
or will peak soon, should be of bigger benefit to retail banks.
According to De Vries' analysis, Europe's main retail banks
including Banco Popular Espanol SA (POP.MC), BBVA, HSBC and Banco
Santander SA (STD), have the most to gain in their earnings when
provisions return to historic norms, though the bank is still
cautious on Spanish banks because of the country's troubled
economy.
Meanwhile, Moody's Investors Service in a note Monday said
European banks face significant ratings downgrades if they don't
clean up their balance sheets and strengthen their stand-alone
credit profiles before the "extraordinary systemic support" they're
enjoying from central banks and governments is withdrawn.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451;
margot.patrick@dowjones.com
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