The Economist Intelligence Unit forecasts that Portugal will have to follow Ireland and Greece in requesting emergency EU/IMF funding, but that Spain will not and that the euro area will continue to hold together. As details of Ireland’s 85 billion euro bailout emerge, we are pleased to offer a complimentary download of the EIU’s latest country report for Ireland, issued just before the current crisis.
- The Economist Intelligence Unit’s central forecast is that the Irish government will collapse and an early election will be held by early 2011.
- The most likely government to emerge over the forecast period is a coalition between Fine Gael and the Labour Party. An early election would undermine political stability in the short term, but could improve it in the medium term.
- The government’s economic policy will remain focused on addressing the financial crisis resulting from the near-collapse of the banking system and the fiscal crisis.
- We estimate that the government deficit will rise to 37% of GDP in 2010, which includes EUR38bn injected into the banking sector. We forecast that the deficit will fall to 11.8% of GDP in 2011 and 4.5% by 2015.
- After falling by an estimated 1% in 2010, GDP is forecast to decline by 0.9% in 2011 before returning to average growth of 1.8% in 2012-15. Growth in the first half of the forecast period will be heavily dependent on foreign demand.
- The current-account deficit has fallen substantially and should remain low at an average of 0.8% of GDP in 2011-15.
Country Report Ireland has been made available free of charge to Research Recap users for 30 days by special arrangement with the Economist Intelligence Unit, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $290.
Also topical is the EIU’s Country Report Portugal and Country Report Spain. (Premium).
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Charge-offs on U.S. credit cards fell 11 basis points in October, finishing the month at 8.79%, according to Moody’s Investors Service Credit Card Indices Report. The charge-off rate is now more than 12% below its year-ago level, which was 10.04%.
The continuing improvement in charge-offs follows the trend in the delinquency rate, which fell another 14 basis points in October to 4.51%, marking the twelfth consecutive month of lower delinquencies. The delinquency rate has dropped over 1.7 percentage points over the past 12 months and is now just shy of 30% below the all-time peak level set in March 2009.
In a related development, Moody’s is revising its outlook on the U.S. credit card ABS sector to stable from negative as the sector recovers from historically poor collateral performance amid a changing and uncertain regulatory environment.
“As the economy emerges from recession, important economic drivers of credit card performance, in particular, unemployment, have stabilized, according to Moody’s Vice President Matias Langer. “In addition, the credit quality of securitized portfolios of credit cards appears to be strengthening as evidenced by meaningful improvements in charge-offs and delinquency rates.”
These positive elements must be tempered by the still material (i.e., one-in-four) risk of a double-dip recession, which would lead to deteriorating performance, and persistent regulatory uncertainty, which could lead to the potential loss of systemic support for some of the main card issuers.
The charge-off rate measures those credit card account balances written off as uncollectible as an annualized percentage of total outstanding principal balance.
The early-stage delinquency rate, the rate on loans 30-59 days past due, was 1.19% in October. It is now at its lowest monthly level since June 2007. The delinquency rate measures the proportion of account balances for which a monthly payment is more than 30 days late as a percent of total outstanding principal balance.
The payment rate index, which measures the average amount of principal that cardholders repay each month, as a percentage of total outstanding principal balance, slid lower during October to 19.25% from 19.57% in September.
Moody’s says the still relatively high rate indicates that credit card trusts have increased their proportions of higher-credit quality obligors, who are not only less prone to be delinquent on monthly payments, but also more likely to be “convenience users” of their credit cards, who pay their balances in full each month.
The monthly yield index slipped below 22% in October, to 21.66%, the second consecutive month of decline. Expiration of some issuers’ principal discounting initiatives partially explain the decrease. Yield is the annualized percentage of income, primarily finance charges and fees, collected during the month as a percent of total loans.
For more see Moody’s Credit Card Statement (Newsletter)
Zack’s has a positive view of Target Corporation (TGT) following the company’s solid third quarter earnings, but has a Neutral rating due to a sluggish retail environment. Zack’s full analysis is available in this complimentary download from the Alacra Store.
Target’s strategic initiatives should help drive comparable-store sales and operating margins in the long term. We expect the company to gain market share, and believe that increased focus on consumable items will boost sales in a sluggish retail environment.
However, with the revival of the economy, the other merchandise categories are also gaining strength. The company is also managing its costs effectively resulting
in margin improvement and bottom-line growth (up 28.5% in third-quarter 2010). Target now tends to focus more on store renovations and enhancing store sales productivity, introducing smaller format stores, and eyeing opportunities to open stores in the international markets beyond a period of 3 to 5 years. However, unfavorable consumer spending pattern and increased competition still remain concerns.
Target’s current trailing 12-month earnings multiple is 14.6X, compared to 18.2X, the industry average and 20.7X for the S&P 500. Over the last five years, Target’s shares have traded in a wide range of 9.9X to 21.6X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on forward earnings estimates.
We have a long-term Neutral recommendation on the stock. Our target price of $58.00, 14.6X 2010 EPS, reflects this view.
[Related research via Alacra Pulse: Citigroup analyst Deborah Weinswig expects Target to gain share as company-specific initiatives take hold this holiday season; Piper Jaffray ups price target to $62 from $59, keeps Overweight rating; Barclays Capital sets a $60 price target with an Overweight rating; Susquehanna initiates coverage with a Positive rating and $67 price target.]
Zacks’ report has been made available free of charge to Research Recap users for 30 days by special arrangement with Zacks Investment Research, an Alacra content partner. After 30 days, the report will revert to its regular Alacra Store price of $24.95)
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For latest analyst comment on Target, see AlacraPulse.
Fitch Ratings says that diversification beyond pharmaceuticals is the preferred business model for European pharmaceutical companies, but despite its advantage of broadening companies’ product bases to be sold in emerging markets, the strategy puts pressure on the companies’ profitability.
From a rating standpoint, diversification outside pharmaceuticals is beneficial for a company in order to establish itself in emerging markets. It can also add some stability to the company’s revenues when patent expiration is high, but it clearly has a negative impact on operating profitability.
Although operating margins tend to be lower in non-ethical pharmaceuticals segments, such as OTC and Generics where operating margins can reach more than 15% to 20%, a presence in these areas helps companies to establish themselves in emerging markets, where consumers’ out-of pocket payments tend to be still very high and non-ethical pharmaceutical products are often a more affordable solution. At the same time, non-healthcare businesses tend not to be affected by patent expiration and thus add some stability to the pharma companies’ businesses.
For some time, pharmaceuticals companies have therefore been expanding into other healthcare areas and Fitch expects this trend to continue, implying a negative impact on the rated industry’s profitability.
Diversification outside ethical pharmaceuticals is clearly not for all: In October 2010, Roche said that it was not willing to diversify beyond patented prescription drugs and diagnostics. AstraZeneca’s announcement that it has formally commenced a review of its strategic options for Astra Tech confirms that some industry players – albeit the minority – are still focusing on pure pharmaceuticals.
For more see Diversification From Ethical Pharmaceuticals Preferred Business Strategy For European Pharma
US commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) increased 4.3% in September, its first increase since May and the largest gain in the history of the CPPI.
As of the end of September, prices are up 0.3% from a year ago but down 36.8% from two years ago. They are now 42.7% below the peak value reached in October 2007.
“Each of the summer months this year recorded declines in the 3%-4% range, followed by this month’s sizeable uptick,” said Moody’s Managing Director Nick Levidy. “The relatively large swings seen in the index recently are due in part to the uncertain macroeconomic environment and the effects of a thin market with low transaction volumes.
Click image to enlarge.
The national property type indices, which are quarterly, had mixed results. Two of the four major property types recorded gains in the third quarter and two showed declines. On the gain side were retail, which went up 5.7% in the quarter, and apartments, which rose 0.4%. Office properties saw a 3.8% decline in prices and industrial properties dropped 4.3%.
For details see: Moody’s/REAL Commercial Property Price Indices, November 2010
Fitch Ratings expects the U.S. retail sector to remain stable in 2011 with credit profiles supported by strong liquidity and steady operating performance with mid-single digit sales growth for the 26 companies under Fitch’s coverage. Low single digit same store sales (SSS) growth during the 2010 holiday season is expected to be followed by modest growth in SSS and an increase in new store expansion in 2011.
Credit implications for the retail sector are stable through next year, however, cost pressures including higher commodity prices, shipping rates and wage pressures in China will likely limit improved bottom lines – Karen Ghaffari, Managing Director at Fitch.
‘Companies have been able to maintain significant cash balances, and improved liquidity has allowed stores to resume or increase share repurchases and boost capital expenditures without straining credit strength. Nonetheless, renewed interest by activist investors and private equity buyers could lead to increased event risk.’
For the 2010 holiday season, Fitch forecasts a significant amount of holiday buying to be concentrated around promotional activity, which has already started and should peak close to the Christmas holiday. Fitch notes that inventory levels have been well planned, which should reduce the need for excessive clearance activity. The luxury market is expected to show reasonable gains.
For details see: 2011 Outlook: U.S. Retailers to See Continued Slow Growth, which includes detailed analysis and expectations for each sector under Fitch’s retail coverage including discounters, luxury & department stores, specialty retailers, supermarkets and drug stores.
Standard & Poor’s Ratings Services says the new, stricter regulatory capital requirements for banks announced in September by the Bank for International Settlements’ are likely to increase the cost of securitization.
The BIS announcement marked the adoption of several revisions to the regulatory capital framework–collectively known as Basel III–that the Basel
Committee on Banking Supervision (BCBS) had previously proposed to address some of the main issues that arose during the credit crisis.
Basel III includes some specific changes to banks’ treatment of securitization exposures when calculating their capital requirements, including:
- The application of a 1250% risk weight to some lower-rated and unrated securitization exposures;
- The introduction of more conservative collateral haircuts (discounts) for securitization collateral with respect to counterparty exposure; and
- The introduction of specific risk haircuts for securitization exposures when calculating the capital requirement related to market risk.
“We believe the adoption of the Basel III capital requirement platform is likely to raise the cost of securitization and could influence the strategies of banks that originate or invest in structured finance transactions,” said Standard & Poor’s credit analyst Jaiho Cho. “With the more-conservative capital reserve requirements for certain securitization exposures, banks may look for ways to reduce their existing exposures and will likely also try to reduce the potential capital charges arising from new transactions.”
For details, see Tougher Capital Requirements Under Basel III Could Raise The Costs Of Securitization
Increasing numbers of U.S. RMBS are being exposed to ‘tail risk’, a growing concern that stands to adversely affect existing U.S. RMBS and needs to be addressed in new transactions that come to market, according to Fitch Ratings.
With call-options not being exercised as frequently as in the past, existing RMBS are increasingly being left with outstanding small pools. While not a new phenomenon, ‘tail risk’ leads to more volatile collateral performance and higher credit risk. ‘Most existing RMBS transactions are not structured to protect against the potential for increased performance volatility as the pool size declines,’ said Managing Director Grant Bailey.
In a reflection of its more stringent credit enhancement on mortgage loans containing small pools, Fitch placed 1,810 U.S. RMBS classes on Rating Watch Negative.
In response, Fitch is raising credit enhancement rating thresholds and incorporating rating ceilings on outstanding RMBS that are collateralized with a small number of remaining mortgages and lack any structural mitigant to protect against tail-risk. Structural features which mitigate tail-risk may include a subordination floor, which is determined as a percentage of the original pool balance that provides for a minimum amount of credit support for rated classes throughout the life of the deal. Other possible structural mitigants may include a feature that converts class principal distribution from pro-rata to sequential once the pool balance declines below a pre-determined threshold.
For details see: Considering Small Loan Count Tail Risk in US RMBS and Fitch Places 1,810 U.S. RMBS Classes on Rating Watch Negative on Small Pool Concerns
Standard & Poor’s says infrastructure and other project financing is holding up well despite weak economic conditions.
The current trend in project finance demonstrates demand for this type of transaction to support infrastructure and renewable energy projects, among others. The ratings on some sectors were pressured because of offtaker or monoline issues, and while we have downgraded a few projects to noninvestment grade from the investment-grade category, the majority of U.S. projects are still in the investment grade. Overall, this asset type, because of its long-term contractual nature remains strong and resistant to some economic pressures.
Currently, 61% of U.S. projects are investment grade, up about 14% for the same period last year. Seventy percent of rated U.S. projects have a stable outlook, 12 have a positive outlook, and 54 have a negative outlook.
While we expect some ratings to remain under pressure until an economic recovery takes hold, we expect most ratings to to show some resiliency through the recession.
For the full report, see Industry Report Card: Global Project Finance Presses On Steadfastly Despite Economic Conditions.
The Federal Reserve’s “quantitative easing” may not be of much help to US banks, says Standard & Poor’s in this complimentary download from the Alacra Store of S&P’s report Will The Fed’s New Round Of Bond Buying Help Or Hinder U.S. Banks?
The true test of the Fed’s recently announced second round of buying U.S. government securities success for U.S. banks will be its ability to deliver sustainable economic growth, which would in turn prompt asset growth.
By contrast, liquidity injections without asset growth do not offer much relief to U.S. banks. For a sector whose net debt is less than zero), continued low interest rates do not offer a major benefit. On the contrary, keeping interest rates close to zero for a longer period of time perpetuates pressure on rate-sensitive revenues. In the absence of private-sector demand, continued higher allocations toward low-yielding assets such as Treasury and agency securities squash yield on earning assets.
Deficiency of asset growth is what hinders the outlook for U.S. banks, not shortage of liquidity, and the high level of reserves the Fed is holding and
overall cash on bank balance sheets attest to this – Standard & Poor’s credit analyst Devi Aurora.
Keeping interest rates near zero has created significant revenue growth headwinds for U.S banks. The most obvious impact is on net interest income growth, as narrowing spreads have resulted in net interest margin compression. If the private sector fails to respond to the Fed’s stimulative policies, the yield curve would maintain its flattening trend, with negative implications for net interest margins. The Fed’s policy could also hurt other rate-sensitive revenues, such as foreign exchange trading revenues, if it results in lower volatility.
Beyond loan spreads and lower yielding securities portfolios, the value of free funds — deposits and equity — declines with low interest rates. Both core deposits and equity have been growing for U.S. banks, but the overall value of this to banks diminishes more with low interest rates than with high interest rates. As such, revenue growth headwinds should remain unfavorable as long as interest rates stay low.
Will The Fed’s New Round Of Bond Buying Help Or Hinder U.S. Banks? 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 $500.00.
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