Latin American banking system outlooks should return to stable this year, reflecting the return to more normal credit conditions in most markets and the resilience of bank fundamentals during the financial crisis, according to Moody’s.
Improving macroeconomic conditions, still-low interest rates, and more diversified funding access are all helping to kick-start investment and credit growth, the rating agency says in a new Outlook report, and this should lead to better profits and asset quality for the banks in 2010.
“As the economic recovery takes hold, our credit outlooks should revert to stable from negative for most of the large banking systems, particularly for Brazil, Chile, and Colombia,” explains the report’s principal author, Jeanne Del Casino, Group Credit Officer for Latin American banks. The outlook for the Argentinean and Peruvian banking systems are currently stable. For Mexico, she points out that the banking system outlook remains negative because of still- challenging economic and credit conditions in that market; however, individual Mexican bank ratings have largely stable outlooks.
The Latin American banks are well positioned to take advantage of the expected revival in business demand in 2010 or, if necessary, to adjust to less-than-optimum growth in light of liquid local markets and adequate reserve and capital cushions. However, the reopening of external funding markets — already afoot through a plethora of debt issuances during the first two months of the year — will also be crucial in the long run to help finance the credit needs of the region’s expanding economies.
The rating agency cautions that the Latin American banking landscape is not without risks to earnings. The potential for movements in interest rates or currency realignments could also trigger a shift in asset/liability dynamics, with attendant effects on bank margins. As the economies recover and demand surges, inflation and interest rates are likely to go higher, increasing funding and operational costs.
“The risk of credit bubbles is also on our radar because of the banks’ high growth prospects and the potential for overheating and easy credit,” notes Ms. Del Casino. “But this is of less immediate concern, because consumer and corporate debt levels are low and bank balance sheets are conservatively managed overall. It is nonetheless an important factor to watch, given the credit expansion expected for the region over the medium term,” she concludes.
For details, see Latin American Banks: Reverting to Stable Industry Outlooks as Growth Momentum Returns. (Premium)
Sustained flows of private investment will be crucial for economic recovery in South-east Asia as fiscal measures are phased out. Banks will remain cautious with lending until growth picks up, but FDI, portfolio investment and M&As are each set to rise.
Guest Post by Oxford Analytica
Fixed investment in South-east Asia dropped sharply last year, as the combined effects of weaker domestic demand and lower foreign orders hit output. Hardest hit were the export-dependent economies of Thailand, Malaysia and Singapore, which also experienced substantial capital outflows.
Signs of a recovery have been apparent since the end of September, as fiscal stimulus measures lifted consumption. Though weak US demand continues to restrain growth in some economies, notably Malaysia and Thailand, inventories are being rebuilt and capacity utilisation is rising across the region.
Recovering flows. Foreign reserves, a leading indicator of investment flows, have been growing since world financial markets began to stabilise in March 2009, strengthening the region’s currencies:
- The exception has been Vietnam, which faces inflationary pressures and a burgeoning trade deficit. The central bank was this month forced to devalue the dong by 3.4%, bringing it into line with black market rates.
- For the region’s other economies, stronger growth and a faster pace of monetary tightening than in other parts of the world has created expectations of currency appreciation. Indonesia’s rupiah has been the strongest performer, rising 17% against the dollar last year.
Supporting investment. Public investment is set to decline as governments progressively withdraw their fiscal stimulus policies. This will put the burden back on financial markets to sustain growth by funding private investment. The World Bank expects private investment to rise by 7-10% across the region in 2010, with impetus coming from several quarters:
Countries that adopted the most aggressive reforms during the downturn, particularly Vietnam and Indonesia, now look set to attract the bulk of medium-term inflows.
- Indonesia expects disbursed capital to grow by 15% to 13.8 billion dollars this year, after a 24% drop in foreign direct investment (FDI) in 2009. Vietnam has forecast a 10-12% rise on its 2009 inflow of 21 billion dollars, with 10 billion dollars being disbursed.
- Political instability and policy inertia will undermine flows into Thailand, Malaysia and the Philippines, the other main FDI recipients.
Capital markets. Equity markets lost about half of their turnover in 2008 but recovered in the second half of 2009 as investors sought safe havens from volatility on Wall Street. Spurred by low inflation and higher earnings, trading in Indonesia, Singapore and Thailand has more than doubled since the deepest trough in late 2008, according to World Bank data.
Bond issues have rebounded as interest rate spreads narrowed, while listings have surged. Malaysia and Indonesia saw 65% increases in initial public offerings in the year to October 31, though returns were mixed. Liquidity is generally ample, but borrowing costs are still high due to debt concerns in Europe and tighter bank scrutiny of loans.
Mergers and acquisitions. South-east Asian companies have become prime targets for equity alliances and takeovers as they struggle to secure funding. Cash-rich investors in India and China are leading the way, with South Korean, Japanese and Western European buyers also active.
Last year saw some 290 mergers and acquisitions (M&As) worth 1.1 billion dollars in Vietnam, a 71% increase on 2008, mostly in banking, construction and manufacturing. In the first two months of 2010, Indonesia had a 10.7% share of global buyouts, largely due to a 770-million-dollar deal by Europe-based CVC Capital Partners for an 80% stake in retailer Matahari Putra Prima.
Brand-name retail and manufacturing firms, construction groups and real estate holdings will be highly sought after elsewhere in the region, as the removal of tariff barriers through recently implemented free trade agreements encourages cross-border expansion.
Standard & Poor’s believes Spain’s weak economic growth prospects could undermine the government’s fiscal consolidation program.
In a bulletin released today S&P said that in its view “Spain’s general government deficit is likely to remain above 5% of GDP through to 2013 versus the official forecast of 3% of GDP by 2013. As a result, we expect the general government debt burden to rise above 80% of GDP by 2012. We also expect much weaker economic performance than current budgetary assumptions. There is, moreover, significant implementation risk with regard to the government’s fiscal consolidation plans, which are not yet fully specified.”
The negative outlook on the sovereign ratings, which we assigned on Dec. 9, 2009, remains in place in the absence of more aggressive and tangible actions by the authorities to tackle Spain’s economic and fiscal imbalances. Any deterioration over and above our current expectations could put further downward pressure on the ratings.
For details, see Bulletin: Economic Growth Prospects Could Undermine Spain’s Fiscal Consolidation Program (Premium)
See also Spain: Country Economic Forecast from Oxford Economics, available for complimentary download via the Alacra Store.
NERA Economic Consulting argues in a new white paper that limiting the size of financial institutions may actually result in more risk-taking, not less.
Legislative proposals that rely on a size-based identification process would erroneously identify a number of financial firms as systemically risky, when in fact they are not. Other firms that do in fact pose significant systemic risk would fail to be identified. Such a process, if enacted, would create a cross-subsidy of significant magnitude from firms that do not pose systemic risk to those firms whose activities are systemically risky.
The resulting moral hazard would encourage increased risk-taking and, as such, could ultimately defeat the legislation’s intent of reducing the economy’s exposure to systemic risk.
Further, if a size-based process for identification of systemically risky financial firms were accompanied by heightened regulatory requirements and new systemic risk charges, the following economic results would be expected:
- Increased financial system risk as a result of new sources of moral hazard;
- Distortions in the competitive environment, impacting economic efficiency and creating
potential barriers to entry;
- Increased costs to consumers for basic, often required, financial services, as a result of the pass-through of assessment cost, and costs associated with increased regulation; and
- U.S. job losses, including those predicted to result from reductions in capital and labor expenditures and economic dislocation, as a result of efforts by firms to structure to avoid size thresholds.
On balance, the costs of the proposal, considering the moral hazard and economic impacts, are economically significant, easily exceeding the benefit of the actual systemic risk fund itself. Though reducing systemic risk and related taxpayer costs is critically important, to achieve these goals and avoid negative economic distortions, underlying sources of firm systemic risk must be properly identified. Elements not directly linked to size, including interconnectedness, cyclicality, leverage, liquidity, and transparency are important considerations in the identification and quantification of systemic risk. While incorporating such elements into the official identification and assessment of systemically risky financial institutions may increase the complexity of the process, a size-based process could result in more economic harm than good.
The full paper, prepared for the Property Casualty Insurers Association of America, is available here.
Ten Wall Street Blogs you need to bookmark now (WSJ)
News moves stock prices shock (Academic study analyzing press release market impact) FT Alphaville
Recent price moves in bond market are a reminder of how entrenched the credit rating agencies are (WSJ)
The Euro’s Next Battleground: Spain (WSJ)
Obama may compromise on consumer agency to pass financial regulation (WashPost)
A cellphone-based cash transfer system has changed the way Kenyans handle their finances (MIT)
Wall Street shifting political contributions to Republicans (WashPost)
‘Volcker Rule‘ Stalls in Senate (WSJ)
Is there anybody not invested in Blockbuster (BBI) in one way or another who thinks the company’s long-term survival strategy is going to work?
Announcing a $435-million quarterly loss the company said that “stores remain a key component of our multi-channel offering,” while simultaneously announcing that it closed 374 company-owned domestic stores in 2009, and expects 500 or more closures this year.
Through the Company’s alliance with NCR (NCR) BBI says it will add an additional 7,000 Blockbuster Express kiosks and expect to have at least 10,000 by 2010 year end and will expand its video-by-mail and digital offerings.
Will this be enough to fend off growing competition from the likes of NetFlix (NFLX), Coinstar’s (CSTR) Redbox and now Wal-Mart’s (WMT) Vudu, as well as competitors such as Apple’s (AAPL) iTunes? As we’ve written before, we have our doubts, as do a growing number of analysts.
Janney Capital analyst Tony Wible today downgraded the shares to Sell, cutting his price target to 15 cents, from 75 cents, Eric Savitz at TechTrader Daily reports. “The accelerated loss of market share, lower cash balance, lack of guidance, and restructuring efforts that could entail significant equity dilution raises concerns surrounding liquidity and/or dilution,” he writes. “We are uncomfortable taking these risks in the face of the volatile media landsacpe.”
Wedbush analyst Michael Pachter repeated his Neutral rating and 75-cent target price. But he also had some ominous words about what could happen here. “”Even if Blockbuster is able to survive competition from Netflix, Redbox, NCR and others, it is burdened by over $700 million in net debt and net interest expenses of over $100 million annually,” he writes. “Should the company’s EBITDA run-rate of ~$200 million annually decline further, we question its ability to repay the principal on its debt and continue as a going concern.”
BMO Capital analyst Jeffrey Logsdon repeated his Market Perform rating, but trimmed his target to 30 cents, from 40 cents; he says that traditional EV/EBITDA valuation “implies no equity value,” but keeps the non-zero price target to reflect “an option on BBI’s brand.”
The Wall Street Journal reported yesterday on BBI’s plans to remake itself, but it seems unlikely that picking up assets from defunct Hollywood Video stores will bring much relief.
Moody’s doesn’t seem to think so. The ratings agency commented on Feb 8 on the bankruptcy filing of Hollywood’s owner Movie Gallery and the closing of around 760 stores in the U.S. “Although on the surface it would appear that these store closings would help Movie Gallery’s main competitor, Blockbuster, we don’t expect this to be the case.”
“In fact, we believe that Movie Gallery’s bankruptcy filing has negative credit implications for Blockbuster as it shows that the shift away from bricks-and-mortar video rentals is accelerating, one of the long-term concerns factored into Blockbuster’s Caa1 credit rating.”
We expect that lost sales from Movie Gallery’s closed stores will mainly migrate to other channels of distribution and not to Blockbuster’s retail stores. However, we think Blockbuster will be able to combat a portion of this shift with its multi-distribution strategy, which includes online rentals, DVD-vending kiosks and digital-on-demand distribution. - Moody’s
Standard & Poor’s downgraded BBI to CCC with a Negative Outlook on Feb 17 saying it “believes performance will remain very challenged. Our concern is that Blockbuster will not be able to transform its business model over the near term, as we had expected, given the competitive pressures in the rapidly evolving domestic media entertainment industry.”
Needham & Co. analyst Charles Wolf expressed skepticism that Blockbuster can realize enough value from new business offerings in time to offset declines at its traditional brick-and-mortar outlets (WSJ).
“If they can’t build a profitable stores operation, then there is no Blockbuster. It’s real simple,” Mr. Wolf said. If traffic doesn’t pick up by mid-year, “we may just kiss this whole story good-bye. We got a dead-man-walking situation here.”
The WSJ reported that in recent days, Blockbuster tapped law firm Weil, Gotshal & Manges and investment bank Rothschild Inc to “explore more strategic options but do so outside of bankruptcy.”
Sounds like a tall order. There will be a market for physical DVDs and games for some time, but we don’t believe it will be large enough to support a network of standalone stores for much longer.
Blockbuster’s Conference Call Transcript
Moody’s has issued details of its methodology for its recent increase in loss projections for US subprime and Alt-A residential mortgage backed securities (RMBS) issued between 2005 and 2007.
Moody’s last month revised lifetime loss projections for US subprime RMBS issued between 2005 and 2007. On average, Moody’s now project cumulative losses of 19% of the original balance for 2005 securitizations, 38% for 2006 securitizations, and 48% for 2007 securitizations. For Alt-A Moody’s projects cumulative losses of 14% for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations.
A few tidbits from the reports:
As a result of dropping house-prices, over 56% of subprime loans and over 58% of Alt-A loans in Moody’s rated securities are currently under-water.
- After increasing starkly in 2008 (from the mid-40s to the mid-60s), loss severities on subprime pools stabilized in 2009. As of December 31, 2009, severities across all vintages were approximately 70%. We expect severities on subprime pools to rise slightly as we reach the home price trough, but improve thereafter. As a result, we expect lifetime severities to average around 70%.
- After increasing through the first half of 2009, loss severities on Alt-A pools have since stabilized. As of December 31, 2009, the three month averages for 2005, 2006, and 2007 severities were approximately 53%, 59%, and 59%, respectively, an increase, in absolute terms, of 8-13% from a year ago. We expect severities on Alt-A pools to remain largely stable at the higher levels.
- Recent government efforts to curb defaults and foreclosures through loan modification have thus far failed to gain the previously expected traction. The updated loss estimates incorporate approximately 5% for subrime and 2% for Alt-A relative benefit to projected losses across vintages to reflect the limited anticipated success of the program.
For details, see Subprime RMBS Loss Projection Update: February 2010 and Alt-A RMBS Loss Projection Update: February 2010 (Premium)
As Greece and other European countries struggle with managing their sovereign debt burdens, Standard & Poor’s has issued a Credit FAQ discussing its approach to issues of support For Eurozone members experiencing financial distress.
How would Standard & Poor’s view bilateral or multilateral financial support provided to a Eurozone government?
Financial support provided by a third party to an individual EMU member country experiencing financial distress would, we expect, likely be limited, temporary, and come with strict conditions attached, with restrictions placed on the disbursement of future funds if specific measures are not implemented. We have observed from past experience of IMF programs, for example, that such third-party support is usually only a stop-gap solution, and we believe it does not eliminate sovereign credit risk.
In our opinion, a strong, well-defined, and timely policy response from the government experiencing financial distress remains the most important factor influencing sovereign creditworthiness. Third-party financial support can provide the breathing space in which to implement a policy response, but we do not believe it is a decisive factor in sovereign rating trends.
In our view, the macroeconomic policy tools and ultimate responsibility for correcting imbalances generally remain with the sovereign state. Success in this regard depends on the political willingness and ability of the individual government to implement policies consistent with stabilizing its credit standing.
Other questions addressed in the report:
Does Standard & Poor’s expect an EMU sovereign to default?
Does Standard & Poor’s expect any sovereign to leave the Eurozone in the medium term?
What does Standard & Poor’s expect the European Central Bank (ECB) might do for an EMU member state experiencing financial distress?
So what form could financial support for a member state take?
For details, see Credit FAQ: S&P Discusses Issues Of Support For Eurozone Members Experiencing Financial Distress (Premium)
Restructuring of the ailing Spanish savings bank sector through mergers and other consolidations is likely to prove positive for their intrinsic financial health.
In a Special Comment, Moody’s notes that so far, 24 of Spain’s 45 savings banks, accounting for close to EUR350 billion in total assets, have publicly announced consolidation intentions, and many others are maintaining contacts in this direction at different levels.
“The Spanish government’s creation of the Fund for Orderly Bank Restructuring (or “FROB” in its Spanish initials) in June 2009 has been a particular driving force of such consolidation. The fund’s declared purpose is not only to support the Spanish financial system, but also to foster its restructuring by means of sector consolidation. In our opinion, both FROB assistance and such integration processes will be crucial for the long-term financial health of this sector,” says Alberto Postigo, a Moody’s Vice-President–Senior Analyst and author of the report.
Moody’s explains that Spain’s savings banks are pursuing consolidation in two different ways: a traditional merger or an alternative option known as an Institutional Protection Scheme (”SIP” in Spanish initials). Although both options are eligible to receive support from the FROB, the rating agency has some concerns with regard to integration processes through SIPs, as their success lies chiefly in some of the governance details as well as the execution of agreed plans, and so far no SIP has been established in Spain.
In general, Moody’s remains moderately positive about the likely impact of the consolidation process on the intrinsic financial strength of savings banks, although the extent of such improvement will depend on the actual benefits that result from integration.
However, this positive effect is unlikely to translate into improvements in senior debt and deposit ratings, as the expectation of extraordinary systemic support that Moody’s currently incorporates into such ratings is anticipated to return to more moderate levels as the financial position of the consolidated entities improves. Pressure on debt and deposit ratings could even be downwards if the withdrawal of such extraordinary support is not accompanied by a sufficient improvement in the institutions’ intrinsic financial health.
For details, see Spanish Savings Bank Sector Likely to Undergo Needed Restructuring Process (Premium)
Zacks has initiated coverage of AIG (AIG) with a “Neutral” recommendation and a price target of $29.50 after the company has recovered from its 52-week low of $7 to $28. We are pleased to offer a complimentary download of Zacks’ full analysis from the Alacra Store.
We are initiating coverage on AIG with a Neutral recommendation. The company s third quarter earnings were substantially ahead of the Zacks Consensus Estimate, primarily driven by a recovery in the value of its investments.
As part of its effort to repay the bailout money which it received in late 2008 when it had been at the edge of a collapse, the company continues to implement several restructuring initiatives.
However, the other issues that have to be dealt with head-on immediately to help revive AIG are an improvement in overall managerial efficiency, inspiring confidence among the dejected staff and withstanding consistent pressure from the U.S. government to sell assets quickly to repay debt.
Though the company stands to benefit from its scale of operations and the equity market appreciation, we remain concerned about its significant exposure to risky assets.
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For latest analyst comments on AIG, see Alacra Pulse.