Wowzers – Execution’s new banking analyst is certainly making an exciting debut.
Having moved to the brokerage from Citadel last month, Joseph Dickerson is sinking his teeth into UK banks with a giant `buy’ on Lloyds and a `sell’ on RBS, in a 64-page punch of a Woody Allen-quoting research note on the British banking sector (The fact that Execution’s London offices are located at the Truman Brewery, amidst the hipsters of East London, no doubt helps in the creative process).
Not only does Dickerson, along with fellow analysts Fiona Swaffield and Anke Reingen, lambaste the government’s Asset Protection Scheme for making “little sense” and being a “sub-optimal way to recapitalise the sector” — he thinks banks like RBS and Lloyds should do their utmost to avoid participating in it.
On Lloyds in particular he would prefer the bank to do a rights issue:
Our view is that the company should opt out of the APS completely and embark on a rights issue of £16bn. We arrive at this figure by benchmarking Lloyd’s 2011 capital requirements to a 10% core Tier 1 ratio (since this is the level against which we believe banks will increasingly be benchmarked) and cross-checking that the parameters of our stress test are met (i.e. 8% core Tier 1 under stressed scenario on the current loan portfolio). The fundamental capital need is £15bn and we gross this up by £1bn for our estimate of the termination fee to be paid to HMT for the implicit promise of Government support since January. . .
And despite reports to the contrary, Dickerson thinks the bank would be able to pass the FSA’s stress test with £14.9bn of equity capital.
What’s more, he says, Lloyds could further boost its Tier 1 capital by exchanging some of its hybrid securities:
Lloyds has £6.8bn of hybrid Tier 1 securities which could be exchanged (subject to approval) for core Tier 1 capital (see Fig), either reducing the size of a prospective rights issue or further enhancing post rights capital. We prefer the latter option. A hybrid exchange would benefit current the core Tier 1 ratio by 140 basis points.
And so, Dickerson concludes:
Using our rights issue figures, and assuming a hybrid exchange, Lloyds would emerge with a fortress balance sheet and a leverage multiple in-line with the major US banks .
In charts and tables, the revamped-Lloyds would look like this (click to enlarge):
Mr Dickerson — you’ve certainly got our attention.
Related links:
RBS: Once bitten, twice shy? – FT Alphaville