Monday, February 22, 2010

Sacred Cows And Toxic Narcissists

I read at Dean Baker's "Beat The Press" today:
Actually, he has a pretty good case. With Goldman Sachs and the rest of the financial sector siphoning off an ever larger share of the country's output, we may not be able to afford much of anything in the future. If the financial sector's share grows at the same rate it has been growing over the last three decades, the rest of us will have to learn to get by on less.

This reminds me how Barry Ritholtz summed-up the Dean Baker's conclusions on "Big Bank Subsidy":
-The spread between big banks’ (1.15%) and smaller banks’ (1.93%) cost of funds is 0.78%:
-The annual boost to profits of 18 biggest banks from that funds -cost advantage: $33 billion;
-Pre-2008 spread in big and small banks’ funds -cost: 0.49%:
-Part of big banks’ profits from rate “subsidy” (1H09): 48%:

and then also this by Barry:
Here is something to think about: Even after the TARP has been fully paid back, the US Government is STILL bailing out TBTF banks more than we are giving bailouts to US families with hungry kids, and more than all of our overseas aid . . .
Of course, all those bank profits still have the "Mark to Make Believe" stigma ... and now when there is a doubt growing about the Eurozone recovery, the banks, especially in the Europe, may get into a difficult situation again. Bank analysts at Citigroup Global Markets estimated last Friday:

Funding Concerns — The volatility in bond markets has once again elevated the issue of funding for the banks. Sovereign and interest rate risks could add additional pressure to earnings. Recent 4Q results have already revealed NII pressures due to rising funding costs.

10% Earnings Hit — We estimate 10% cumulative impact to normalised earnings from four factors: higher credit risk spreads, higher interest rates, maturity extension, and net stable funding ratio requirements. This impact equates to c. 21 bps cumulative repricing of loan books. A sizeable chunk of the impact could be passed on to customers if changes in underlying rates & spreads are not abrupt.

€240 Billion Annual Issuance — We estimate that twenty-four European banks accounting for 65% of system assets may need to issue c. €240bn annually for the next three years. This issuance should be enough to fund the banks’ existing business and new business, as well as satisfy the new Basel stable funding requirements. At 76% of historical issuance for 2007-09, needs are not onerous.

Risk Appetite Flourished...and Wilted? — These twenty-four banks were able to issue €56bn of long/medium-term funding in January 2010. This is double the rate of January 2008 and 50% higher than in January 2009. However investors’ macro
concerns are restricting their appetite for new issuance in February and this could eventually drive up funding costs meaningfully. Fears of crowding out by sovereign and corporate issuers, however, look overblown.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

Equity strategists at Danske Bank have an even less rosy look at European banks today:

The harsh future conditions for the Financials sector and specifically the banking industry are not discounted by the stock market.

This is a key problem for the stock market in 2010/11 as regulation, policy exit strategies and debt crisis make investments in banking stocks risky.

The high valuation of the industry makes it especially risky. Today investors pay a premium on European Banking stocks of 10% vs. a historical discount of 20%, and the market is discounting long-term EPS growth of 5% vs. historical 4%.

As Financials is still one of the two most market trendsetting sectors in the European stock market universe, the market, in our view, will remain vulnerable to the erosion of earnings conditions for the banking industry.

However, European banks are outperforming the market as I write ...

No comments:

Post a Comment