Many analysts are advising clients to buy battered banking stocks.
But none of them are doing it in quite the style of Arturo de Frias, head of banks research at Evolution Securities, who is taking a very big picture, top-down approach:
Morning, following my email from Tuesday (main idea being “buy banks if you think the euro stays, sell banks if you think the euro goes”), a few lines to explain why I think that the euro cannot, and should not, go.
The reason is simple: if the euro goes, the whole European banking system – including the banking systems of the core nations – would be nearly bust.
If the euro is abandoned, and we go back to the peseta, lira, escudo, drachma, etc, devaluations would follow immediately. And devaluations mean write-offs of loans and investments – of a size that would render the whole European banking system completely insolvent.
Jeepers.
According to Basel, last June, German banks had €250bn claims vis a vis Spain and Italy. If Spain and Italy devalue by 30% on their way back to the peseta/lira, the German banks lose €74bn. If you add Greece, Portugal, and Ireland, total losses would be €120bn. That is almost half of the total equity capital of German lenders.
The French banks have €430bn claims vis a vis Spain and Italy. A 30% devaluation would imply €129bn losses. Add Greece, Ireland and Portugal and the total losses would be €160bn. This is more than the capital of BNP, SocGen and CASA combined.
The UK banks have €132bn exposure vs Spain and Italy. That means €40bn losses. Add the smaller countries and we get to €80bn losses. That is nearly half of the equity of BARC, RBS, and LLOY.
Combined, the French, German and UK banks could lose €360bn if the euro goes.
Faced with that apocalyptic outcome, de Frias reckons the only way forward for the EU is fiscal union:
It has become now 100% evident that monetary union without fiscal union does not make any sense. My gut feeling is, the decision has been taken already.
Presumably he means the decision has been taken by Germany, which will now try to bend the rest of Europe to its will and create Großdeutschland.
And naturally that’s created an excellent buying opportunity for … BANKS.
The latest episode of acute Sovereign fears is creating a great buying opportunity in the banks sector. I am not saying that this is the bottom: acute Sovereign fears can become extreme Sovereign fears before we reach the bottom… And the implementation of fiscal union will be a very bumpy road, with plenty of demonstrations and general strikes on the way.
Buy, buy, buy! Or should that be, kaufen, kaufen, kaufen?
Related link:
European banking binary bet – FT Alphaville
Willkommen in Hotel Kalifornia – FT Alphaville
Germany’s Bank-Asset-Berg - FT Alphaville