JP Morgan expects European banks to incur around €28.4bn of pretax writedowns in the second half of this year, according to a just-released bit of research.
Some highlights (or lowlights, depending on your position):
[This figure] would bring total writedowns to an estimated €116.1bn, implying 24% of total writedowns remain.
The main European banks requiring additional writedowns on a pretax basis are Lloyds (incl. HBOS) €5.7bn, Deutsche Bank €4.5bn, Barclays €3.7bn, UBS €2.7bn and Société Générale €2.6bn, in our estimates.
The banks that would be at risk of not making a 2008E JPM core tier I of 6% would be Lloyds TSB, RBS, Barclays and Credit Agricole and hence we see NAV at risk (assuming no dividends).
On toxic assets:
We see the greatest risk of further markdowns in the following asset classes: i) US CMBS and commercial real estate, where we have assumed a c.75/$ from c.85/$ market price partially due to the overhang of Lehman’s $24bn of US commercial mortgage exposures; and ii) leverage finance which we mark to c.88/$, however with some US banks’ peers pricing their leverage finance exposure down at up to c.80/$ we see risk of further price decline.
The MOAB:
We view the US Treasury’s $700bn TARP proposal as a net positive, should it get passed, providing liquidity to meet the oversupply of structured credit, and providing a floor value for assets. However, the structure proposed so far, in our view does not solve the fundamental banking crisis as we see potentially limited take-up due to i) question-marks on mark to market vs. mark to model; and ii) the recouping of any losses taken by the government after 5 years from the banks benefiting from the program, according to the proposal.
Alternatively plan B could be a Japanese style quantitative easing by the Fed in our view.
Stock picks:
We would avoid banks with risk to NAV based on our detailed analysis of: i) mark to market losses (RBS, Barclays, Credit Agricole and Lloyds TSB JPM core Tier I 2008E looking stretched post markdowns); ii) traditional asset quality (SEB, Danske Bank, BCP, Nordea, Bank of Ireland and RBS most exposed); and iii) funding (Lloyds TSB, Dexia and Bank of Ireland).
We Overweight banks which perform well on our risk test, while trading at attractive valuations in our new valuation framework focused on unlevered valuations. Hence our OW portfolio – CSG, SG, Natixis, BBVA, UCI, NBG, Erste Bank, Banco Popolare, and UW portfolio – Barclays, RBS, CASA, Popular, SEB, HRX, BoI, Lloyds TSB.