A new working paper from The Bank of England suggests that when their capital is tight, banks tend to increase lending to households, while making it more difficult for small non-financial businesses to get loans.
The paper assesses how shocks to bank capital may influence a bank’s portfolio behaviour using novel evidence from a UK bank panel data set from a period that pre-dates the recent financial crisis.
“Focusing on the behaviour of bank loans, we extract the dynamic response of a bank to innovations in its capital and in its regulatory capital buffer. We find that innovations in a bank’s capital in this (pre-crisis) sample period were coupled with a loan response that lasted up to three years. Banks also responded to scarce regulatory capital by raising their deposit rate to attract funds. The international presence of UK banks allows us to identify a specific driver of capital shocks in our data, independent of bank lending to UK residents. Specifically, we use write-offs on loans to non-residents to instrument bank capital’s impact on UK resident lending.”
A fall in capital brought about a significant drop in lending, in particular to private non-financial corporations.
In contrast, household lending increased when capital fell, which may indicate that — in this pre-crisis period — banks substituted into less risky assets when capital was short.
from Shocks to bank capital: evidence from UK banks at home and away by Nada Mora and Andrew Logan
Following the demise of Circuit City and CompUSA, Best Buy (NYSE: BBY) is taking full advantage of being the only significant national specialized consumer electronics and computer retailing chain. It’s now become the first place that comes to mind for many people when they think of buying electronic goods.
Strong sales of TVs and notebook computers helped Best Buy top analysts’ fourth-quarter forecasts as the big electronics chain survivor attracted new customers and got them to spend more (Investor’s Business Daily).
Best Buy earned $1.82 a share, up 13% from last year and 3 cents over the average estimate of analysts , according to Thomson Reuters. Same-store sales rose 7.4%, rebounding sharply from last year’s 4.8% decline.
“Best Buy definitely benefited from being the only real big electronics retailer,” said David Silver, a research analyst at Wall Street Strategies. Sales at international stores open at least 14 months increased 5.5 percent, topping some analysts’ estimates (Bloomberg). “The international business is more robust, turning a source of concern into a source of strength,” David Schick, an analyst with Stifel Nicolaus & Co., told Bloomberg. “The guidance is both robust and achievable.”
William Blair analyst Jack Murphy is bullish on the retailer’s shares. “[Best Buy] remains our favorite large-cap idea,” he says. “We believe investors face limited downside and a few sources of upside.” Murphy told Forbes there are three main upsides for the company: “First, repurchases under the $2.5 billion buyback are not included in guidance. Second, improving mix toward appliances and a subcycle in sales of connected devices, like Internet-connected Blu-ray players and TVs, could drive comps and margins above expectations. Third, we see the long-term potential of selling related digital content as a comp and operating margin driver.”
Societe Generale upgraded Best Buy from Sell to Hold based on the company’s Q4 results (StreetInsider). But FBR Capital analyst Stephen Chick downgraded the company to Underperform from Market Perform, setting a price target of $36 (TechTraderDaily). “From here, we think that BBY will face an inevitable deceleration in its business, as the company cycles the significant market share gains it garnered from the demise of its No. 1 former competitor, Circuit City, over the past year,” he wrote.
Best Buy also faces growing competition from the likes of Wal-Mart (NYSE: WMT), Amazon (NASD: AMZN) and Costco Wholesale (NYSE: COST). As well as competitive prices, Costco offers 2-year warranties, a generous return policy and “concierge” after-sales support. But none of them provides anything like Best Buy’s Geek Squad technical support services, the wide range of products, or the quasi-entertainment experience offered in Best Buy stores. The addition of Apple’s (NASD: AAPL) iPad provides extra allure to Best Buy stores that could lead to increased sales of other products.
With all this going for it why would Best Buy be interested in the struggling Radio Shack (NYSE:RSH)?
Best Buy could turn Radio Shack locations into more of its successful smaller standalone Best Buy Mobile stores. The company said it plans to open 75 to 100 such stores in the coming year, adding to the 75 it already operates. RBC Capital Markets analyst Scot Ciccarelli recently estimated that the highly profitable concept eventually could reach 500 to 1,000 locations (BusinessJournals).
But the only thing that Best Buy would get in a potential deal with RadioShack is “real estate, and they could get cheap real estate some other way,” says David Strasser, retail analyst at Janney Montgomery Scott (Forbes).
This type of deal that has the appeal of extending a brand and presence in strip malls across the country is the kind that often gets done, but as Gizmodo points out “it looks like we’d lose more than we’d gain.”
Disclosure: long Costco.
Best Buy Co., Inc. Q4 2010 Earnings Conference Call Summary
Standard & Poor’s Ratings Services views the overall recovery in Eurozone member countries as still fragile, which calls into question the single currency zone’s growth model.
Since its inception in 1999, the Eurozone has derived its growth from two major sources: Strong domestic demand, financed in part by increasing private sector debt in Spain and southern countries (plus Ireland); and solid foreign trade, in the northern countries under Germany’s lead.
“When we consider the trade balances for each of the major Eurozone member countries, two groups clearly emerge,” said Standard & Poor’s credit analyst Jean-Michel Six. “Trade balances in Spain, Portugal, Greece, and France have
remained consistently in the red since 2000, contrasting with strong surpluses in Germany and The Netherlands.”
The split into two growth models within the single currency zone has sparked heated public debate since the beginning of the year, particularly given Greece’s current troubles. In some circles, the export model epitomized by Germany continues to be presented as the most sustainable because it tends to be associated with hefty trade and current account surpluses, which is logical.
“Still, what is paradoxical and often overlooked is that Eurozone countries with strong foreign trade rely highly on demand for their products from the rest of Europe,” said Mr. Six.
We think the rebalancing of the Eurozone growth model, bridging the gap between foreign-trade-oriented economies and those relying extensively on debt-fuelled domestic demand is a necessary next step for the consolidation of the single-currency zone. Otherwise the battle for exports may end up with no winners.
Eurozone economies with solid foreign trade experienced on average a more severe decline in GDP in 2009 compared with their southern counterparts, because of the sharp contraction in world trade. While world trade has recovered significantly since the third quarter of last year, Eurozone imports have remained virtually flat. This persistent weakness in Eurozone imports illustrates the challenge the single currency zone’s growth model now confronts.
from Standard & Poor’s Economic Research: The Eurozone’s Two Growth Models Collide (Premium)
Private equity firms have invested in 86 bankrupt companies over the past three years, according to PitchBook. Of these, 17 have been during this quarter alone, more than during the first and second quarters of last year combined. In the past two quarters, there has been a total of 32 investments in bankrupt companies.
This data shows the continued interest of PE investors in distressed companies and the delayed effect the credit crisis and recession have had on companies. Distressed investing opportunities will probably continue to be above normal as companies struggle with maturing debt loads and poor balance sheets.
With Applied Materials On The Prowl, Which Start-Ups Will Benefit? (DJVentureWire)
A Look at Case-Shiller, by Metro Area (WSJ blog)
Our guess is that the (health) plan will add $50 to $100bn to the deficit over the next decade.(BofAML via FTAlphaville)
With health bill, Obama has sown the seeds of a budget crisis (Robert Samuelson in WashPost OpEd)
US CMBS Delinquencies Continue to Rise, but More Slowly (Realpoint)
Ratings agency is looking into anomalies into how banks around the world account for their defined-benefit pension plans.
Moody’s says that in fiscal 2009, the defined benefit plans of 10 of the banks it examined were in a deficit position (meaning that the present value of the plans’ obligations exceeded the value of the related plan assets); and the remaining 4 were in a surplus position – JPMorgan Chase, ING, Banco Comercial Portugues and Banco Espirito Santo. In fiscal 2008, 11 banks’ plans were in a deficit position, and 3 had a surplus – Banco Comercial Portugues, National Australia Bank and Mizuho Financial Group.
The 4 U.S. banks examined (Bank of America, Wells Fargo, JPMorgan Chase and Citigroup), together with one European bank (Royal Bank of Scotland) and National Australia Bank, each fully-recognized the funded status of their plans (i.e. the difference between the present value of the plan’s obligations and the value of the assets in the plan trust) on their respective balance sheets.
However, due to different accounting rules, some banks reported a net asset on their respective balance sheets for their plans in fiscal 2009, even though the plans were in a deficit position: the funded status of Bank of Montreal’s (BMO) plans was a deficit of CAD0.8 billion, but it reported a net asset of CAD0.6 billion; the funded status of UBS’s (UBS) plans was a deficit of CHF1.9 billion, whereas it reported them as a net asset of CHF2.6 billion; and the funded status of Mizuho Financial Group’s plans was a deficit of JPY158 billion, whereas it reported a net asset of JPY523 billion.
We believe that this is incongruous reporting and does not reflect the plans’ true economic condition.
The results of the rating agency’s review highlights why it is proposing to introduce a global standard adjustment to banks’ financial statements to ensure increased comparability amongst banks with these plans, as well as applying “principles that Moody’s believes better reflect the banks’ true economic conditions.”
Moody’s said implementation of these proposed adjustments would not have an immediate impact on ratings. “However, via formalizing our methodology for interpreting these plans, their impact on banks’ capital and financial results would be more transparent than in the past; and it will enable us to more easily monitor and assess the credit risk associated with them.”
from Moody’s Peering Behind the Curtain of Banks’ Employee Benefit Plan Obligations (Premium)
Verizon Communications (NYSE: Z) shares jumped to an almost 4-month high after renewed reports of the pending arrival of a CDMA version of the iPhone, but now analysts say any deal with Apple (NASD: AAPL)likely won’t see a CDMA iPhone in US stores before the end of the year.
Credit Suisse’s Bill Shope wrote in a research report “We wouldn’t count on a Verizon iPhone for the holidays,” adding that a device may be in the works, but that Apple won’t be supporting Verizon until 2011 (WSJ blog). UBS analysts Maynard Um also noted a Verizon phone would be unlikely this year, but that a CDMA phone could be launched with international operators in Asia, such as China Telecom and KDDI later this year. (MacObserver).
RBC Capital Markets analyst Mike Abramsky said that a subsidized iPhone on the Verizon network would add 5 million to 6 million units of sales in the first year, or about $3.6 billion in revenue and 75 cents EPS for Apple. He also believes that a CDMA iPhone could be launched for China Telecom or KDDI before Verizon (AppleInsider).
Hudson Square Research analysts Todd Rethemeier and Scott Tilghman said Verizon may not even be the one to get the iPhone in the US apart from current carrier AT&T (NYSE: T). “If the CDMA version isn’t ready until late 2010 or early 2011, and if AT&T’s exclusivity expires this summer, we would not be surprised to see the iPhone being sold by T-Mobile” this year, they wrote (WSJ blog).
While many are hyping up the possible business prospects of a CDMA iPhone for Verizon, other analysts are questioning just how much this would help Qualcomm (QCOM), the leading supplier of CDMA chips.
JMP analysts write that the news is clearly bullish for Qualcomm.But in a note downgrading Qualcomm shares on March 26, CLSA analysts wrote, “the much-speculated CDMA iPhone win should have a limited impact as we believe that it could cannibalize other CDMA smartphones at Verizon” (WSJ blog).
Michael Walkley and Charles John of Piper Jaffray are maintaining their “Overweight” rating and $53 price target on Qualcomm as their channel checks continue to show an increasing mix of 3G based smartphone sales.(Benzinga) Dr. Paul Jacobs, CEO of Qualcomm said “We now project earnings per share to be well above the high end of our prior guidance driven by the strength in licensing revenues and favorable volume and product mix in our chipset business.”
It’s been a rough week or so for the pharmaceuticals sector, with disappointing developments predominating over new drug approvals.
Cephalon (NASD: CEPH) got a one-two punch from the U.S. government, FiercePharma reports. The Food and Drug Administration refused to approve the alertness drug Nuvigil to fight jet lag, a key element of the company’s strategy for switching patients to the new med from its predecessor Provigil. Next, a federal judge refused to dismiss antitrust suits filed against Cephalon by the Federal Trade Commission and others. Soleil Securities had been hoping for good news for Cephalon, reiterating its “Buy” recommendation in anticipation of FDA approval.
Things are going from bad to worse at Boston Scientific Corp (NYSE: BSX): according to Wall Street Journal the company is under investigation by the Securities and Exchange Commission and the Department of Justice over its recent recall of heart defibrillators. (See our recent Pulse Check on Boston Scientific here.)
It’s been a rollercoaster ride for ARCA Biopharma (NASD: ARCA), whose shares soared more than 200% on Friday, only to lose 25% of their value on Monday. While the 200% increase can be tied to issuance of a patent, reasons for the 25% pullback are still unclear. TheStreet’s Adam Feuerstein believes it might be related to the company’s heart failure drug bucindolol, which needs FDA signoff on a special protocol assessment for a proposed late stage study.
Sally Church, on the Pharma Strategy Blog, notes that Antisoma & Novartis lung cancer drug ASA404 halted its phase III trials following interim analysis, an ominous sign for the drug. As Church points out, “It’s been a tough year for cancer drugs in lung cancer in 2010 already, following several spectacular rounds of futile data from Pfizer’s figitimumab, Novelos’s NOV-002 and now ASA404, all of which had promising but early data in phase II, only to stumble in phase III.”
Genzyme’s (NASD: GENZ)) troubles also are mounting. Morningstar reports that the FDA will likely issue a consent decree targeted at Genzyme’s Allston Landing facility. That’s the facility which experienced viral contamination last summer, leading to a brief shutdown of operations.
On top of that Zacks blog reports that Shire plc (SHP) presented positive data to the FDA related to vPriv, a Gaucher disease product that competes with Genzyme’s Cerezyme.
And Medivation (NASD: MDVN), which last week reported disappointing phase III trial results for its Alzheimer drug Dimebon announced that it would cut its workforce by 20%.
On the plus side of the ledger, Vivus (NASD: VVUS) announced that an FDA panel will be reviewing its obesity candidate, Qnexa. In a note, Leerink Swann analyst Steve Yoo suggests that Vivus and Arena will probably both get their drugs reviewed by an advisory committee at the same time.
Meanwhile, Salix Pharma (NASD: SLXP) has received FDA approval for Xifaxan 550mg for treatment of hepatic encephalopathy. Jefferies & Co analyst Corey Davis sees upside ahead.
All this does not bode well for Big Pharma: Bristol Myers Squibb (NYSE: BMY), Eli Lilly (NYSE:LLY), AstraZeneca (AZN)and Sanofi Aventis (SASY) must all develop a strategy to counteract major patent expirations and slowing growth. “Those companies are all betting on their pipelines. At this juncture, they feel that their pipelines can sustain them. That remains to be seen,” said Deutsche Bank analyst Barbara Ryan.
Citigroup’s (C) share price has dipped slightly from its recent closing high of $4.27 following the Treasury Department’s announcement that it will sell its $7.7 billion shares “over the course of 2010 subject to market conditions.” Longer term, however, analysts generally welcome the move as it will remove the uncertainty associated with the Treasury’s stake.
Morgan Stanley will serve as the government’s advisor on the sale. The government will sell between 8% and 10% of average daily volume each day following Citigroup’s earnings report on April 19.
Sandler O’Neill analyst Jeff Harte said the sale of the US Treasury’s shares could drive up Citigroup stock prices over time (WSJ Blogs). Harte contends that concrete signals of a U.S. departure from Citigroup could coax institutions back into the stock.
“It’s an attractive name in some ways, but it’s also a lot riskier” than its more richly valued peers, said Jaime Peters, an analyst at Morningstar Inc. And Citi’s $4.18 per-share price tag (down 13 cents Monday) is not much of a discount to long-term fair value as modeled by Morningstar. (American Banker). But Deon Strickland, a Wake Forest University finance professor who has studied different aspects of stock ownership composition, said any impact from an increase in Citi’s institutional investor base would probably be short-term.
Standard & Poor’s analyst Matthew Albrecht also saw the development as an encouraging sign for Citi. He raised the financial services company’s rating from “Hold” to “Buy,” predicting that “the government could divest its stake without undue pressure on the share price.” He said, “We are raising our target price by $1.50 to $6.00, on a higher premium to projected tangible book value to reflect our view of Citigroup’s improved outlook” (Barron’s). Albrecht told MarketWatch that the US Treasury shares “are included in my earnings estimates and have been for a while.” He said, “The impact is large but the company can make money for shareholders in future.”
Rochdale Securities LLC analyst Dick Bove again told CNBC that Citigroup could earn 70 cents a share over the next few years and upgraded his stock price target for Citi, from $7 on March 10 to $8.50. Based on Bove’s target the government’s current $8 billion profit could translate into a $15 or $20 billion profit in 6 months to 1 year, a $106 billion profit on the Treasury Department’s initial $25 billion investment (American Banking News).
But “Even though Citi is performing better, the bank remains unwieldy and still looks a long way from earning enough to offset its cost of capital,” breakingviews says. “There’s plenty more work needed to make absolutely certain that Uncle Sam does not have to move back in.”
Avram J. Davis
Read US Treasury Press Release.
See previous Pulse Checks on Citigroup here.
For latest analyst comment on Citigroup, see Alacra Pulse.
Central banks have already widened dramatically the quality of assets they are willing to discount for central bank money. Further innovations may be only a matter of time.
Guest Post by Oxford Analytica
Core tenets of central banking derive from timeless principle and experience. The key tenet is making the central bank the economy’s monopoly supplier of money. This makes it the one institution capable of addressing financial calamity. It can create money in the face of any number of processes which alone or in combination can bring monetary circulation to a standstill, thereby crippling economic activity.
That this power was insufficiently exercised by the US Federal Reserve in 1930 is perhaps one of the most enduring ‘lessons’ of monetary policymaking in the Great Depression. That abdication of power explains the greater part of OECD central banks’ current willingness to use their balance sheets to create money — so-called ‘quantitative easing’ (QE).
Independence. A concern with QE is the threat that it might pose to central bank independence. There is a fear that, by acquiring such a range and depth of unconventional assets (in exchange for base money), the central bank is politicising its balance sheet. For example, the Fed has acquired 1.07 trillion dollars in mortgage-backed securities, in an effort to keep mortgage interest rates low. The concern is that:
- the Fed might not be able to sell these securities over the objections of the US Congress; and
- the Fed’s intervention in housing-specific finance makes it in some way de-facto responsible for US housing policy.
Like many central banks, the Fed’s independence – its very existence, in fact – is not called for in the constitution. The US Congress could change it with an act of ordinary legislation (it twice eliminated US central banks in the early nineteenth century).
Inflation. In a systematic econometric review of 59 studies, the Dutch economist Jeroen Klomp and co-author confirm a significant inverse relationship between central bank independence and inflation. Their result is not dependent on the measure of central bank independence used, be it legal statute or de facto indicator such as turnover of central bank governorship.
Independence matters not only for inflation but, arguably, also for transparency. Using an index of independence based on turnover of the central bank governor, independence is reasonably correlated with a composite measure of transparency.
‘Last’ war. If the present focus on central bank independence and inflation targeting reflects an emphasis on the ‘last’ war — namely, high inflation in the 1970s — what focus might tomorrow’s central banks inherit from today’s war? Judging from the expansion of OECD central bank balance sheets, that war is the ‘liquidity trap’:
- Households and firms have little desire to hold or increase debt, so that any increases in central bank money are absorbed as currency. This premise is borne out by today’s conjunction of base money expansion and generally stagnant or even falling price levels.
- As the reality of a ‘liquidity trap’ pervades opinion, it is even possible to imagine an impetus to free central banks from present inflation targets to allow a more aggressive policy stance.
Further innovations? There is a fine line between ‘aggressive’ and heterodox. Central banks have already widened dramatically the quality of assets they are willing to discount for central bank money. Further innovations may be only a matter of time. For OECD banks at least, one can image the exchange rate as an operative target. That would be a huge departure, but is hardly unprecedented. In the Great Depression, the only relief from deflationary expectations was unilateral currency devaluation.