UBS Investment Research European Banks
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ab Global Equity Research Europe Including UK UBS Investment Research European Banks Banks Market Comment Euroviews – that vertiginous feeling The rally increases the probability of equity issuance… Financials have rallied strongly, reflecting recognition that policymakers will do 30 April 2009 what it takes to reflate the global economy and that nationalisation is a very last www.ubs.com/investmentresearch resort. However, this does not mean that dilution risk from equity issuance is no longer a concern, and we believe a number of European banks need new equity – John-Paul Crutchley either for loss absorption capacity or to support market risk within their businesses. Analyst [email protected] …but timing is back in the banks’ control +44-20-7568 5037 Governments (ex UK) have avoided dilutive recapitalisation of banks through the Alastair Ryan creation of “buffer” core Tier 1 – an instrument that satisfies regulators and more Analyst senior creditors – but this capital does not ultimately bear losses. “Buffer” capital is [email protected] useful where a bank is suffering from cyclical capital stress and may buy time – +44 20 7568 3238 giving a bank the opportunity to raise equity on more advantageous terms as the Daniele Brupbacher cycle improves. The alternative is a “zombie” work-out with operating profits Analyst utilised in absorbing losses and rebuilding capital for years to come. [email protected] +41-44-239 1493 Buying recapitalised banks… Nick Davey Through choice, we are taking money off the table following the market rally. Our Analyst preference is for banks with strong business models whose capital strength is close [email protected] to undoubted, such as HSBC, Lloyds and Intesa. Generically, we want to avoid +44 20 756 84409 banks with uncertain business models or where there is heightened risk of a Omar Fall protracted work-out process, such as domestic Germany, Ireland or Spain. Analyst [email protected] …and playing relative value ideas +44 20 7568 2131 We prefer HSBC over Standard Chartered – playing the better capitalised, more Alexander Kyrtsis attractively valued emerging markets story. SocGen remains our preferred French Analyst bank, with a better earnings momentum story than our least preferred bank, CASA. [email protected] Looking to purer domestic banks, we are happy owning Lloyds post its fourth +44-20 7568 1689 recapitalisation and the creation of a bad bank outright, and note the contrast with Matteo Ramenghi Sabadell, which arguably has it all to come. Similarly, we would rather own Analyst Intesa over Santander, as Italy is less exposed to structural economic weakness [email protected] than Spain. Finally, in emerging Europe, we would own Erste over OTP, +39-02-7210 0286 reflecting the former’s more attractive franchise and valuation. Ignacio Sanz, CFA Analyst [email protected] +34-91-436 9624 Philipp Zieschang Analyst [email protected] +41-44-239 7414 This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 34. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.ubs.com/independentresearch or may call +1 877-208-5700 to request a copy of this research. European Banks 30 April 2009 Contents page John-Paul Crutchley Analyst Euroviews 3 [email protected] +44-20-7568 5037 Economic outlook 4 Alastair Ryan — Main messages....................................................................................................4 Analyst — Things to watch....................................................................................................4 [email protected] From dogmatism to pragmatism 7 +44 20 7568 3238 Daniele Brupbacher — From zombie to Lazarus.......................................................................................8 Analyst — The point of “buffer” core capital.........................................................................10 [email protected] — The impact of conversion ...................................................................................12 +41-44-239 1493 Key stock calls 13 Nick Davey Analyst — Erste Bank – Buy, PT €18..................................................................................13 [email protected] — HSBC – Buy, PT 530p........................................................................................14 +44 20 756 84409 — Intesa – Buy, PT €2.3.........................................................................................15 Omar Fall Analyst — Lloyds – Buy, PT 120p .......................................................................................16 [email protected] — Societe Generale – Buy, PT €45 ........................................................................17 +44 20 7568 2131 — CASA – Sell, PT €5.4.........................................................................................18 Alexander Kyrtsis Analyst — OTP – Sell, PT HUF 1,750 .................................................................................19 [email protected] — Sabadell – Sell, PT €3.7.....................................................................................20 +44-20 7568 1689 — Santander – Sell, PT €4.3 ..................................................................................21 Matteo Ramenghi — Standard Chartered – Sell, PT 780p...................................................................22 Analyst [email protected] Country views 24 +39-02-7210 0286 — France ...............................................................................................................24 Ignacio Sanz, CFA — Germany............................................................................................................24 Analyst [email protected] — Greece...............................................................................................................25 +34-91-436 9624 — Italy....................................................................................................................26 Philipp Zieschang — Spain and Ireland...............................................................................................27 Analyst [email protected] — UK......................................................................................................................31 +41-44-239 7414 UBS 2 European Banks 30 April 2009 Euroviews The adoption of quantitative easing provides further evidence of the “whatever it takes” stance being pursued by authorities to reflate the global economy. The Bank of England is already taking similar action to the Federal Reserve, but it may take some time for the European Central Bank (ECB) to follow. The moves to intervene in credit markets and stabilise the economic outlook have provided a positive backdrop for the sector, and stocks have reacted accordingly. The European bank sector has rallied 80% from its lows, as actions by policymakers have helped reduce perceived risk premia. At the same time, the broader macroeconomic picture remains difficult. Our expectation is that this rally, like others that have preceded it, will fade as the reality of the difficult earnings cycle reasserts itself. It is right to discriminate: expectations remain heightened among capital market names, leaving greater upside potential for those credit-sensitive names that afford minimal dilution risk. Our preferred stocks are relatively defensively positioned with strong business models or franchises and little need to raise additional capital beyond what has already been announced. Four themes are prevalent in our views of European banks: (1) Our Buy-rated names are linked through a broadly defensive focus and minimal dilution risk. We would rather buy a recapitalised stock post- dilution, rather than one where the risk of such still remains. (2) We remain very cautious on banks in economies with severe structural problems, such as Spain and Ireland. (3) The market has moved from pessimism to over optimism in capital market banks, recognising that these are generally less exposed to banking credit risks. However, it is not absent, as the exposure of Barclays and Deutsche to monolines shows. Moreover, the momentum of the first quarter is expected to fade. (4) It is right to be differentiated in respect of banks with exposure to emerging markets in the east. We remain much more comfortable with exposure to the CEE-4 rather than to more peripheral states, including Ukraine and the Baltics. Table 1: Key stock calls Stock Rationale Most favoured Erste (Buy, €18 PT) Attractive risk/reward, strong franchise HSBC (Buy, 530 PT) Undervalued, yield support Lloyds (Buy, 120p PT) Recapitalised and cleaned up Intesa (Buy, €2.3 PT) Defensive, well capitalised Societe Generale (Buy, €45 PT) Diversified, well capitalised Least favoured Credit Agricole (Sell, €5.4 PT) Expensive, capital less strong than perceived OTP (Sell, HUF 1,750 PT) Expensive, dilution risk Sabadell (Sell, €3.70 PT) Expensive, Spanish exposure Santander (Sell, €4.3 PT) Expensive,