Standard & Poor’s Ratings Services’ base-case outlook for global auto sales in 2012 is for sharper differences between regions than in 2011. The mixed outlook for passenger vehicle sales reflects an economic outlook that varies by region and so the outlook for credit quality also varies. The mixture of regional exposures is a key aspect of credit quality in 2012.
Our forecast for 2012 US sales of 14.2 million units means sales may climb comfortably above estimated replacements of 13 million for the first time since 2008.
And the first three months of 2012 have seen annualized rates of sales in excess of our 2012 forecast. Still, we remain cautious about potential weakness in the economic recovery because of challenges in Europe, the impact of slower growth in China, and the potential for U.S. fiscal showdowns late in 2012.
In Europe our base-case outlook assumes that light-vehicle sales will decline more significantly in 2012 than in 2011 (the fourth consecutive year of European decline). In Japan, new vehicle sales during the first three months of 2012 jumped by 47.5% compared with the same period in 2011; we expect improved supply conditions and the government’s new eco-car subsidy program to boost new vehicles sales. In the important markets of China and Brazil our base case is for slower, but still positive growth.
More from S&P Credit Research
Industry Report Card: Mixed Regional Sales Outlooks Equals Mixed Prospects Among Global Automakers
Technorati Tags: automakers
Strong refi-driven mortgage banking results and a rebound in capital markets business drove surprisingly solid revenue growth for the large U.S. banks, according to Fitch Ratings.
Though revenues were generally higher for most banks, spread income was flat or down given the prolonged low interest rate environment. The uneven economic recovery produced modest organic loan growth in 1Q12. Banks reported more normalized levels of C&I loan growth (down from the robust activity reported last quarter), which was offset by lower consumer balances and continued CRE runoff.
Based on new regulatory guidance related to second liens, several institutions reported an increase in home equity nonperforming balances. Excluding this increase, nonaccruing loans were lower on a sequential basis. Fitch does not view this as a material shift in the performance of these loans or the reserving methodology.
Fitch would probably revisit its loss estimates on second lien loans if there is a sufficient increase in principal modification activity.
Exposure to home equity loans remains of Fitch’s top concerns for U.S. banks, particularly for the largest institutions where most of these loans are concentrated. While Fitch believes there is a possibility that losses in these portfolios could be material, current ratings reflect Fitch’s assumption that losses will remain above historical levels for several years.
For details, see the full Fitch report U.S. Banking Quarterly Comment: 1Q12
Technorati Tags: U.S. banks
The large US aerospace and defense companies have fallen further behind in their funding of burgeoning pension liabilities, says Moody’s Investors Service in a new report.
In 2011 the funding gap for the eight largest contractors rose by about $15 billion to $51 billion, and the average level of funding dropped five percentage points from the end of 2010, to 77%.
The defense contractors are able to bill the US government for pension costs, which helps to mitigate the risk such liabilities pose for credit quality, says Moody’s. But the billing must be done on future contracts, and US fiscal pressures could lead to payment delays or more stringent rules being imposed on plan sponsors.
The $51 billion figure for combined pension benefit liabilities (net of plan assets) is for the plans sponsored by Boeing, Lockheed Martin, Northrop Grumman, United Technologies, Honeywell, Raytheon, General Dynamics and Textron — eight of the largest Aerospace & Defense companies with some of the biggest defined benefit pension programs.
Moody’s expects the rising pension liabilities only to pressure ratings of the defense companies at their margins.
“While key credit metrics, especially leverage, look decidedly worse for some companies, we do not expect rating changes solely as a result of the growing pension burden,” says Russell Solomon, a Moody’s Senior Vice President. “Still, companies with outsized funding gaps could face growing downward rating pressure to the extent that liquidity is strained as funding requirements inevitably grow.”
For details see the Moody’s Special Comment Top Defense Contractors See Pension Deficits Widen
Technorati Tags: Aerospace, Boeing, defense contractors, General Dynamics, Honeywell, Lockheed Martin, Northrop-Grumman, pension funding, pensions, Raytheon, United Technologies
Buy-side analysts tend to recommend stocks that are less volatile and more liquid than those recommended by sell-side analysts, according to a new working paper from Harvard Business School.
While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds).
The study finds that buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts’ clients) prefer that buy-side analysts cover less volatile and more liquid stocks.
The study also finds that the buy-side firm analysts’ stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest.
For stocks covered by both buy- and sell-side analysts, there were no differences in the buy recommendations’ performance.
The failure to find that buy-side research out-performs that of sell-side analysts raises questions about whether investment firms should continue to rely on their own research rather than using research from sell-side analysts.
Resolving whether buy-side research creates value is highly relevant to managers at buy-side firms who are faced with the challenge of allocating limited research resources.
For details see THE STOCK SELECTION AND PERFORMANCE OF BUY-SIDE ANALYSTS
Technorati Tags: analyst-conflicts, analysts, trading-strategy
The Asia-Pacific banking industry faces a turning point in 2012 following three years of stable performance, according to Standard & Poor’s.
We believe that the high loan growth and moderate credit costs the sector has enjoyed could become a thing of the past. Instead, Europe’s debt crisis, lower regional economic growth, and contraction in some property markets could impair loan quality and push credit costs higher.
“In our view, slower economic growth is likely to impede credit growth and fee-based activities for banks, and this, in turn, could weaken profitability,” said Standard & Poor’s credit analyst Naoko Nemoto. “Instability in the global financial markets could also hurt Asia-Pacific banks that rely on wholesale funding, and higher funding costs would squeeze
net interest margins.”
Yet despite these potential hurdles, we expect adequate capitalization, strong systemwide liquidity, and low levels of nonperforming loans (NPLs) to help Asia-Pacific banks navigate a difficult 2012. Currently, a majority of our bank ratings fall into the single ‘A’ category or higher, and 80% of our outlooks on Asia-Pacific bank group ratings are stable, which reflects our view that most rated banks will be able to withstand the pressure.
Under our base-case scenario, we assume that the global economy will slow but
avoid a severe recession. If the Asia-Pacific economy faces a sharp and prolonged downturn due to a global recession, causing a surge in credit costs and capital deterioration, we could consider negative rating actions. A hard landing in China, with weaker economic growth than our base-case scenario of 7.7%-8.0% GDP growth, would have significant knock-on effects on growth in the Asia-Pacific region. However, this downside scenario is unlikely in our current view.
For details, see: Asia-Pacific Banking Outlook: Higher Credit Costs And Lower Earnings Will Test Banks In 2012
Standard&Poor’s also has published industry reports on the banking sectors of 14 countriesin the Asia-Pacific region. They can be found at the Alacra Store by selecting Standard&Poor’s from the Publisher tab and entering “banking outlook” in the search box.
Technorati Tags: Asia-Pacific-region, Australia, banking, china, Hong Kong, India, Indonesia, japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand, Vietnam
Firms with lower disclosure on their anticorruption efforts may make more sales in corrupt countries than their high-disclosure peers, but they are likely to make less money from them, according to a new working paper from Harvard Business School.
The study examines 480 of the world’s largest companies, using ratings by Transparency International of firms’ public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Key concepts include:
- While firm-level research on corruption is still at the formative stage, findings suggest that disclosure is more than cheap talk.
- Firms with high disclosure on their anticorruption efforts are committed to fighting corruption. The policies and enforcement actions reflected in their disclosures help to protect their public reputation and profitability, but at the cost of slower sales growth in high corruption risk markets.
- Firms with abnormally low disclosure have roughly 15 percent higher sales growth in corrupt country markets than their high disclosure peers. But this higher growth is accompanied by lower profit margins and return on equity.
- Firms with abnormally high anticorruption ratings have a lower frequency of subsequent allegations of corruption in the media, suggesting that disclosures reflect their commitment to fighting corruption.
- Future research could examine (among other issues) what factors, other than monitoring/enforcement costs and risk exposures, explain the differences in firms’ level of disclosure and commitment to fight corruption.
Fore details, see Causes and Consequences of Firm Disclosures of Anticorruption Efforts
Technorati Tags: corporate-governance, corruption, disclosure
Companies that manage for the short term present their investors with more risk, according to a new working paper from Harvard Business School.
Short-Termism, Investor Clientele, and Firm Risk, by Francois Brochet, Maria Loumioti, and George Serafeim finds that for one thing, short-term firms have share prices that are more volatile than companies managing to a longer time horizon.
Firms focused on near-term results are characterized by “high absolute discretionary accruals, high likelihood of just beating analyst forecasts, reporting very small positive earnings, and just avoiding violating loan covenants.
“From Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors. We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not mitigated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Overall, our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation.”
Technorati Tags: corporate-governance, Earnings-Surprise, investment-strategy, management
Fitch Ratings says that over the next few years it expects M&A to remain high on the agenda of global pharmaceuticals companies as they seek to counteract sales and profit declines due to upcoming patent expirations.
“Fitch believes that the rated pharmaceuticals companies most exposed to operating challenges over the next three years and benefitting from deep pockets - Pfizer Inc, Eli Lilly Co., Merck & Co, Bristol-Myers Squibb Company and AstraZeneca PLC - may be tempted to increase M&A expenditure beyond their normal budgets for bolt-on acquisitions,” says Britta Holt, a Director in Fitch’s Corporates group in London. .
Almost all of the large, rated pharmaceuticals companies favour small and medium-sized targeted acquisitions, with a focus on specific pipeline projects, specific technology, or portfolio or geography gaps rather than mega-mergers.
Fitch calculates that of the 82 $1bn-plus acquisitions in the pharmaceuticals industry over the past 10 years, almost 50% (40) have been announced since 2009 – with the patent cliff imminent. The value of these acquisitions was half ($358bn) of the total value of acquisitions over the past 10 years ($710bn). Since the emergence of the patent cliff Pfizer, Merck, Novartis AG, Roche Holding Ltd, Sanofi SA and Johnson & Johnson Inc., chose to pursue large acquisitions (above $15bn), while other pharmaceuticals, such as BMS and Amgen pursued smaller, more targeted acquisitions, despite operating challenges ahead, and accepted that they faced a period of declining sales.
In terms of the ability to cope with (partly) debt-financed acquisitions, the track record of Fitch-rated pharmaceuticals companies suggests that the companies are able to absorb even large acquisitions without prompting downgrades of more than two notches.
Despite the M&A potential, Fitch expects global pharmaceuticals to remain one of its highest-rated industries. The reasons include superior cash flow generation, large cash balances and strong liquidity – driven by high unsatisfied medical needs, favourable demographics, technological advances and the persistence of chronic diseases.
In the event that companies decide to significantly change their financial policies, Fitch believes that the ‘A’ rating category, ensuring access to the tier-one commercial paper market, will generally be the lowest category that the agency assigns to large pharmaceuticals companies.
For details, see the full Fitch report M&A Pressure to Persist for Global Pharmaceuticals Companies.
Technorati Tags: Amgen, AstraZeneca plc, big pharma, Bristol-Myers Squibb Company, Johnson&Johnson, Merck, Novartis AG, Pfizer Inc., Pharmaceuticals, Roche, Sanofi-Aventis S.A.
Fitch Ratings warns that persistently low returns on pension assets are a far greater threat to European companies than changes to International Accounting Standards.
Low returns increase the cash companies are forced to put into the schemes to keep them funded, with a direct effect on credit quality. The IAS changes will themselves cause many companies to report higher deficits and weaken their income statements – but not change the underlying economics of the pension schemes.
December 2007-December 2011 data from the UK’s Pension Protection Fund shows an average annual increase of pension plan assets of around 3.6% – much of which will have been accounted for by company contributions above payments rather than asset returns. This compares with an assumed return of 6.4% in 2007 for BT Group, which runs the country’s largest private-sector defined-benefit pension scheme, for example.
The difference between the two growth rates over the period represents £113bn additional funding the UK corporate sector will have to find (using December 2011 actual assets of £1,019bn).
In addition, amendments to IAS 19 “Employee Benefits” will have an adverse effect on some companies’ results. The removal of the corridor approach – an option under the current standard that allows companies to smooth movements in their reported deficits – will increase reported deficits in the vast majority of cases where this option is used.
The other major change, which will apply to all companies with pensions, is that the rate at which expected returns on assets can be booked will be required to equal the ‘AA’ bond yields used to discount liabilities. In most cases this will be lower than current assumed returns. This will result in lower financial income recognised in the income statement.
The effect could be material. For example, BT Group had a blended expected return on assets in the year to March 2011 of 6.35%. This compares with the rate used to discount liabilities of 5.5%. Reducing BT’s asset returns for a year by 0.85% gives a fall in profit of GBP303m – 15% of pre-tax profit.
For details see Fitch: Returns not Accounting Real Threat from European Pensions
Technorati Tags: accounting, BT Group, pensions
Noting the stronger than expected earnings performance of US industrial companies, S&P’s Global Markets Intelligence group sees potential upside in companies such as Southwest Airlines.
We think there are a number of intriguing trading possibilities among industrials CDS. For example, Southwest Airlines Co.’s CDS tightened 37% to 118 bps over the past month, though it is 4 bps wider than a year ago.
As the fourth-quarter earnings season winds down, the percentage of industrials companies beating the S&P Capital IQ consensus estimate was the largest (67.44%) of any of the 10 sectors through Feb. 6. Highlights included results from Caterpillar Inc., which reported $2.25 per share against the estimate of $1.77, and Textron Inc., whose $0.49 per share topped the forecast of $0.35.
A majority of companies within the sector expressed optimism about 2012, with Caterpillar saying, “The 2011 increase in sales and revenues was the largest percentage increase in any year since 1947, and much of it was driven by demand for Caterpillar products and services outside of the United States…We’re expecting 2012 to be another year of good growth.” On a forward 12-month basis, the consensus expects the industrials sector to report the most significant earnings growth of all 10 sectors, at 11.1%.
The GMI research team wanted to see if five-year credit default swap (CDS) spreads for U.S. industrials reflected this bullish outlook. We found that the average spread for corporates in this sector tightened by 11% over the past month, according to CMA DataVision. However, it wasn’t enough to lift the average spread out of speculative-grade territory.
But the average spread for the industrials group does not tell the whole story. Transportation spreads tightened by 30% over the past month and are averaging 70 bps. Capital goods spreads narrowed 31% to 196 bps, and commercial and professional services spreads tightened only 1% to 569 bps.
Excerpted from Credit Market Commentary: Market Derived Signal: CDS Spreads Reflect Earnings Momentum In The Industrials Sector
Technorati Tags: Caterpillar, CDS, Earnings, industrials, Southwest Airlines, Textron
