Chill. Analysts at JPMorgan really do think that the worst is over for European investment banks. In fact, we can probably cap credit-related markdowns at just €61bn, split €26.9bn/€34.1bn across 2007/08.
Indeed, according to a note by Kian Abouhossein sent to clients on Wednesday, the main continental European banks requiring further writedowns on a pretax basis are UBS SF5.1bn, Deutsche Bank €3.6bn, Credit Suisse SF2.1bn, Société Générale €1.9bn and Natixis €1.4bn.
But what’s this?
Based on markdowns, we do not believe that further capital raising is needed at this point, but capital is tight and potential margin for error appears small as we witnessed in the case of Fortis. In addition, we see capital raising opportunities “closed” until Sept unless banks are willing to issue highly dilutive discounted capital over the summer.
And this?
Although we expect to have seen the worst of the markdowns, we still see significant challenges for the sector with little government and financial industry proactive leadership leading to the structured credit crisis spilling over into i) traditional credit in 2009E, ii) IB flow revenue to slow in 2H08 as volatility falls with consensus EPS still 15% too high in 2009E, iii) pro-cyclical regulatory pressure (regulator should be anticyclical), leading to potentially higher capital requirements and potentially increased regulatory supervision (especially for US pure IBs), and iv) potential ‘curve balls’ relating to counterparty risk concerns such as monoline sector and US pure IBs . In addition, European IBs still show unwillingness to cut staff leading to negative operational leverage in 2Q08. We estimate staff levels in-line with 2005-06 leading to -13% staff cuts this year with IB revenue run-rate in 2009E at 2004 level (adjusted for acquisitions).
So…balance sheets overstretched, equity capital market shut, “curve balls” in the air…
Who needs a bear when we’ve got bulls like Mr Abouhossein.
