The probability that Moody’s would place a negative outlook on the US rating in the next two years has risen as a result of both long-term trends and recent developments, Moody’s says in a new report
“This would be contingent on no significant deficit-reduction measures being adopted during that time. Even though the economic outlook is now looking more favorable than earlier thought—partly as a result of the recent tax package—economic growth alone will not be enough to fundamentally alter the negative trend in debt ratios. While long-term trends have always carried a risk of significant worsening in US debt metrics relative to other Aaa sovereigns, the time frame as to when this trend might affect the rating outlook has shortened.”
The new report offers no new conclusions about the outlook or the rating, but rather provides additional detail about these influences and context as to how Moody’s analysis of the US sovereign has evolved in the wake of the global financial crisis.
Moody’s concludes that over the next three years, our expectations include:
- Constructive efforts to reduce the current budget deficit as evidence of firmer growth becomes apparent;
- Constructive efforts to control the long-term growth of entitlement spending or to expand its funding;
- Average nominal real GDP growth in the 4-5% range;
- Long-term Treasury bond yields rising toward, but averaging less than, 5%.
The report includes comparisons of the US to other Aaa-rated countries on measures like government debt to revenue, interest payments to revenue, and government debt to GDP.
For details, see : Evolution of Moody’s Perspective on the US Aaa Rating
Fitch Ratings says it expects the trends seen in the global auto industry in 2010 to generally continue in 2011 and has a Stable Outlook for the sector.
“Overall global auto demand this year will be up over last year’s level, but sales growth rates in 2011 will be uneven across regions, with growth in the US and Asia offsetting flat to declining sales in Europe,” says Jeong Min Pak, Senior Director in Fitch’s Asia Pacific Corporates team.
The increase in global demand, combined with improved cost structures, will result in increased free cash flow and stable to improved credit profiles for most of the world’s auto manufacturers.
In the US, ongoing improvement in industry conditions will give the Detroit Three the opportunity to continue strengthening their weakened balance sheets.
At the same time, Asian and European manufacturers, who emerged from the global recession in relatively better shape than their US peers, will also have opportunities for some credit profile improvement, albeit of a lesser magnitude.
However, Fitch believes that many industry risks remain. Global overcapacity will continue to restrain industry pricing power, while heavy employee unionisation will put pressure on costs. Increasingly stringent regulations tied to fuel economy, emissions and safety will also increase costs and force manufacturers to quickly implement changes to vehicle designs and engineering, often incorporating new technologies.
For details, see 2011 Outlook: Global Automotive Industry
The Moody’s/REAL All Property Type Aggregate Index recorded a 0.6% increase in November, the third consecutive month of national price gains.
The National – All Property Type Aggregate Index has increased 6.4% during the past three months. These three months of rising prices contrast with the prior three months in which prices measured significant declines.
Prices are up 2.8% from a year ago, down 31.6% from two years ago and are 41.6% below the peak, which occurred in October 2007.
For details, see: Moody’s/REAL Commercial Property Price Indices, January 2011
Fitch Ratings says the credit outlook for most banks in Northern Europe is Stable. However, they could be hurt by contagion effects from difficulties faced by peripheral euro zone countries, Fitch says in this complimentary download from the Alacra Store.
Striking a new balance: The Outlooks on Issuer Default Ratings (IDRs) for most banks in northern Europe (NE) are Stable. In general, the fundamental financial positions of banks in this region are either stable or improving. However, this improvement is balanced by growing political and social momentum to ensure that taxpayers’ money is no longer called upon to support banks, which is negative for bank ratings.
Slowly improving macroeconomy: GDP growth was above expectations in NE (France, Germany, the UK, Benelux, the Nordics, Austria and Switzerland) in 2010, particularly in Germany and Sweden. Fitch Ratings expects slower but still positive growth in 2011. NE countries are likely to continue to be providers rather than receivers of financial support in the face of the concerns facing the euro area in 2011. However, they are unavoidably exposed to any pitfalls the region encounters.
Asset‐quality strengthening: Substantial impairment charges since 2008 were driven by exposure to central and eastern Europe (CEE), structured products and commercial real estate (CRE). Problem assets largely remain on the banks’ balance sheets, but most impairment costs have been taken. Further charges in 2011 will be smaller. With little evidence of deterioration in domestic asset quality, Fitch expects impairment charges at NE banks to continue their downward trend in 2011.
Gradual improvement in operating profit but revenue generation still a key concern: Lower impairment charges should be reflected in improved operating profit. However, pre‐impairment profit will suffer from deleveraging, low interest rates, lack of corporate activity and higher funding costs, all contributing to weakened revenue. There is a limit to how far cost containment can go.
Funding and liquidity improving: Most banks in NE have been able to improve maturity profiles and enhance liquidity buffers. Although this has come at a cost, increased use of covered bonds, for which there are some deep domestic markets in NE, is helping banks contain funding costs.
Protracted capital increases likely: Many NE banks are planning to improve capitalisation, at least in part by deleveraging, but with weak demand for most “legacy” assets, Fitch expects this process to stretch out way beyond 2011.
Dividend payments will remain low or on hold at many banks, and repayment of state‐injected capital may take longer than governments initially anticipated. Fitch expects further equity issuance from stronger banks as opportunities emerge.
Progress on resolution: Notable progress to enact bank resolution legislation is being made. Around a quarter of banks in NE are at their Support Rating Floors, with most Outlooks Stable to reflect Fitch’s view that governments will continue to support banks’ senior creditors in full at least until Europe returns to financial stability.
What Could Change the Outlook
Any change in Fitch’s outlook for NE banks is likely to be negative rather than positive. The two main potential drivers for this would be progress in implementing bank resolution schemes to the detriment of senior bank creditors, and/or economic developments proving more negative than Fitch is projecting. The latter could result from further contagion effects on NE countries from difficulties faced by peripheral euro zone countries. It would also emerge from a wider global economic slowdown, causing a “double dip”.
2011 Outlook: Northern European Banks has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $165.
Also available 2011 Outlook: Southern European Banks
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Zacks has upgraded Applied Materials (AMAT) to Buy from Neutral, as it expects the company to outperfom its peers this year. Zacks full analysis is available in this complimentary download from the Alacra Store.
We see continued momentum in Applied Materials business. Revenue growth has really picked up in fiscal 2010 with nearly 55% of the business growing at a triple-digit percentage rate over 2009 and the rest of the business growing at strong double-digit rates.
In fact the only pocket of weakness is a section of the EES segment, which has shrunk considerably due to tough operating conditions, especially in Europe. We are also encouraged by the order trend over the last four quarters that have resulted in book-to-bill ratios of well over unity. Operating margin trends are also generally positive across all segments and point to effective management execution and decision-making.
Historically, AMAT shares have traded in a very broad range, at a premium of 10.8% to 29.6% to the peer group. Therefore, the 0.8% premium based on our 2011 expectations is well below the historical range. This indicates upside from current levels.
Additionally, our earnings growth expectations for AMAT are slightly more than the peer group, indicating that the positive sentiment is likely to be sustained. We therefore upgrade the shares to Outperform. Our target price of $18 (14.4X P/E) supports this view.
[Related research via Alacra Pulse: Stifel Nicolaus analyst Patrick Ho this week reiterated a Buy recommendation and increased his price target to $17 from $15; Barclays Capital last month upgraded AMAT from Equal Weight to Overweight and raised their price target to $17 from $12. Morgan Stanley maintained its overweight rating in early December and said it believes that the share price will rise relative to the industry over the next 60 days.
Zacks’ 12-page 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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(Disclosure: long AMAT)
Capital remains a relative weakness for the ratings of the majority of the world’s largest banks, according to Standard & Poor’s Ratings Services’ latest global comparison of bank capital strength (see Despite Significant Progress, Capital Is Still A Rating Weakness For Large Global Banks).
The aim of the report is to provide a snapshot of the comparable capital position of the world’s largest banks, based on $&P’s methodology. It compares the capital adequacy levels of 75 of the world’s largest banks, as measured by Standard & Poor’s risk-adjusted capital (RAC) ratio, with the banks’ regulatory Tier 1 ratios, as of mid-2010.
A minority of banks achieved a RAC ratio of 8% both before and after the impact of diversification/concentration adjustment. An RAC ratio of 8% indicates that a bank should have sufficient capital to withstand an ‘A’ or substantial stress scenario in developed markets.
In a related report, Standard & Poor’s also compares the RAC ratios for 56 U.S.-based financial institutions from December 2008 to September 2010 (see U.S. Banks’ Risk-Adjusted Capital Has Improved, But Remains Neutral To Negative For Ratings).
Of the 75 global banks examined, banks in Australia, Singapore, Hong Kong, and the Nordic countries had the highest average RAC ratio, while banks in Japan and Austria had the lowest.
In the U.S., the regional banks are, in our view generally better capitalized than the larger complex institutions, before diversification adjustments. However, with the exception of a limited number of still-struggling or aggressively leveraged regional banks, we consider capital adequacy to be a neutral ratings factor for U.S. regional banks.
RAC ratios are significantly lower on average than Basel I and Basel II Tier 1 ratios, according to the reports. The ratios also highlight that significant disparities in capital strength persist among the world’s largest banks. The rankings for some banks have changed substantially since November 2009, highlighting differences in the speed and aggressiveness of de-risking and recapitalization policies. Several of the banks with the lowest RAC ratios have managed to catch up, at least partially, with the average ratio of the banks.
S&P expects some convergence over time between Basel III ratios and RAC ratios which anticipate several aspects of Basel III.
At the bottom of S&P’s global rankings is Commerzbank, with an RAC of only 3.6 despite a Basel Tier 1 ratio of 10.8. Bank of China tops the rankings with an RAC of 13.4. Some other big banks near the top with an RAC of 9.0 or higher include ING, Standard Chartered Bank, HSBC, Bank of Montreal and Toronto Dominion Bank.
US banks with the lowest RAC of 6.0 or below: Wilmington Trust, Marshall and Ilsley, Capital One, M&T Bank, First BanCorp and First National of Nebraska.
Fitch Ratings says that pharmaceutical companies will face significant operating challenges during 2011, as the expiration of significant drug patents is set to erase record levels of revenues and earnings, coupled with pressure from government cost containment in the US and Europe. The agency’s outlook for the sector in 2011 is negative.
Fitch expects that despite an improvement in the industry’s R&D productivity since 2007, the additional sales from newly launched products will not completely fill the sales gap emerging from the accelerating patent cliff.
To mitigate the effect of the looming patent expiries while also positioning themselves in high growth potential areas and to ensure some stability in sales and profit, Fitch anticipates that pharmaceutical management’s focus in 2011 will continue to be toward risk-diversifying strategies including investments in technology and in-incensing, and expansion into emerging markets and healthcare businesses beyond ethical pharmaceuticals.
Fitch expects that companies will continue with restructuring measures and capture integration synergies, which served to drive strong EBITDAR margins for the industry in 2010.
Share-holder friendly activities have moderated over the past few years as share repurchases dwindled given the focus on capital preservation in light of difficult macroeconomic conditions. In 2011, Fitch anticipates an uptick of share buybacks as well as dividend payments for many pharmaceuticals companies. Fitch believes that the rated pharmaceutical companies will sustain M&A activities during the year directed to filling R&D pipelines and portfolio gaps, but does not anticipate major consolidating activities like those seen in 2009.
Despite the operating headwinds in 2011, the global pharmaceutical industry is expected to remain one of Fitch’s highest rated industries due to its superior cash flow generation, large cash balances, strong liquidity and solid growth prospects – driven by high unmet medical needs, favourable demographics, technology advances and the existence of chronic diseases.
For details see: 2011 Outlook: Global Pharmaceuticals
Standard & Poor’s believes this week’s announcement of the merger of Duke Energy Corp. and Progress Energy Inc. marks the beginning of the acceleration of the long-awaited consolidation of the U.S. electric utility industry, according to this free download from the Alacra Store.
Despite all of the mergers to date (the number of U.S. shareholder-owned electric utilities dropped 41% between 1995 and 2009, according to the Edison Electric Institute), the industry is still relatively fragmented. If the Duke/Progress merger is a watershed event, as we believe it is, other large utility holding companies will be seeking out other substantial partners to create ever-larger companies in an effort to keep pace.
From our perspective, that kind of future would mean an improving credit quality picture that could eventually return the average industry rating back to the ‘A’ category where it was before the deregulation trend began a generation ago.
The following factors drive the current wave of mergers among the electric utilities:
- Credit quality, rather than equity concerns, is the impetus;
- Regulatory approval process has become less onerous and time consuming;
- Modest acquisition premiums; and
- Lower cost-saving assumptions in deals.
U.S. Electric Utility Consolidation Will Accelerate Following The Duke-Progress Merger; Industry Credit Quality Could Improve 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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Moody’s remains confident in the Aaa ratings of France, Germany , the UK and the US in its just-published “Aaa Sovereign Monitor, at least in the short term. But the agency warns that” the outlook for near-term stabilization of US government debt ratios is not promising,” and economic growth cannot be relied on as a solution to longer term problems..
Moody’s emphasizes that all four countries face dramatic increases under their existing policy commitments arising from ageing-related pension and healthcare subsidies. These future costs must be brought under control if these countries are to maintain long-term stability in their debt burden credit metrics.
With respect to shorter-term considerations, the US has taken a different approach than the other three in its response to the economic and fiscal problems that have emerged in the aftermath of the Great Recession. In particular, the US has recently rolled out a program of additional stimulus while, in contrast, the UK’s coalition government has introduced a strong program of deficit reduction in order to address the steep increases in government debt as a result of the financial crisis. These two countries have seen the steepest increases in government debt as a result of the financial crisis.
Germany and France have also recorded significant debt increases, but have on balance moved toward deficit reduction, France less aggressively so than Germany.
Despite these differing strategies, Moody’s continues to believe that all of these countries still possess debt metrics — including the debt affordability (i.e. the ratio of interest payments to government revenue) — that are compatible with their Aaa ratings.
Apart from focusing on the “Big Four” Aaas, Moody’s “Aaa Sovereign Monitor” also contains updates on the three Aaa-rated sovereigns in the Asia-Pacific region: Australia, New Zealand and Singapore. Fiscal metrics for Australia and Singapore are among the strongest of Aaa-rated sovereigns. Moody’s expects Australia to continue to post one of the lowest debt levels of any Aaa-rated sovereign. Although Singapore’s debt is higher, the country is a net creditor and is forecast to record the fastest growth rate in Asia for 2010. New Zealand’s debt position compares favourably with the group, but its near-term trajectory shows a further rise in its debt ratios before a reversal is achieved.
For details see Moody’s Aaa Sovereign Monitor
As the backlog of foreclosures continues to drive down housing prices, losses on private-label residential mortgage backed securities (RMBS) will increase in 2011, says Moody’s Investors Service in its 2011 outlook report. However, the rate at which loans in securitizations become delinquent should decline during the year. Moody’s also expects RMBS issuance to remain limited in 2011 as the market awaits proposed changes to the GSEs and implementation of new legislative and regulatory rules for securitizations.
Moody’s expects the flaws in foreclosure practices that have come to light over the last several months to delay the foreclosures by three to six months. As servicers take corrective actions, costs associated with the relevant loans will increase. As the new year progresses we should get a better sense of which servicers will bear remedial foreclosure costs and to what extent and which of them will pass them on to the RMBS trusts and ultimately to investors as additional losses.
Loan modifications that include principal forgiveness will lower delinquency rates.
The expected increase in losses, but decrease in the rate at which loans become delinquent, in 2011 follows a year during which the performance of the loans backing RMBS largely stabilized, says Moody’s. As a percentage of original balance, cumulative losses from December 2009 to November 2010 for the 2005-2008 vintage deals grew to 14.9% from 11.8% for subprime pools, to 9.5% from 5.7% for Option ARM pools, to 7.9% from 5.2% for Alt-A pools, and to 1.4% from 0.6% for Jumbo pools.
Securitization costs are likely to be higher than the cost of other funding sources because of new requirements for governance mechanisms and asset verification.
Furthermore, regulatory changes may also have a hand in limiting RMBS issuance. For instance, the regulatory requirement that originators retain a 5% vertical slice of the securitization may result in originators avoiding securitization.
An additional factor weighing down on private label RMBS issuance for 2011 is the government’s extension of the higher GSE loan limit. The increased loan limit, $729,750, has already been partially responsible for shrinking the non-conforming jumbo market.
“The high cost of securitization and compliance with the increasing layers of regulation, along with the extension of the GSE loan limits, will continue to make accessing the private label RMBS market an uneconomical funding option for most mortgage lenders.” says Todd Swanson, a Moody’s Assistant Vice President-Analyst . “The transactions that do come to market will likely have a very strong credit profile as a result of high quality assets, an increased alignment of interest between issuers and investors, increased disclosure of collateral and structural information, and structural mechanisms to monitor and enforce breaches of representations and warranties.”
Investor demand, regulatory requirements and rating agency criteria are requiring these credit strengthening features, says Moody’s.
For the full report see Private-label RMBS: 2011 Outlook and 2010 Review.