Banks Coming into focus !

http://ftalphaville.ft.com/blog/2012/02/16/883721/moodys-is-reviewing-a-long-list-of-european-and-global-banks/

Moody’s is reviewing a long list of European and global banks

Posted by Kate Mackenzie on Feb 16 00:45.

Moody’s ratings of Credit Suisse, Morgan Stanley and UBS are set to fall up to three notches after the ratings agency announced reviews of both European banks, andglobal banks and securities firms with credit market operations. Some banks, of course, fall into both categories and will be reviewed on both counts.

There were several statements, so rather than pasting them all in full, here are a few highlights.

This list relates to the combined European and global credit reviews:

POTENTIAL LONG-TERM RATING IMPACT FOLLOWING REVIEWS:

The following guidance is indicative only. The final rating impact will be determined during the review.

UP TO 1 NOTCH:

Bank of America
Nomura
Royal Bank of Scotland
Societe Generale

UP TO 2 NOTCHES:

Barclays
BNP Paribas
Citigroup
Credit Agricole
Deutsche Bank
Goldman Sachs
HSBC Holdings
JPMorgan Chase
Macquarie
Royal Bank of Canada

UP TO 3 NOTCHES:

Credit Suisse
Morgan Stanley
UBS

Rating Action: Moody’s Reviews Ratings for European Banks

Global Credit Research – 15 Feb 2012

London, 15 February 2012 — Moody’s Investors service has today announced rating actions affecting 114 financial institutions (counted by group) in 16 European countries. The actions reflect, to differing degrees, the combined pressures from (i) the adverse and prolonged impact of the euro area crisis, which makes the operating environment very difficult for European banks; (ii) the deteriorating creditworthiness of euro area sovereigns, which led to the adjustment of the ratings for nine European sovereigns on 13 February 2012 http://www.moodys.com/EUSovereign; and (iii) longer-term, the substantial challenges faced by banks and securities firms with significant capital market activities. While there are mitigating factors such as the currently supportive stance of many governments towards their banking systems and accommodative monetary policies, these are overshadowed by the aforementioned pressures, in Moody’s opinion. Moody’s expects that once the reviews announced today are resolved, its EU bank ratings will fully reflect the effects of currently foreseen adverse credit drivers.

http://ftalphaville.ft.com/blog/2012/02/16/884311/a-fistful-of-legacy-dollars-at-socgen/

A fistful of legacy dollars, at SocGen

Posted by FT Alphaville on Feb 16 10:12.

More huge numbers on US dollar asset deleveraging in a French bank’s end-2011 results, on Thursday. Societe Generale got rid of $55bn in funding needs in the six months from June 2011:

(All charts via SocGen’s Q4 2011 presentation)

Though a significant part of it, interestingly, in sales of SocGen’s “legacy assets”. Credit exotica to you or us — RMBS, CDOs etc denominated in dollars.

 But ooh, there’s a CDO valuation controversy involved!

It arises because SocGen actually posted a fairly big miss on net revenues in the fourth quarter. They came in at €5.5bn, seven per cent below expectations. It’s largely due to a €418m cost from the revaluation of… US RMBS CDOs. The above slide shows they’re the only portion of SocGen’s legacy porfolio for which a recent external credit valuation is less than net book value.

Espirito Santo’s Andrew Lim picked apart the unexpected loss on Thursday:

This will be taken negatively as management has consistently tried to assure the market that an independent BlackRock valuation of the assets in the portfolio had implied a fair value higher than the current book value. On top of this, p27 of the presentation appears to reveal a €2bn over-valuation in the legacy asset portfolio on top of the revaluation losses of €418mn. This is an increase from the €1bn delta that was disclosed at 3Q11. The net book value of the legacy assets is now €12.4bn, compared to a fair value of only €10.4bn; this compares to BV of €16.7bn versus FV of €15.6bn at the 3Q11 stage.

The legacy asset portfolio generated significant unexpected losses of €418mn for the revaluation of US RMBS CDOs and monoline risk. The total value of the legacy asset portfolio now stands at €17.5bn, down from €22.2bn at 3Q11. Management has for the first time provided a split of the portfolio into “money good assets” and “non-investment grade assets” of €12.6bn and €4.9bn respectively.Management now appears to be suggesting that the BlackRock independent valuation only applied to the money good assets, which are investment grade and consume a small amount of B3 capital. The non-investment grade assets were apparently not under the remit of the BlackRock stressed analysis (new news to us and the market) and this is where the losses on revaluation have been taken. These assets have a high capital charge under Basel 3 of €2.8bn.

The independent valuation by Blackrock Solutions was presented here, in June 2011. Thursday’s little revelation, however, could go some way to knocking the market’s trust in these types of proclamations and presentations by the bank in question. All is never what it seems.

http://www.creditwritedowns.com/2012/02/in-europe-the-reasons-to-fear-a-lehman-like-event-still-seem-compelling.html

It appeared that the brinkmanship tactics had pushed Greece over the edge on Feb 12 as Athens was set ablaze in protest. Now it appears that the European finance ministers are slipping over the edge. Strong doubts remain, and are being expressed, about whether a second aid package is throwing good money after bad.

Papademos has failed to deliver. As former ECB vice president, he was expected to deliver two things: new austerity and implementation. He has, after much fanfare, agreed to the new austerity demands. The rub, according to the creditor nations, is the commitment.

Domestic considerations are blunting the international priorities. When this seemed to be the case in Italy late last year, Germany’s Merkel reportedly helped push Berlusconi out. However, it seems more difficult to repeat. It seems European officials would prefer to extend Papademos’s term. Samaras has no incentive to agree to postpone elections that he would likely win. Nor can European officials bar Samaras, yet his apparent reservations and desire to modify/renegotiate the agreements cannot but undermine confidence in a government he would lead.

In this environment, creditor nations seem to be making a bet on the LTRO that will provide banks with another large liquidity cushion. It will increase their ability to deal with a shock emanating from Greece, if necessary. Ironically, that may mean that the larger than take down at the Feb 29th LTRO, the more likely European officials will be emboldened vis a vis Greece.

There is plenty of room for policy error. The reasons to fear a Lehman-like event still seem compelling.European officials suggest the problem is the lack of implementation of reform and growth measures in Greece. No doubt there is an element of truth with that assessment.

The problem is that it is incomplete. Part of the problem is that the program is working. Greek unit labor costs are falling. Demand is evaporating. The contraction is deeper than expected and despite optimistic forecasts of growth as soon as 2013, the risks are all on the downside.

The Troika are in Portugal to review their progress. They will likely praise Portugal’s efforts. However, it may still miss its debt/GDP targets because of the denominator.

At the end of last month and without much fanfare, at the end of last year, the IMF cut its expected Spanish output by 5% for 2013. It has been slow to cut Portuguese growth forecasts, but it may have to. Over the past decades, the Spanish and Portuguese GDP are about 98% correlated.

The IMF has noted that if Portugal’s GDP disappoints, its debt is not sustainable. This is despite the better debt dynamics than Greece and the greater willingness to adopt structural reforms. While we know that failure in Greece’s case is not working, it is not clear that success (in implementation) will yield more fruitful results for investors.

Nor will an exit by Greece solve the underlying problems in the euro zone. Greece is a symptom of the problem but not the cause. The problem is structural. The crisis has interrupted the recycling of the North’s surplus to the South in the euro area, though previously European officials assured themselves that imbalances within the euro zone are not significant. If Greece (and other peripheral countries) have an over-valued currency, then surely Germany has an undervalued currency.

Just like there are policies that can duplicate the effect of a devaluation–such as a large increase in the VAT, for example, and a large reduction in cost of labor (including employment taxes)–which appears to be the Troika’s agenda, there are policies that can duplicate the effect of an appreciation. With or without Greece in the euro zone, Germany does not seem prepared to take such action.