BNP Paribas is the the best placed among leading French banks, according to this complimentary download from the Alacra Store of Fitch’s latest Semi Annual Review.
As with several other large banks in Europe, the H110 results posted by leading French banks were much improved on comparable achievements for 2009. While
this is encouraging, Fitch Ratings is not expecting any positive impact on the banks’ Long‐Term (LT) IDRs in the near future, and the Outlook on these is Stable.
H110 results for France’s large banks highlight a number of common threads which are discussed more fully later in this report. Briefly, these are as follows.
- Retail banking is being brought to the forefront of business development, particularly in Q210 — Société Générale (GLE) bucks the trend and continues to focus heavily on CIB.
- Loan impairment charges experienced a sharp contraction.
- The domestic retail networks performed well, spurred on by still dynamic loan growth and low default rates, but results posted by the international retail banking divisions were, on the whole, poor, with the exception of BNPP.
- No major difficulties in accessing the wholesale funding markets have been experienced; access is easing following the squeeze at the height of the April 2010 “Greek” crisis.
- Capital adequacy ratios are improving but large French banks are not the best capitalised among European peers; market pressure for increasing capital is likely to continue and Fitch believes French banks will try to address this issue mostly by retaining earnings. Nevertheless, rights issues cannot be ruled out.
In Fitch’s opinion, BNPP is the best placed among the leading French banks, reflecting mainly its broad geographic diversification and real efforts made to
reduce its higher risk CIB business (note that within CIB, BNPP’s franchise in the wholesale financing markets has grown substantially).
Furthermore, and despite the obvious concentration risk which this poses, Fitch believes those banks which are squarely focused on the French retail domestic market should expect to post fairly stable, and marginally improving, results in the foreseeable future.
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In our opinion, the decisions reached by the United Kingdom coalition government in its 2010 Spending Review reduce risks to the government’s implementation of its June 2010 fiscal consolidation program. Moreover, the coalition parties have shown a high degree of cohesion in putting the U.K.’s public finances onto what we view to be a more sustainable footing.
We have accordingly revised the outlook on the United Kingdom to stable from negative. We have also affirmed the ‘AAA/A-1+’ sovereign credit ratings on the United Kingdom.
For details see Research Update: United Kingdom Outlook Revised To Stable; ‘AAA’ Ratings Affirmed (Premium)
If someone promised annualized returns of 9% to 10% in today’s economy you’d be right to be skeptical. So why are big companies such as General Mills, First Energy, Johnson & Johnson and Honeywell assuming such a high level of return on their pension funds? Audit Integrity’s Jim Kaplan gives his opinion in this guest post excerpted from his latest Chairman’s Corner.
The front page article in the October 16 Wall Street Journal, “Pension Funds Flee Stocks in Search of Less-Risky Bets,” was a real eye-catcher.
I can understand the motivation to reduce risk in view of the fact that Funds generally have taken on far more risk (or blame) than good judgment dictates. The eye-catching part of the headline, however, is the disparity between risk reduction and the increased Return on Assets (ROA) assumptions that many Funds are declaring. If they have found a low-risk, high-return alternative, I’m certain the rest of us would be eager to know about it!
The reasons this doesn’t make sense are twofold. Pension Plans are reducing risk and, by implication, reducing their potential rate of return. Secondly, expected returns on investments are approaching a historic low. By what logic are companies using return assumptions as high as 10%?
The table below represents some (but not all) of the companies that, ignoring market conditions, have ROA far in excess of market averages. Some have even had the audacity to raise their ROA in 2010. None of the companies listed has a portfolio asset allocation that would be considered high risk/high return; most have equity exposure less than 70% of total assets and realistically should expect a long-term return lower than 7%.
What does this mean to the investor? An unrealistic return assumption could be masking operating problems, or could be indicative of accounting games.
Raising the appearance of profitability in the short term only increases damages down the road when pension expenses increase. I strongly suggest that stakeholders carefully assess their holdings to ensure that they are not basing their expectations on improper representation of the companies they own.
Investment in a 30-year bond, assuming no default, yields 4%. Stocks, a far riskier asset class, bring expected returns to no more than 7%. It is not reasonable to expect long-term return on assets to exceed a rate somewhere between 4% and 7%. Based on quantifiable facts, corporate Pension Plans should be reducing the long-term expected ROA to reflect market conditions. Instead, many corporations have elected to maintain or raise their return assumptions to outrageous levels. Why?
The answer is obvious. Higher return assumptions reduce current pension expenses, raising earnings.
Click image to enlarge.
Did you ever wonder why companies such as Johnson & Johnson (JNJ) and Microsoft (MSFT) choose to borrow large sums of money when they have plenty of cash? If so check out this complimentary download from Standard & Poor’s via the Alacra Store.
Many U.S. corporations have taken advantage of near record-low interest rates to issue new debt. From January through August 2010, issuance averaged $75 billion, and then jumped to $138 billion in September. Yet at the same time, economies in most of the developed world remain sluggish, with stubbornly high unemployment.
Furthermore, this debt issuance has been happening while many corporations have amassed large amounts of cash, and across multiple categories. Issuance of speculative- and investment-grade debt, convertible debt, and bank loans has all risen in recent months–even as companies generally have maintained large amounts of cash on their books.
Why would companies want to issue so much debt?
One of the most significant reasons, in our opinion, is that many corporations facing debt maturities in coming years are opportunistically seizing low-cost funding alternatives now, while interest rates are historically low.
During the next four years, approximately $1.5 trillion in corporate debt will mature.
Some issuers are simply refinancing their existing debt. But others are tapping the credit markets now so they can “prefund” subsequently maturing debt while interest rates remain low.
They’re making the judgment, in our opinion, that it’s better to incur additional debt now for their soon-to-be-maturing corporate credit obligations than to confront uncertain capital markets some months down the road, when interest rates might be higher. Those that choose this “prefunding” route will potentially carry additional debt on their books until their old debt matures. Depending on the borrower’s specific financial profile, this additional debt could become a negative rating factor. But we believe that low interest rates will mitigate this possibility as long as they prevail.
Credit FAQ: Why Do Companies Issue Debt When They Don’t Seem To Need The Money? has been made available free of charge to Research Recap users for 30 days by special arrangement with Standard & Poor’s, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $300.00.
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Fitch Ratings says in a new report that although major UK bank earnings have recovered this year, evolving regulation of capital and liquidity will weigh on earnings over the long term. Capital management policies will also be heavily influenced by the final requirements and timing of the new regulation and the response of international peers. Other banking reforms could also have implications for ratings.
H110 represented a marked recovery for the major UK banks’ earnings. The continuation of positive trends, such as lower loan impairment charges and stable to modestly widening net interest margins, could help close the earnings gap that opened up amongst the four major UK banking groups during the recent crisis.
Better performance, combined with improvements in risk profiles and funding structures, could also help close the gap between the Individual Ratings of Lloyds Banking Group plc (’C') and The Royal Bank of Scotland Group plc (’C/D’), both of which have ‘AA-’/Stable Long-term Issuer Default Ratings (IDR) and Barclays plc (’B’ and ‘AA-’/Stable) and HSBC Holdings plc (’B’ and ‘AA’/Stable).
There are indications that asset quality has stabilised at major UK banks, although charges are likely to remain high, given the muted economic recovery.
Although the major UK banks remain vulnerable to a double-dip recession, this is not Fitch’s expectation and the positive trends in the areas of margins and impairment charges should continue in 2010 and into 2011.
Even so, earnings will remain weaker relative to pre-crisis levels, at least until economic recovery takes a more definitive path. Given the more stringent capital and liquidity requirements being phased in, earnings may never recover fully. Lower trading volumes in Q310 are likely to confirm the volatility of investment banking as an earnings source.
Fitch notes that banking reforms could exert downward pressure on certain ratings. Direct structural reforms, such as the introduction of “living wills” to complement the UK’s bank resolution law and subsidiarisation (whereby banks would be split into legally separate subsidiaries), could reduce the implicit state support for systemically important banks and thus represent a potential threat to Support Rating Floors and to Issuer Default Ratings and debt ratings that are currently dependent on it (eg, Lloyds and RBS).
Click on the link for Fitch’s UK Major Banks Semi-Annual Review: Slowly Returning to Health
Fitch Ratings forecasts that EMEA corporates will boost their capex by 8% in 2010, making up roughly half the spend lost in 2009. This is a significant acceleration from the agency’s view in its previous capex report (October 2009) of a 1% decline for 2010. The turnaround can be attributed to a combination of improved demand conditions in some — particularly commodity driven — sectors, and the steps companies took to strengthen their balance sheets in 2009.
The rise in capex is, however, heavily weighted to emerging markets, which at an 18% annual growth rate accounts for almost two thirds of overall growth.
This leaves western European companies increasing spend at a less spectacular 4%. The differing rates are not simply the result of emerging markets bouncing back from a deeper dip — in 2009, emerging market capex fell by only 9% compared with 12% in developed markets.
For more see EMEA Corporate Capital Expenditure: Emerging Markets Lead Return to Growth in 2010 (Premium)
Oxford Analytica is concerned that growth in international e-commerce could be slowed by a complex web of overlapping regulations, in this complimentary download from the Alacra Store.
Although WTO e-commerce negotiations are mired in a stalemate, many of the organisation’s member countries, both developed and developing, have signed preferential trade agreements (PTAs) containing provisions on this kind of trade. This changes the regulatory landscape for companies that engage in e-commerce.
E-commerce comprises trade carried out over electronic platforms, such as the internet. Companies in almost every economic sector — from retail and healthcare to education — engage in it. However, regulatory mismatch among countries increases e-commerce costs and inefficiencies, and prevents greater competition.
Negotiations on rule-making and regulation of e-commerce at the WTO, which started in 1998, have yielded minimal progress, even as this kind of trade has become increasingly important. Member countries agree that e-commerce falls within the scope of the overall WTO framework, but disagree with regards to which specific agreements and provisions apply to it.
Against the backdrop of discord at the multilateral level, preferential trade agreements (PTAs) containing e-commerce provisions have proliferated in recent years, due to:
- the search for greater and deeper market access;
- low expectations of a successful outcome for the Doha Round (although discussions on a multilateral regulatory framework for e-commerce started before the current trade round was launched in 2001, they have since been conducted under the Doha umbrella;
- for countries that are not yet parties to PTAs, fear of being excluded from an increase in e-commerce as a result of agreements among other WTO members; and
- countries’ desire to establish a first-mover advantage in setting and benchmarking e-commerce rules.
The growth of e-commerce preferential rules and disciplines creates a potential ’spaghetti bowl’ effect, in which numerous competing and parallel rules govern this kind of international trade. Although this generates trade distortions and potentially extra costs for companies having to deal with different sets of rules, the prospects for a multilateral framework to regulate e-commerce are low, particularly as progress in this area is subject to the successful conclusion of the Doha Round.
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The delinquency rate on loans included in US Commercial Mortgage Backed Securities (CMBS) increased 14 basis points in September to 8.24%, according to Moody’s Investors Service’s Delinquency Tracker (DQT). It was the smallest monthly increase in the national delinquency rate since October 2008, and the fourth consecutive month of modest growth in the rate.
“This easing of the rate of growth in the delinquency rate does not necessarily portend a near term improvement in the market,” said Moody’s Managing Director Nick Levidy.
The number and balance of loans becoming newly delinquent remain high, but in the past few months the number of loans that became current, worked out or disposed has increased.
In September, 311 loans totaling nearly $3.8 billion became newly delinquent, while 238 previously delinquent loans, totaling approximately $3.3 billion, became current, worked out, or disposed. In all, the total number of delinquent loans increased in September to 3,971, and the total balance of delinquent loans increased by approximately $500 million to $52 billion.
By property type, hotels had the greatest increase in delinquency rate for the second month in row, gaining 47 basis points to 15.94%.
At 31 basis points, industrial properties experienced the next highest gain. Industrial properties, however, remain the best performing of the five property types, with a delinquency rate that stands at 6.32%.
Office properties had the third largest increase in its delinquency rate in the past month, with a gain of 29 basis points, bringing the delinquency rate to 6.40%.
In the retail sector, the delinquency rate increased a single basis point to 6.60%.
For details click here.
During the recent financial crisis, credit default swap (CDS) spreads indicated an elevated risk of default that, for some sectors, was ultimately not borne out by subsequent experience, according to a Fitch Ratings report.
In its study, Fitch analyzed the performance of CDS spreads as market-implied indicators of default risk for more than 100 companies across five U.S. industry sectors that experienced pronounced market pressure during the credit crisis: monoline insurers, real estate investment trusts (REITs), homebuilders, banks, and insurance companies. All of the credits studied were rated investment grade as of June 30, 2007.
Fitch’s analysis illustrates that overall performance of CDS spreads during the crisis period was mixed.
For example, widening spreads proved to lead the severe distress that occurred among monolines, but appeared to generate “false positives” for homebuilders and REITs, sectors that as a whole experienced relatively mild erosion in credit fundamentals and a considerable tightening in CDS spreads after reaching their respective peaks in late 2008.
Similarly, although CDS spreads also widened markedly for financial services firms during the height of the crisis, only one credit event (Washington Mutual) occurred among the approximately 60 U.S. bank and insurance companies sampled. This discrepancy suggests that CDS markets might not have fully anticipated the significant role of external support (e.g. government assistance, acquisition by other financial institutions) in mitigating risks to debtholders.
“While CDS spreads can provide a dynamic, market-based view on a credit, it is important to keep in mind that CDS pricing can be driven by a number of factors not directly related to an entity’s fundamental creditworthiness” said Robert Grossman, Group Managing Director, Fitch Macro Credit Research group.
For details, see the full report CDS Spreads and Default Risk: Interpreting the Signals (Premium)
Corporates in the Asia-Pacific region are seriously concerned about the impact of climate change on their industry, and are preparing to tackle increasing legislation aimed at curbing greenhouse gas emissions, according to a survey conducted by Standard&Poor’s Ratings Services and carbon analytics firm RepuTex Ltd.
The survey, which canvassed the views of more than 300 Asia-Pacific issuers rated by Standard&Poor’s on their current and anticipated carbon exposure, found nine out of 10 respondents were concerned about the impact of physical climate change on their industry.
For more see Climate Change A Serious Concern For Asia-Pacific Corporates (Premium)