The US banking sector remains riskier than its peer group on most measurements, according to Standard & Poor’s.
Excerpts from Banking Industry Country Risk Assessment (BICRA): U.S.
We have reviewed the banking sector of the United States of America (AA+/Negative/A-1+) following the recent affirmation of the U.S. sovereign rating. We rank the U.S. in BICRA group ‘3′, along with countries such as South Korea, Denmark, Chile, New Zealand, and the U.K.
Our criteria define the BICRA framework as one “designed to evaluate and compare global banking systems.” A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. The analysis covers the entire financial system of a country while considering the relationship of the banking industry to the financial system as a whole. A BICRA is scored on a scale from 1 to 10, ranging from what Standard & Poor’s views as the lowest-risk banking systems (group ‘1′) to the highest-risk (group ‘10′).
The BICRA comprises two main areas of analysis–economic risk and industry risk–on which the U.S. scores ‘3′ and ‘4′, respectively.
Our economic risk score of ‘3′ reflects our opinion that the U.S. has “very low risk” in “economic resilience” and “intermediate risk” in terms of “economic imbalances” and “credit risk in the economy,” as our criteria describe those terms.
Our industry risk score of ‘4′ for the U.S. is based on our opinion that the country faces “intermediate risk” in its “institutional framework,” “high risk” in its “competitive dynamics,” and “very low risk” in “systemwide funding.”
Moody’s Analytics says there was “more drama as markets view of creditworthiness among most European banks dropped in June,” especially in Italy.
The June monthly widening for CDS spreads on Italian banks was by far the largest on a percentage basis among banks we cover globally.
Credit Default Swap spreads of three banks (Unione di Banche Italiane, Banco Popolare Societa Cooperativa, and Banca Popolare di Milano) widened by nearly 50% to the 265-350 bp range. Italian banks accounted for six of the top 50 bank deteriorations globally on a CDS-spread percentage basis, and three of the top ten.
For more see Market Signals Bank Risk Report (Premium)
Moody’s today placed ratings of 14 of UK financial institutions on review for possible downgrade, reflecting the prospect of reduced systemic support from the UK government.
Current levels of systemic support account for two to five notches of uplift for the large UK banks and one to five notches of uplift for the small to medium-sized financial institutions. Moody’s expects to retain a high level of systemic support uplift in the senior debt ratings of the major UK banks, as the rating agency believes that the regulators do not currently have all the tools necessary to resolve such institutions without causing financial instability.
Moody’s expects to retain a lower level of systemic support uplift in the ratings of the small to medium-sized institutions; this level of support is expected to vary based on the resolvability of each firm and will be determined in the course of the review.
The long-term and, in some cases, short-term debt/and or deposit ratings of the following institutions were placed on review for possible downgrade:
Bank of Ireland (UK) plc (Baa3/P-3); Co-Operative Bank plc (A2/P-1); Coventry Building Society (A3); Lloyds TSB Bank plc (Aa3); Nationwide Building Society (Aa3/P-1); Newcastle Building Society (Baa2/P-2); Norwich & Peterborough Building Society (Baa2/ P-2); Nottingham Building Society (A3); Principality Building Society (Baa2/P-2); Royal Bank of Scotland plc (Aa3); Santander UK plc (Aa3); Skipton Building Society (Baa1/P-2); West Bromwich Building Society (Baa3/P-3); Yorkshire Building Society (Baa1/P-2).
The outlook on the Aa3 senior debt and deposit ratings of Barclays Bank plc has been changed to negative from stable and the Aa2 senior debt and deposit ratings of HSBC Holdings and HSBC Bank plc have been affirmed with a negative outlook.
The A1 long-term senior unsecured debt and bank deposit ratings of Clydesdale Bank remain on review for possible downgrade.
A complimentary summary of Moody’s rationale for the actions is available at the Alacra Store, along with a full list of firms’ senior debt and deposit ratings (included affected subsidiaries) and current standalone ratings in UK Banks Systemic Support Rating Reviews ($150.00).
Moody’s says it expects US banks to continue loosening their loan standards, a negative for their credit quality.
Last week, the Federal Reserve Board released its first-quarter 2011 “Senior Loan Officer Opinion Survey on Banking Lending Practices.” The survey, which polled 55 banks, revealed that banks loosened credit standards across their commercial and consumer loan portfolios.
Given the outlook for moderate economic growth for this year, we expect banks to continue to compete aggressively by loosening their loan standards, which is credit negative for banks, as looser lending can lead to increased loan losses.
Commercial lending. Commercial and industrial (C&I) loan underwriting standards for large and midsize firms loosened for the sixth consecutive quarter, according to the survey, while commercial real estate (CRE) underwriting standards loosened for the first time since 2005. Overall, banks continued to ease lending standards in the first quarter because of increased competition and a less uncertain economic outlook. On balance, survey respondents continued to report stronger demand for both C&I and CRE loans.
Click image to enlarge.
In addition to providing an attractive alternative to CRE, banks have moved toward C&I lending because it is more profitable than other loan assets (owing mainly to the low cost deposits that are derived from these relationships and the ability to cross-sell other products). Furthermore, as economic conditions improve, the need for business investment will make this segment even more attractive. Leading up to the recent crisis, banks tightened underwriting standards as demand declined. We expect underwriting standards to loosen as demand improves.
For details see US Bank Survey Shows More Loosening of Lending Practices, a Credit Negative (Premium)
Fresh headwinds are gaining force in Europe’s real estate markets, according to Standard & Poor’s.
Fiscal retrenchment in many countries–especially in the U.K., Spain, and France–will likely prompt potential buyers to camp on the sidelines. And the specter of interest rate hikes in the coming 18 months, which is what we forecast, will mark the end of central banks’ largely accommodative monetary policies.
We expect housing markets to retreat in the U.K. and France, and remain in the doldrums in Spain and Ireland. In contrast, steady market conditions continue to prevail in Germany -Jean-Michel Six, Standard & Poor’s chief economist for Europe
The potential shift toward higher short-term interest rates will have various negative effects on European housing markets, including:
- Upping reimbursements for current holders of mortgages with variable interest rates, mainly in Spain and Italy; and
- Reducing the supply of new housing loans because financial institutions will have to refinance at higher costs.
Overall we anticipate that the U.K. housing market will drift sideways in the coming 18 months, with prices shedding about 5% this year and roughly flat in 2012.
We see signals that the French residential real estate market is slowing, after bouncing back spectacularly in 2010 following two years of contraction.
We anticipate a prolonged slump in Spain’s housing markets. Prices may not post massive drops in the coming 12 to 18 months as sales pick up slowly. But we think more time will elapse before supply and demand balance out again.
Irish house prices have, in our opinion, completed their correction but it will take time–probably another couple of years–before we see tangible signs of market activity resuming.
The full report Europe’s Housing Markets To Be Held In Check Between Fiscal Austerity And Tightening Monetary Policy is available at the Alacra Store.
The precipitous drop in mortgage-origination volume will lead to heightened competitive pressures that will materially lower mortgage banking revenue, which is credit negative for banks, says Moody’s on its latest Weekly Credit Outlook.
However, the pain will hit banks unequally; for example, in Moody’s scenario this would reduce pre-provision income by 2% at JPMorgan but by 9% at Fifth Third. Furthermore, the decline in mortgage banking revenue at large banks with sizable servicing platforms will be partially offset by increased mortgage servicing rights (MSR) valuations.
The table below demonstrates the impact to pre-provision income that a 45% decline in mortgage banking origination income (i.e., the income on loans held for sale recognized at the point of sale) would have on selected banks with sizable mortgage origination platforms.
The projected decrease to overall pre-provision income is minimal for large banks whose earnings are diversified, whereas other firms with heavy mortgage banking concentrations, such as Flagstar Bank, will be materially affected.
Click image to enlarge.
Fore details see Declining Mortgage Origination Volume Is Credit Negative for US Banks
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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For latest analyst comment on Target, see AlacraPulse.
(Disclosure: long AMAT)
Breaking Football News reports that Wall Street stockbroker and Chinese billionaire Kenneth Huang is set to launch a £237 million bid to takeover Liverpool Football Club and Athletic Grounds Plc by offering to buy the club’s debt from the Royal Bank of Scotland.
German magazine Wirtshaftswoche reported over the weekend that France’s Total, Russia’s Rosneft and Avia we the possible buyers of BP’s Aral pretol station chain. Opec member Kuwait is rumored to be buying some of BP’s Middle East and Asian assets.
Power equipment maker Crompton Greaves has offered $400 million for the transformer division of US-based Emerson Electric.
French financial holding firm Eurazeo (EURA.PA) said on Saturday it is in exclusive talks to sell its B&B Hotels chain to U.S. private equity firm the Carlyle Group [CYL.UL].
Property group Stockland Corporation Ltd (ASX: SGP) announced on Monday that it would pursue its takeover negotiations with Aevum Ltd (ASX: AVE) despite the latter’s rejection of a $266 million cash bid for the blanket acquisition of the retirement group’s shares at 38 percent premium of the stock’s closing price on Friday.
Analysts with smaller firms made a good showing on Alacra Pulse’s ranking of most-quoted analysts in the first half of the year. But, demonstrating their bench strength, it was the big sell-side firms that dominated the list of most-quoted sell-side research firms.
Despite having only the sixth most-quoted analyst, UBS topped the rankings by a comfortable margin over Citigroup, JP Morgan and Sanford C. Bernstein, which were closely grouped. Of these three, only Bernstein’s Craig Moffett featured on the most-quoted individual analyst list. Likewise, fifth place Credit Suisse had no top-ten individual analyst, though Gene Munster’s top ranking helped Piper Jaffray reach number six on the research firm list.
Rounding out the top ten were Deutsche Bank, RBC Capital Markets (with Mike Abramsky also featuring on the analyst list), Morgan Stanley and Barclays Capital.
Despite being the only firm with two analysts on the most-quoted list(Maynard Um and Yair Reiner) , Oppenheimer & Co just missed the top ten, coming in at number 11, with half as many mentions as first-place UBS.
Of course, different firms have different attitudes towards publicizing their research, which helps explain why Goldman Sachs did not make the top ten.
The rest of the top 20: Stifel Nicolaus, Goldman Sachs, Jefferies & Co, Kaufman Bros, Panmure Gordon, Raymond James, BMO Capital Markets, Robert W. Baird and Macquarie.
One notable big firm did not make the top twenty: Bank of America Merrill Lynch came in at number 23. Oft-quoted banking analyst Dick Bove placed fourth on the individual list, but his Rochdale Securities only ranked number 38. Still, showing the power of personality, that was still higher than some bigger and better-know firms such as ING Financial Markets (41) and HSBC (59).
The oil & gas industry was one of the leading feeders of the deal rumor mill during the first half of the year, based on an Alacra Deal Pulse analysis of traditional and alternative news sources. There were 32 deal rumors during the period. How much of that was due to BP (BP)?
The fallout from the Gulf oil spill did spur a surge in rumors involving BP (BP). Prior to the disaster, there was only one deal rumor concerning BP since the start of the year, and that was an acquisition by the then-expansionary company. Since the spill there have been at least 9 deal rumors ranging from sales of assets in places such as Alaska and Colombia, to a full or partial takeover of the company by the likes of BHP Billiton (BHP) or Royal Dutch Shell (RDSA). Other rumors involved the government of Pakistan and BP’s Russian partner TNK.
One rumor that turned to fact was BP’s sale of $7 billion of oil fields in Canada, Texas and Egypt to Apache Corporation (APA). Interestingly, the only BP-related deal rumor in the first quarter was the company’s acquisition of $7 billion of deepwater assets from Devon Energy (DVN) in March.
Given BP’s need to pay multi-billion oil spill costs and its avowed commitment to get smaller, look for more BP deal rumors -and actual deals- in the second half of the year.
Below is Alacra Pulse’s breakdown of deal rumors during the first half of the year, by region and by sector. Click image to enlarge.
Likewise the aftershocks of the financial meltdown have resulted in continuing rumors and deals in the banking sector. Big global banks such as Citigroup (C) and Royal Bank of Scotland Group (RBS) have been busy divesting assets, often at the demand of regulators, while other big banks like Banco Santander (SAN) are looking to get bigger by picking up some of those assets. Much of the activity has involved smaller regional banks changing hands. This process is far from over so more deals are guaranteed.
Coupled with the likelihood of big US banks looking to spin off some trading activities as a result of the financial reform act, and we’re likely to see some significant changes in the rankings of the world biggest banks in the next year or so.