There’s clearly a race to the pearl-handled revolver amongst bank sector analysts.
Witness Merrill Lynch’s Stuart Graham in his 2009 outlook:
History tells us that recessions which are preceded by banking crises on average last twice as long as normal recessions and are almost four times as harsh. We are cutting our 2009E and 2010E forecasts by 15% and 25% respectively which takes us 28% below consensus. Provisions are a key swing factor — we forecast 115bps for 2009E and 123bps for 2010E. We expect profits to fall again for the sector in 2010.
Marvellous – 2009 is going to be worse than 2008 and 2010 is going to be worse than 2009.
Mr Graham believes that the current consensus view of recovery in the second half of next year is misplaced. Yes, action by the authorities could provide a surprise on the upside, but in this analyst’s view a credit bubble has to be followed by a credit contraction. Period.
And that contraction clearly has some way to go. Merrill Lynch reckons large banks have so far shed €800bn of the €5.5 trillion necessary.
So far the declines in Europe are zero. Although not our base case, we see the risk of negative loan growth in the UK, Spain and Ireland possibly for the next four years.
Just to reinforce the sense of gloom, Mr Graham has a “hypothetical downside scenario” where European banks could require a further €123bn of capital, meaning that anyone trying to spot value by looking at current book values is probably wasting their time.
Here come the bad debts. Lead indicators point to a severe deterioration in asset quality. We see commercial real estate, shipping and CEE as particular hot spots. We forecast provisions of 115bps in 2009, rising to 123bps in 2010, with our stress test based off 159bps (a re-run of 1992′s 152bps).
Funding pressures remain a concern for CEOs. Maturity profiles have shortened and it is not clear to us how banks can be weaned off government guarantees and central bank repo lines. All banks are targeting retail funding but this is becoming more expensive in a very low interest rate environment.
Political risks are very high. The sector faces unprecedented political and regulatory scrutiny. Pressure on deposit spreads would normally lead to wider asset margins but can the banks put through such price increases? The threat of nationalisation hangs over some institutions.
So what is a sector specialist like Mr Graham to do? He’s taking himself off on holiday, of course – to the Danakil Depression in Ethiopia.
This is one of the lowest points on earth and widely regarded as one of the hottest and most inhospitable. After the trials of 2008, this seems strangely appropriate as a destination for a banks analyst.