60220810 socgen stress test
TRANSCRIPT
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Macro Commodities Forex Rates Equity Credit Derivatives
Societe Generale (SG) does and seeks to do business with companies covered in its research reports. As a result, investors should beaware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only asingle factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.
18 July 2011
Cross Asset StrategySpecial report
www.sgresearch.com
Less bank stress, sovereignprogress?Credit Research - BanksHank Calenti, CFA(44) 20 7676 [email protected]
Equity Research- BanksPhilip Richards(44) 20 7762 [email protected]
James Invine(44) 20 7762 [email protected]
EconomicsMichala Marcussen(44) 20 7676 [email protected]
James Nixon(44) 20 7676 [email protected]
Rates StrategyVincent Chaigneau(44) 20 7676 7707
Cross Asset StrategyAhmed Behdenna(44) 20 7676 [email protected]
Contents
Summary 3
The Facts 4
Economic standpoint 8
Fixed Income standpoint 11Bank Equity standpoint 13
Bank Credit standpoint 17
Few surprises allow us to say that market reaction should largely be insensitive to thosestress tests from a top down perspective. 8 banks are forced to recapitalise quickly, 16banks by April 2012. However, the test does not reflect current reality, in our view; even ifGIIPS sovereign are further stressed within this test, a 22bn shortfall and a relativelyhealthy average 6.2% core Tier 1 appear. The European banking sector is captive topolitics at the moment. A political error can trigger a freeze in money markets, and aliquidity crisis could quickly turn into a solvency crisis. Only improved governance wouldavoid such a nasty scenario.
The EBA was in a lose-lose situation: too few failures and the test is branded too lenient;
too many failures and some will worry that the system is in worse shape than expected.
Recapitalisation What has been done: Under the adverse scenario, a 2.5bn shortfall is
recognised after 90 banks from 21 countries had been stress tested. The pure sight of the test
forced banks into a beauty contest: some massive 50bn was raised so far this year in core
Tier 1 to reach that amount.
Recapitalisation what will be done: Banks with less than 5% core Tier 1 will be forced
to recapitalise by end 2011. Those between 5% and 6% are highly recommended to do so by
April 2012 (see page 7 for company details). The c. 3,500 datapoints (149 during the 2010
stress tests), should enable analysts to draw their own conclusions on a bank-by-bank basis.
The stress is stressed enough on a macro level: Total losses per year amount to
c. 200bn, equivalent to the loss rates of 2009 repeated in two consecutive years.
GIIPS sovereigns stressed by SG analysts on 40 larger banks : Further stressing GIP
sovereign debt with a 50% haircut, and Spain/Italy with 20%, on top of the test conducted,and we see a 22bn shortfall and a still relatively healthy 6.2% core Tier 1 (see page 7 for
company details).
Politics and governance now take the lead: Peripheral countries need help, and some
form of restructuring should occur. Policy makers should allow for the governance to be at par
with what should be qualified as a solid banking system, if contagion is avoided.
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Table Of Contents
3 Summary
4 EBA bank stress tests The Facts
6 Headline results
7 Results for the 90 banks which balance sheets have been stressed
8 Economics: Banking on Sovereign Transparency
11 The Fixed Income Angle
13 The Equity Angle
13 Part 1 EBA Stress Tests
14 GIP Sovereign exposures Absolute amounts
14 GIP Sovereign exposures As % common equity (%)
15 Part 2 What if GIIPS sovereign debt had been stressed?
15 Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures, 20% on Italy/Spain
15 Overall results Core tier 1 ratios under four scenarios (%)
17 The Credit Angle Two-way Causality in the stress tests
18 Adverse Scenario Core Tier 1 Capital vs. 5-year Subordinated CDS on 15 July 2011for select EU banks
19 Stressed Sovereign Core Tier 1 Ratios vs. 5-year Subordinated CDS on 15 July 2011for select EU banks
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SummaryScepticism around: the EBA was on a lose-lose situationThe EBA was effectively in a lose-lose situation: too few failures and the test is branded too
lenient; too many failures and some will worry that the system is in worse shape than they had
expected.
Economics: banking on sovereign transparencyThe stress tests confirmed two already well know results. First, the bulk of exposure to the
weakest sovereigns is held by the domestic banks (in both absolute and relative terms).
Taking the example of Greece, of the total exposures to the Greek sovereign reported for the
90 banks taking part in the stress tests almost 60% is held by Greek banks. Second, exposure
of non-domestic banks to, respectively, Greek, Irish, Portuguese and Spanish sovereign risk isrelatively moderate.
The Fixed Income AngleThe stress tests have brought more details on individual exposure to sovereign risk. What
investors still do not know is the extent to which banks, and other investors, will be asked to
contribute to fixing the sovereign crisis.
The Equity Angle Part 1: EBA stress testEquity market reaction to the stress tests is likely to be relatively muted in our view, with few
big surprises despite the huge volume of new disclosure. Market sentiment is likely to remain
focussed on the fall-out of the Greek crisis and how that spreads further afield.
The Equity Angle Part 2: 'Only' 22bn shortfall if GIIPSsovereign debt is also stressedThe tests will inevitably be criticised for such a small number of failing banks (eight) with an
aggregate capital shortfall of just 2.5bn, and the fact that sovereign default is not considered.
By including the possibility of sovereign default across multiple jurisdictions (haircut of 50%
for GIP sovereigns, 20% for Italy/Spain), our analysis suggests 13 banks of a sub-set of 40 of
the larger, quoted banks could fail, with an aggregate capital shortfall of 22bn. The average
core Tier 1 capital would remain at a still relatively healthy 6.2%.
The Credit AngleLike the equity market, credit market reaction to the stress tests is also likely to be relatively
muted in our view, with few easily decipherable surprises discovered within a large volume of
disclosures. We do not envision a flood of new bank debt issuance in the short term for two
reasons. It may be more advantageous to de-lever than raise funds in the international capital
markets. This would clearly have attending feedback into the bank-to-sovereigns and
economy causality.
For more details on the credit angle, please refer to:EU Banks, Stressed but not tested
https://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667eb -
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EBA bank stress tests The FactsIntroductionAfter market-close on Friday 15
thJuly, the European Banking Authority published the long-
awaited results of its 2011 stress tests. The tests covered 90 EU banks, representing 65% of
banking sector assets in the EU.
To recap, the tests have a 5% Core Tier 1 (EBA definition, similar to Basel 2.5) pass mark for
two different macro-based scenarios, a baseline and an adverse scenario.
The baseline scenario is based on the Autumn 2010 EC forecast of a gradual recovery in EU
growth and the adverse scenario a more severe scenario designed by the ECB.
An impossible taskThe outcome of the stress tests were never going to do enough to convince sceptics that
European banks have enough capital to withstand a severe downturn, particularly if combined
with one or more sovereign defaults.
That said, we suspect that the market will be surprised by the fact that only nine banks failed
the test. The EBA was effectively in a lose-lose situation: too few failures and the test is
branded too lenient; too many failures and some will worry that the system is in worse shape
than they had expected.
Whose stress test is it anyway?
Although the market is unlikely to give the stress tests credit for it, we suspect that the rash of
capital raisings announced earlier this year were triggered, at least in part, by the looming
stress test.
Without the mitigation measures this year, including capital raising of some 50bn, the EBA
stated that 20 banks would have failed the test. We suspect that seeing those banks fail the
test and then raise capital/restructure would have been taken positively: a real sign that
regulators were getting tough and taking tough decisions. As it is, those capital raisings are
now a distant memory, leaving this stress test to be perceived (perhaps unfairly) as a damp
squib.
But whereas the sector rallied into last years stress tests, share prices have this time been
heading down, whether we look in absolute terms, relative to the European market or relative
to global banks.
So while these tests are not, in our opinion, a powerful trigger for a rally, the sectors valuation
and investor sentiment are both low enough that even a mild positive may help share prices.
We suspect that the market willbe surprised by the fact that onlynine banks failed the test. TheEBA was effectively in a lose-losesituation: too few failures and thetest is branded too lenient; toomany failures and some will worrythat the system is in worse shapethan they had expected.
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European banks performance 120 daysbefore/after stress test (absolute) European banks performance 120 daysbefore/after stress test (rel to euro mkt) European banks performance 120 daysbefore/after stress test (rel global banks)
70
100
130
-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120
2010 2011
70
100
130
-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120
2010 2011
70
100
130
-120 -96 -72 -48 -24 0 +24 +48 +72 +96 +120
2010 2011
Source: Datastream, SG Cross Asset Research
We have the raw materials to make a more comprehensive testThe main criticism of the tests centres on the fact that it does not incorporate the possibility of
a sovereign bond default, despite the fact that this is looking increasingly likely. In the analysis
below, we compute our own, tougher, tests on 40 of the 90 banks covered by the EBA
typically the larger, quoted European banks.
In addition to the stress applied by the EBA to the banks private sector loan books, we
write down Greek, Irish and Portuguese sovereign exposures by 50% andthose of Italy
and Spain by 20%.
On that basis, we see 13 of the 40 banks failing the test, with a total deficit of 22bn,
equivalent to 41% of the end-2010 tangible equity of those 13 banks, but just 2% of the end-
2010 tangible equity for all 90 banks in the test.
We suspect that if the EBA stress test had been formulated in that way, with those results,
then the market opinion may well have been more positive.
Does it really matter?Ultimately, of course, even with the stress test results suggesting that the European banks are
in a relatively healthy position and able to withstand likely shocks, no regulatory authority can
everprove that is the case.
A stress test examines what happens to an asset when macro conditions deteriorate butrelies on the bank/regulator estimating how losses will develop as those macro variables
change.
But while macro conditions have been worse than expected, we believe that the worst-
affected banks through the crisis would never have anticipated the losses incurred, even if
they had had perfect foresight on the economic outlook.
Stressing Greek debt by 50%,
and Italian and Spanish debt by
20%... would trigger 13 of thelargest 40 quoted banks failedthe test with 22bn capitalshortfall.
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Headline resultsOn the EBAs adverse scenario 82 banks pass and just 8 banks fail versus the 5% Core Tier 1
pass-mark:
- Five Spanish banks (listed Banco Pastor and four Cajas)
- Two Greek banks (EFG Eurobank and ATEBank),
- Austrian Volksbank
- German Landesbank Helaba (which pulled out of the tests earlier in the week amid
protests against the EBA methodology).
The total capital shortfall of the 8 banks is a mere 2.5bn. This result is almost identical to the
2010 stress test results, when 7 banks failed the tests with a total capital shortfall of 3.5bn
(Hypo Real Estate, ATEbank and five Spanish Cajas). There were a further 16 near -fail
banks with a capital ratio between 5% and 6% in the 2011 tests, which included Banco
Sabadell, Banco Popolare, Banco Popular and Bankinter.
Core Tier 1 ratios on EBA Adverse scenario, versus 5% pass mark
-5%
0%
5%
10%
15%
20%
25%
BANCAMARCH
IRISHLIFE&PERMANENT
OTPBANK
Sydbank
BANQUECAISSED'EPARGNE
DANSKE
Jyske
PKOBANKPOLSKI
OP-Pohjola
RABOBANK
SEB
LandesbankBerlin
DEXIA
BANKOFVALLETTA
CAJASANSEBASTIAN
KBCAIB
HypoRealEstate
Nordea
Swedbank
MONTEDEPIEDAD
Nykredit
DekaBankDeutsche
ABNAMRO
BBVA
DnBNOR
INTESASANPAOLO
GRUPOBBK
WGZBANK
CAJAVITORIAYALAVA
INGSHB
CREDITAGRICOLE
HSBC
SANTANDER
Erste
NOVAKREDITNA
BNPPARIBAS
Raiffeisen
Lloyds
NBGUBI
ALPHABANK
BARCLAYS
CAJAINVERSIONES
LandesbankBaden-Wrt
BayerischeLandesbank
BANKOFIRELAND
SNSBANK
DZBANK
EFFIBANK
BPCE
CAJAZARAGOZA
UNICREDIT
BancoBPI
DEUTSCHE
CAJADEBARCELONA
COMMERZBANK
RBS
MPS
CAIXAGERALDEPSITOS
COLONYA
BANKOFCYPRUS
GRUPOBMN
WestLB
SABADELL
BANCOPOPOLARE
GRUPOBANCACIVICA
CAJAONTINYENT
NorddeutscheLandesbank
HSHNordbank
TTHELLENIC
BCP
BFA-BANKIA
CAIXAGALICIA
BPE
NOVALJUBLJANSKA
MARFIN
PIRAEUS
BANKINTER
BES
EFGEUROBANK
CAIXADECATALUNYA
Volksbank
CAIXAUNIODECAIXES
GRUPOCAJA3
BANCOPASTOR
CAJADELMEDITERRANEO
ATEbank
Near-fail Fail
Source: European Banking Authority, SG Cross Asset Research
The total capital shortfall of the 9banks is a mere 2.5bn. Thisresult is almostidentical to the010 stress test results, when 7banks failed the tests with a totalcapital shortfall of 3.5bn
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Core Tier 1 resultsName 2010 EBA
definition2012 EBAadverse*
Name 2010 EBAdefinition
2012 EBAadverse
BANCA MARCH 22.2% 23.5% LB Baden-Wurttemberg 8.2% 7.1%
IRISH LIFE & PERMANENT 10.6% 20.4% Bayerische LB. 9.3% 7.1%
OTP BANK 12.3% 13.6% BANK OF IRELAND 8.4% 7.1%
Sydbank 12.4% 13.6% SNS BANK 8.4% 7.0%
BANQUE CAISSE D'EPARGNE 12.0% 13.3% DZ BANK 8.2% 6.9%
DANSKE 10.0% 13.0% EFFIBANK 8.3% 6.8%
Jyske 12.1% 12.8% BPCE 7.8% 6.8%
PKO BANK POLSKI 11.8% 12.2% CAJA ZARAGOZA 9.7% 6.7%
OP-Pohjola 12.2% 11.6% UNICREDIT 7.8% 6.7%
RABOBANK 12.6% 10.8% Banco BPI 8.2% 6.7%
SEB 11.1% 10.5% DEUTSCHE 8.8% 6.5%Landesbank Berlin 14.6% 10.4% CAJA DE BARCELONA 6.8% 6.4%
DEXIA 12.1% 10.4% COMMERZBANK 10.0% 6.4%
BANK OF VALLETTA 10.5% 10.4% RBS 9.7% 6.3%
CAJA SAN SEBASTIAN 13.2% 10.1% MPS 5.8% 6.3%
KBC 10.5% 10.0% CAIXA GERAL DEPSITOS 8.5% 6.2%
AIB 3.7% 10.0% COLONYA 11.2% 6.2%
Hypo Real Estate 28.4% 10.0% BANK OF CYPRUS 8.1% 6.2%
Nordea 8.9% 9.5% GRUPO BMN 8.3% 6.1%
Swedbank 8.7% 9.4% WestLB 8.7% 6.1%
MONTE DE PIEDAD 12.5% 9.4% SABADELL 6.2% 5.7%Nykredit 8.8% 9.4% BANCO POPOLARE 5.8% 5.7%DekaBank Deutsche 13.0% 9.2% GRUPO BANCA CIVICA 8.0% 5.6%
ABN AMRO 9.9% 9.2%CAJA ONTINYENT 8.9% 5.6%BBVA 8.0% 9.2% Norddeutsche Landesbank 4.6% 5.6%DnB NOR 8.3% 9.0% HSH Nordbank 10.7% 5.5%INTESA SANPAOLO 7.9% 8.9% TT HELLENIC 18.5% 5.5%GRUPO BBK 10.2% 8.8% BCP 5.9% 5.4%WGZ BANK 10.8% 8.7% BFA-BANKIA 6.9% 5.4%CAJA VITORIA Y ALAVA 12.5% 8.7% CAIXA GALICIA 5.2% 5.3%ING 9.6% 8.7% BPE 7.1% 5.3%SHB 7.7% 8.6% NOVA LJUBLJANSKA 5.2% 5.3%CREDIT AGRICOLE 8.2% 8.5% MARFIN 7.3% 5.3%HSBC 10.5% 8.5% PIRAEUS 8.0% 5.3%SANTANDER 7.1% 8.4% BANKINTER 6.2% 5.3%Erste 8.7% 8.1% BES 6.4% 5.1%NOVA KREDITNA 7.4% 8.0% EFG EUROBANK 9.0% 4.9%BNP PARIBAS 9.2% 7.9% CAIXA DE CATALUNYA 6.4% 4.8%Raiffeisen 8.1% 7.8% Volksbank 6.4% 4.5%Lloyds 10.2% 7.7% CAIXA UNIO DE CAIXES 6.3% 4.5%NBG 11.9% 7.7% GRUPO CAJA3 8.6% 4.0%UBI 7.0% 7.4% BANCO PASTOR 7.6% 3.3%
ALPHA BANK 10.8% 7.4%CAJA DEL MEDITERRANEO 3.8% 3.0%BARCLAYS 10.0% 7.3% ATEbank 6.3% -0.8%CAJA INVERSIONES 8.2% 7.3%
*LB=Landesbank - Source:EBA, SG Cross Asset Research
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Economics: banking on Sovereign TransparencyAt the macro-economic level, the most pressing risk in the context of the euro area debt crisis
resides in the linkages from sovereigns-to-banks and banks-to-sovereigns. The EBA stress
tests offered an unparalleled level of detail on banks sovereign debt exposures, with over
2,800 data points per bank detailing sovereign exposure with regard to issuer, maturity and
accounting classification (notably giving the split between trading book and bank book).
Combing through the data, we find that - as expected - the bulk of exposure to the weakest
sovereigns is held by the domestic banks. Moreover, the direct sovereign exposure to Greece,
Ireland and Portugal of other euro area banks are relatively low. The greater concern is
potential contagion to other euro area sovereigns and to bank funding conditions stemming
from renewed sovereign tension, which are potentially very substantial.
When euro area leaders meet on Thursday, July 21 for an emergency summit on Greece, they
will do well to keep these channels of contagion in mind in defining the private sector
involvement (PSI) in the new Greek financial assistance program. Poorly defined, the risk is to
see further contagion domino-ing sovereign bond markets and to European banks.
Sovereigns-to-banksThe stress tests confirmed two already well know results. First, the bulk of exposure to the
weakest sovereigns is held by the domestic banks (in both absolute and relative terms). As
seen from the chart below, it is generally true that banks hold a significant share of their
sovereign exposure in the home sovereign. For Greece, the EBA reports total sovereign
exposure at default (EAD) basis to the Greek sovereign at 98.2bn. Of this total amount for the
90 banks taking part in the stress tests, 67% is held by Greek banks. For Ireland and Portugal,
total sovereign EAD and the share held by home banks are reported at, respectively, 52 .7bn
and 61%, and 43.2bn and 63%. Second, exposure of non-domestic banks to, respectively,
Greek, Irish, Portuguese and Spanish sovereign risk is relatively moderate. As seen from the
table below (based on gross sovereign exposure) adding Italian sovereign risk to the equation
increases the stakes, however. This illustrates the danger of the contagion currently spreading
through the euro area bond markets.
Main direct exposure is to the domestic sovereign
0%
20%
40%
60%
80%
100%
AT BE CY D E DK ES FI FR GB GR HU IE IT LU MT NL N O P L PT SE SI
Share of total gross sove reign exposure
to home sovere ign (%, end-2010 EBA stress tests)
Source: EBA, SG Cross Asset Research / Economics
For Greece, the EBA reports totalsovereign exposure at default(EAD) basis to the Greeksovereign at 98.2bn.
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Greece, Ireland, Portugal and Spain are modest, adding in Italy increases the stakesGross sovereign exposure EURbn, end-2010 (selected countries for banks par ticipating in EBA stress tests)
Germany France Netherlands Italy Spain Greece Ireland Portugal UK
Total EURbn 556 504 169 223 350 64 21 31 705
Greece EURbn 8 10 1 1 0 54 0 1 3
% total 1% 2% 1% 1% 0% 85% 0% 5% 0%
Ireland EURbn 1 2 0 0 0 0 12 1 1
% total 0% 0% 0% 0% 0% 0% 60% 2% 0%
Portugal EURbn 4 5 1 0 5 0 0 20 3
% total 1% 1% 0% 0% 2% 0% 1% 62% 0%
Spain EURbn 19 15 2 3 232 0 0 0 12
% total 3% 3% 1% 1% 66% 0% 2% 1% 2%
Italy EURbn 37 53 10 164 7 0 1 1 26
% total 7% 11% 6% 74% 2% 0% 4% 3% 4%
Source: EBA, SG Cross Asset Research / Economics
In considering the linkages and the potential dominos from a contagion scenario, it is also
important to take account of other exposures. As seen from the table below, broadening out
to include total exposures to all sectors in the economy, this substantially increases the
numbers.
As does including the full economyTotal exposure, EAD basis, EURbn, end-2010 (selected countries for banks participating in EBA stress tests)
Germany France Netherlands Italy Spain Greece Ireland Portugal UK
Total EURbn 3,755 4,106 1,883 1,895 3,007 339 354 349 4,467
Greece EURbn 18 44 1 1 0 242 0 7 8
% total 0% 1% 0% 0% 0% 71% 0% 2% 0%
Ireland EURbn 45 21 8 1 2 0 191 2 68
% total 1% 1% 0% 0% 0% 0% 54% 1% 2%
Portugal EURbn 18 15 0 2 62 0 1 248 14
% total 0% 0% 0% 0% 2% 0% 0% 71% 0%
Spain EURbn 104 78 4 7 2,174 0 5 20 77
% total 3% 2% 0% 0% 72% 0% 1% 6% 2%
Italy EURbn 103 261 2 1,262 1 0 3 2 37
% total 3% 6% 0% 67% 0% 0% 1% 0% 1%
Source: EBA, SG Cross Asset Research / Economics
A more surprising outcome is found on the maturity of holdings, with a far more mixed picture
from institution to institution, breaking somewhat with the general consensus that banks hold
the bulk of exposure in short maturity issues. Adding up the total numbers for euro area
banks, we find that the pool of sovereign debt that could be involved in PSI over the 3-year
horizon, amounts to 34.5bn for Greece (gross exposure, up to and including 3-year maturity),
with the bulk held by euro area banks. Note, these numbers include only the European banks
taking part in the EBA stress tests, which cover around 65% of total assets in the region.
Including all banks would increase the pool for PSI: assuming a simple proportionate increase
we find 53bn.
At present, several proposals for PSI appear to be on the table, ranging from some form of
vehicle to buyback Greek bonds at a discounted price from private investors to various forms
of bond exchanges. In all cases, a writedown seems likely to be on the agenda for private
investors. The bank stress tests have already made some provisions for such a scenario
(please refer to results section), but the risk is to see this exceeded if contagion is not
successfully stemmed.
Adding up the total numbers foreuro area banks, we find that thepool of sovereign debt that couldbe involved in PSI over the 3-yearhorizon, amounts to 34.5bn forGreece (gross exposure, up toand including 3-year maturity),with the bulk held by euro areabanks.
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While a CDS event can likely be avoided, a downgrade to SD on Greece seems all but
inevitable. This raises the question on ECB collateral. As we have highlighted on previous
occasions, this is primarily an issue for Greek banks. The question remains what the ECB
would do, but at present it seems likely that in such an event the ECB would no longer accept
Greek bonds as collateral and instead offer Emergency Liquidity Assistance (ELA) to the Greek
banks.
A mixed picture on the exposure of maturity to the Greek sovereign
0%
20%
40%
60%
80%
100%
ALL AT B E CY DE DK ES FI FR GB GR IE IT LU MT NL PT SE SI
Maturity structure of gross exposure to Greek sovreign(%, end-2010 (EBA stress tests)
3M 1Y 2Y 3Y 5Y 10Y 15Y
Source: SG Cross Asset Research
An important point to keep in mind is that PSI for Greece is likely to be seen as a blueprint for
Portugal and Ireland, and any other member states that many ultimately need to seek EU/IMFassistance. Poorly defined, the risk is that PSI could trigger a buyers strike in weak sovereign
bond markets and also weigh on bank funding. In the context of the bank stress tests, it is
important to note that funding and a potential liquidity was not explicitly stressed (please refer
toresults section).
Banks-to-sovereigns, and the economyIn discussing the links from sovereigns to banks, it should be recalled that it is a two-way
causality. As such, a weak banking sector can feed back to weigh on the sovereign. This is
especially true if a bank fails to raise sufficient capital in markets or lose access to funding. In
the context of the stress tests, the 2.5bn identified is unlikely to pose any significant problem.
The risk is, however, that this number ultimately proves higher (please refer toresults section).
Linkages to the real economy should not be forgotten either. The euro area debt crisis is no
doubt a negative for consumer and business confidence, and fiscal austerity weighs directly
on activity. In addition, the real economy is linked directly to the banking system via the credit
channel (higher funding costs and lesser supply of capital). Wealth effects also play a role for
both financial and real assets as risk-aversion increases.
Breaking the channels of contagion is thus today the main challenge for euro area
policymakers. Failure to do so would spell a very bleak scenario, far beyond what has been
outlined in the stress tests.
The 2.5bn identified is
unlikely to pose any
significant problem. The
risk is, however, that this
number ultimately proves
higher.
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The Fixed Income AngleThe stress tests have brought more details on individual exposure to sovereign risk.What investors still do not know is the extent to which banks - and other investors - will
be asked to contribute to fixing the sovereign crisis.
From the start, EU officials have treated Greeces and other countries problems as a liquidity
crisis. There was the foundation of the muddle-through strategy: help Greece for a while, and
give them time to convince investors that they are returning to a sustainable debt path. We
have never been fond of that strategy, especially on evidence that time was not being used
wisely (indeed Greece has failed to reassure). As a second plan for Greece is in the working,
EU policymakers are discovering a new impossible trinity. Just consider the three
following pillars: 1) bringing Greece on a sustainable debt path; 2) limitingofficial lending;
3) limiting the damage for the private sector, including the fragile banking sector.
There is no rabbit in the hat: the only way to satisfy those three objectives is through a
credible and effective austerity plan. But the past misachievements and resulting credibility
gap have made the above an impossible trinity. The French plan, by transforming credit risk
into duration risk, clearly focused on making Private Sector Involvement sweet (pillar 3). But
the plan had shortcomings: it failed to bring PSI to the desired 30bn level (so failing pillar 2),
and certainly did not address Greeces debt sustainability issue (pillar 1). Given that even this
Vienna Initiative does not seem sweet enough to avoid a Selective Default, the plan has been
shelved.
Policymakers instead now seem to focus on pillars 1 and 2. This has probably not been
done the hard way yet (haircuts on principal). Greece is set to receive more loans, and we fear
that resources continue to be misallocated. The IMF itself now recognises that only the threat
of wider financial contagion allows the IMF to keep lending to a country with such an unstable
debt situation. Providing more lending may avoid a traumatic near-term shock (Lehman-like),
but not a slow-burning contagion. Policymakers indeed are investigating a tougher treatment
of private investors: The IMF now cautions against offering any incentives for creditor
participation that would negatively impact on Greeces already difficult debt dynamics .
Investors, naturally, are getting worried. Debt swaps will most likely prove bigger and more
costly than a Vienna initiative. We have yet to see the details of the debt swaps. Default fornow may just mean a temporary Selective Default rating. Later on it will most likely involve
haircuts on principal. This is proving extremely stressful for sovereign risk with contagion now
going beyond Ireland, Portugal and Spain. Whether there will be an EU summit in the coming
week is still uncertain. But even if one occurs, there is no instant cure for the troubles of the
eurozone. They may be in abeyance for now. But we continue to see more tensions in
September, at which time investors want to be short risky sovereigns again (see Sovereign
section).
The best we can hope for, fornow, is a respite this summer, onhopes that EFSF will be buying inthe secondary market (or lendingto countries that can use thefunds to buy back their debt).
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The best we can hope for, for now, is a respite this summer, on hopes that EFSF will be
buying in the secondary market (or lending to countries that can use the funds to buy back
their debt)
The details of the second aid plan to Greece may not be known before late summer. If for now
we can avoid a plan that would be ostentatiously painful for the private sector, we should see
some near-term respite. That, along with signs of a V-shape recovery in Japan, fading
concerns about China's growth and a pick-up in US economic surprise indices, forms the
basis of our small short duration exposure (bias towards a rebound in bond yields in the next
few weeks).
Our biggest near-term fear, however, continues to be the contagion of the crisis towards the
banking sector, given the threat of a heavier private sector involvement. Hence we
recommend hedges that would benefit from bank stress. It is tempting to do so in USD, as
European banks find it more difficult to raise funding in the dollar markets.
Hedging against the adverseeffects of such a crisis is oftencostly.
We critically discuss a number ofprotective strategies andrecommend a 3M/6M LIBORbasis trade in forward space asthe most appropriate hedge (seeFocus US, Keep hope alive).
https://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6bhttps://www.sgresearch.com/p/en/3/0/26884/75B431FF4F4E5CA8C12578CE00646758.html?sid=0166959fa9a1bdc641ee7e4129ad2e6b -
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The Equity Angle, Part 1: EBA stress test Equity market reaction to the stress tests is likely to be relatively muted in our view,
with few big surprises despite the huge volume of new disclosure. Market sentiment is
likely to remain focussed on the fall-out of the Greek crisis and how that spreads further
afield. The tests will inevitably be criticised for such a small number of failing banks
(nine) with an aggregate capital shortfall of just 2.5bn, and the fact that sovereign
default is not considered.
In this section we focus on the outcome for a selection of 40 banks typically the largest,
quoted banks in the EU. The chart below shows Core Tier 1 ratios under the adverse scenario.
The results vary from over 12% for three Nordic banks to 4.9% for EFG Eurobank, the only
bank in our sub-set to fail.
Core Tier 1 Ratios Adverse Scenario
0%
2%
4%
6%
8%
10%
12%
14%
Sy
dban
k
Dans
ke
Jys
ke
SEB
Dex
ia
KBC
AIB
Nordea
Swe
dban
k
BBVA
Dn
BNOR
Intesa
SHB
Cre
ditAgrico
le
HSBC
San
tan
der
Ers
te
BNPPari
bas
Ra
iffe
isen
Lloy
ds
NBG
UBI
Alpha
Ban
k
Barc
lays
Ban
ko
fIre
lan
d
Na
tix
is
Un
icre
dit
BPI
Deu
tsc
he
Ban
k
Commerz
ban
k
RBS
MPS
Sa
ba
de
ll
Popo
lare
BCP
Popu
lar
Piraeus
Ban
kinter
BES
EFG
Euro
ban
k
Source: European Banking Authority, SG Cross Asset Research
Updated sovereign exposuresOne clear positive of the stress test exercise is the extra disclosure provided alongside the
results. Aggregate sovereign bond exposures to Greece, Ireland, Portugal, Italy and Spain are
shown below in absolute amounts and as a percentage of common equity. In absolute terms,
the banks with biggest exposures are (in order) Intesa, BBVA, Unicredit, Santander and BNP
Paribas (to the home sovereign in the first four cases).
However, as a multiple of common equity the biggest exposures are AIB, MPS, Piraeus,
Popolare and EFG Eurobank. The Nordic and UK banks stand out as the least exposed banks
to sovereign bond default.
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GIP Sovereign exposures Absolute amounts (bn)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Intesa
BBVA
Un
icre
dit
San
tan
der
BNPP
ari
bas
MPS
Dex
ia
Ba
rclays
Comme
rzban
k
NBG
Cre
ditAgrico
le
HSBC
Deu
tsche
Ban
k
Po
po
lare
UBI
RBS
P
opu
lar
EFG
Euro
ban
k
Na
tix
is
P
iraeus
KBC
BCP
Sa
ba
de
ll
AIB
Ire
lan
d
BPI
Alpha
Ban
k
Ban
kinter
BES
Ers
te
D
ans
ke
SEB
Rai
ffe
isen
N
ordea
Jys
ke
Lloy
ds
SHB
Swe
dban
k
Dn
BNOR
Sy
dban
k
Spain
Italy
Portugal
Ireland
Greece
Source: European Banking Authority, SG Cross Asset Research
GIP Sovereign exposures As % common equity (%)
0%
100%
200%
300%
400%
500%
600%
700%
800%
AIB
MPS
Piraeus
Popo
lare
EFG
Euro
BPI
BBVA
NBG
Intesa
Sa
ba
de
ll
BCP
Commerz
Ban
kinter
UBI
Popu
lar
Un
icre
dit
Dex
ia
Alpha
Ban
k
San
tan
der
Ire
lan
d
BNPPari
bas
KBC
BES
Barc
lays
Deu
tsc
he
Cre
dAgrico
le
Na
tix
is
RBS
HSBC
Ers
te
Dans
ke
Ra
iffe
isen
Jys
ke
SEB
Nordea
Lloy
ds
SHB
Swe
dban
k
Dn
BNOR
Sy
dban
k
Spain
Italy
Portugal
Ireland
Greece
Source: European Banking Authority, SG Cross Asset Research
Incorporating sovereign exposures into the tests
As noted above, the EBA stress tests do not account for the possibility of a sovereign default,
despite the fact this has become an increasingly likely scenario.
In the following section we therefore incorporate into the EBA scenarios:
1. The potential impact of a sovereign default in Greece, Ireland and Portugal, by applying a
50% haircut to sovereign exposures to each country.
2. Apply an additional 20% haircut to sovereign bond exposures to Italy and Spain. We
caveat that this is far removed from our base-case expectation.
In absolute terms, the banks withthe biggest exposures are (inorder) Intesa, BBVA, Unicredit,Santander and BNP Paribas(to the home sovereign in the firstfour cases).
However, as a multiple ofcommon equity those with thebiggest exposures are AIB, MPS,Piraeus, Popolare and EFGEurobank. The Nordic and UKbanks stand out as the least
exposed banks to sovereign bonddefault.
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The Equity Angle, Part 2: What if GIIPS sovereigndebt had been stressed By including the possibility of sovereign default across multiple jurisdictions, our
analysis suggests 13 banks of a sub-set of 40 of the larger, quoted banks could fail, with
an aggregate capital shortfallof 22bn.
Applying 50% haircuts on GIP exposuresThe chart below shows estimates Core Tier 1 ratios based on the EBAs adverse scenario,
incorporating a sovereign default in each of Greece, Ireland and Portugal.
On this basis, 8 of the 40 banks fail the 5% CT1 pass mark, versus just one bank as reported
by the EBA excluding sovereign stresses. Perhaps unsurprisingly, the newly failing banks are
from those countries included within the sovereign default all four Greek banks fail, one Irish
and all three Portuguese banks. The aggregate capital shortfall of the failing banks is
EUR16bn.
Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Sy
dban
k
Dans
ke
Jys
ke
SEB
KBC
Nordea
Swe
dban
k
BBVA
Dex
ia
Dn
BNOR
Intesa
SHB
HSBC
Cre
ditAgrico
le
San
tan
der
Ers
te
Ra
iffe
isen
AIB
Lloy
ds
BNPPari
bas
UBI
Barc
lays
Deu
tsc
he
Ban
k
Un
icre
dit
BPCE
MPS
RBS
Commerz
ban
k
Popo
lare
Sa
ba
de
ll
Ban
kinter
Popu
lar
Ban
ko
fIre
lan
d
BES
Alpha
Ban
k
BCP
BPI
EFG
Euro
ban
k
NBG
Piraeus
Source: European Banking Authority, SG Cross Asset Research
Applying 50% haircuts on GIP AND 20% haircut on Italy/SpainexposuresIf we additionally include a 20% haircut on all Italian and Spanish sovereign bond exposures,
13 of the 40 banks fail with an aggregate capital shortfall of 22bn. As well as those failing on
the GIP haircuts, two Italian banks would fail (MPS and Popolare) and the three small Spanish
banks (Sabadell, Bankinter and Popular).
On this basis, 8 of the 40 banksfail the 5% CT1 pass mark, versusjust one bank as reported by theEBA excluding sovereign stresses
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Core Tier 1 Ratios 50% haircuts on GIP sovereign exposures, 20% on Italy/Spain
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Sy
dban
k
Dans
ke
Jys
ke
SEB
Nordea
Swe
dban
k
KBC
Dn
BNOR
SHB
HSBC
Cre
ditAgrico
le
Ers
te
Ra
iffe
isen
Lloy
ds
AIB
Dex
ia
San
tan
der
Barc
lays
BNPPari
bas
Intesa
Deu
tsc
he
Ban
k
BBVA
BPCE
RBS
UBI
Un
icre
dit
Commerz
ban
k
Popo
lare
Ban
ko
fIre
lan
d
Sa
ba
de
ll
Ban
kinter
Popu
lar
BES
Alpha
Ban
k
MPS
BCP
BPI
EFGEuro
ban
k
NBG
Piraeus
Source: European Banking Authority, SG Cross Asset Research
Finally, the chart below shows the overall results for each bank on 3 different scenarios,
ranked by the most severe scenario (scenario 3 below):
1. EBA Adverse scenario
2. EBA Adverse scenario with additional 50% haircut to GIP sovereign exposures
3. EBA Adverse scenario with additional 50% haircut to GIP sovereign exposures and 20%
haircut to Italy/Spain sovereign exposures.
The banks which standout as best performing under the scenarios are all Nordic banks, KBC,
the Austrian banks and large Spanish banks. The middle ground typically includes the French,
UK and large Italian banks, with the most impacted unsurprisingly being the smaller banksfrom the GIIPS countries. Of the larger banks, Commerzbank, RBS and Unicredit are below
average. For RBS this largely reflects the stringent rules applied to securitisation positions,
whereas for Unicredit and Commerzbank it reflects the sovereign haircuts we apply.
Looked at from the opposite perspective, we are surprised by just how resilient some of the
banks are. Despite an economic recession (adverse scenario), a triple sovereign default and
20% haircuts on Italian and Spanish sovereign debt, the average core Tier 1 ratio for our sub-
group is a still relatively healthy 6.2%. Furthermore, most of the larger banks have ratios in
excess of that average.
Overall results Core tier 1 ratios under four scenarios (%)
-5.0%
0.0%
5.0%
10.0%
15.0%
Sydbank
Danske
Jyske
SEB
Nordea
Swedbank
KBC
DnBNOR
SHB
HSBC
C
reditAgricole
Erste
Raiffeisen
Lloyds
AIB
Dexia
Santander
Barclays
BNPParibas
Intesa
D
eutscheBank
BBVA
Natixis
RBS
UBI
Unicredit
C
ommerzbank
Popolare
Ireland
Sabadell
Bankinter
Popular
BES
AlphaBank
MPS
BCP
BPI
E
FG
Eurobank
NBG
Piraeus
Adverse
GIP
GIIPS
Source: European Banking Authority, SG Cross Asset Research
Despite an economic recession(adverse scenario), a triplesovereign default and 20%haircuts on Italian and Spanishsovereign debt, the average coretier 1 ratio for our sub-group is astill relatively healthy 6.2%.
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The Credit Angle: Two-way Causality in the StressTests Like the equity market, credit market reaction to the stress tests is also likely to be
relatively muted in our view, with few easily decipherable surprises discovered within
large volume of disclosures.
The focus on the relatively low level of capital required as a result of these tests may cause
market participants to dismiss them. Indeed, during the analysts call on Saturday, 16 July
2011, the Chairman of the EBA himself noted that he is uncomfortable with the 2.5bn of
required capital raising in light of how the sovereign situation has deteriorated and stated that
he believed more strengthening of capital is needed.
If there is any good news concerning this exercise for the credit markets, it is that it is over.
However, we do not envision a flood of new bank debt issuance in the short term for two
reasons. One, the European bank earning season is upon us with attending constraints on the
ability of some to raise funding during the quiet period. As institutions publish their results, we
are likely to see meaningful attempts by the primary funding markets to re-open. Two, credit
market sentiment is likely to remain focussed on the fall-out of the Eurozone and possible US
budget crisis. These will continue to influence the overall cost of capital and drive bank
managements decisions with respect to how to fund their operations. It may be more
advantageous to de-lever than raise funds in the international capital markets. This would
clearly have attending feedback into the bank-to-sovereigns and economy causality.
SovX Index and iBoxx subordinated financials index
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
150
200
250
300
350
400
450
500
Jan-'11 Feb-'11 Mar-'11 Apr-'11 May-'11 Jun-'11 Jul -'11
iBoxx F inancia l Subordinated SovX 30 day lag correlation: SovX vs Sub Fins
Source: SG Cross Asset Research, Markit
Liquidity and funding matter to credit marketsThe European Banking Authority 2011 stress test does not include a stress of liquidity while
funding stress is not really tested, in our view. The framework of this test is largely
concentrated on the asset side of the balance sheet to derive capital requirements, while the
complexity of adding liability stresses to the process are largely absent. However, during theconference call on Saturday, 16 July 2011, the EBA noted that it had recently undertaken a
non-publicly disclosed liquidity stress scenario test and discussed these results with national
We do not envision a flood of newbank debt issuance in the shortterm.
Please see the following report fordetails on traderecommendations:EU Banks: Stressed, but nottested.
https://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667ebhttps://www.sgresearch.com/p/en/3/0/26884/D7861292643B2CEAC12578CD001E4336.html?sid=9f9c7a603a7b90942d577395600667eb -
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regulators. When pressed on this issue during Q&A, the EBA noted that it believed it was not
appropriate to publish the results of this test.
Funding costs are assumed to be driven by credit spreads which are linked to the sovereign inthe stress test, again highlighting the sovereign-to-bank causality. However, these are
modelled within a constrained methodology, as the recent jump to default in the credit
spreads of some countries is clearly not captured in the funding costs exercise. In addition,
the tests permit the re-pricing of loan portfolios to capture 50% of the increase in funding
costs while new loans are assumed to replace maturing loans, in the constant balance sheet
assumption. This could lead to the overstatement of interest revenues and an understatement
of interest expenses in the real world, but clearly as noted (please refer to Does it really
matter) there are limits to what can be modelled.
It is also important to note that these tests are further constrained by the lack of harmonized
definitions across the EU with respect to certain important measures. For example negative
Available for Sale Reserves were subject to prudential filters at national discretion and this
obviously impacts the starting line with respect to available Core Tier 1 capital. In addition, it is
well publicized that the non-inclusion of pro-cyclical loan loss reserves for Spanish banks and
the exclusion of silent participations in the German banks had a detrimental impact on their
respective starting Core Tier 1 levels, despite inclusion at the national level. Theses impacts
can be adjusted for, but focusing on the headline number as a true cross-European
comparison may lead to type two errors, that is, false conclusions.
The adverse scenario & bank credit default swapsAmongst the largest EU banks, the results of the adverse stress case scenario relative to 5-
year subordinated credit default swaps are shown below. There are clear outliers, but for the
most part, the market tends to favour those banks with higher core Tier 1 ratios in an adverse
scenario.
Adverse Scenario Core Tier 1 Capital vs. 5-year Subordinated CDS on 15 July 2011 for select EU banks
Erste
Raiff eisen
Dexia
KBC
BNP Paribas
Credit AgricoleNatixis
Commerzbank
Deutsche Bank
Intesa
MPS
Unicredit
Popolare
UBI
BBVASantander
Sabadell
Bankinter
Popular
Barclays
HSBC
Lloy ds
RBS
Nordea
SHB
SwedbankSEB
DnB NOR
Danske
R = 0.2385
0
100
200
300
400
500
600
700
800
900
1000
4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%
Source: SG Cross Asset Research, European Banking Authority, Bloomberg
It is also important to note thatthese tests are furtherconstrained by the lack ofharmonized definitions across theEU with respect to certainimportant measures.
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Stressing sovereign exposure & bank credit default swaps As per the test in (please refer to Incorporating Sovereign Exposures), applying the 50%
haircut on sovereign exposures to Greece, Ireland and Portugal, as well as a 20% haircut tosovereign exposures to Spain and Italy, shifts Spanish and Italian banks downwards in the
core Tier 1 equity tables. Relative to 5-year subordinated credit default swaps, we have a
better fit, in terms of correlation, than is seen in the EBA adverse scenario core Tier 1 test
results. However, we caution that this is a static, one-step, assessment with other dynamic
factors that would likely occur in this scenario, such as increased funding costs and other
losses, not accounted for. Nevertheless, from this example, it appears as though the credit
markets are applying a much more stringent test than the EBA to some EU banks.
Stressed sovereign core Tier 1 ratios vs. 5 year subordinated CDS on 15 July 2011 for select EU banks
Danske
SEBNordea
Swedbank
KBC
DnB NORSHB
HSBC
Credit Agricole
Erste
Raiffeisen
Lloy ds
Dexia
Santander
Barclays
BNP Paribas
Intesa
Deutsche Bank
BBVA
RBS
UBI
Unicredit
Commerzbank
Popolare
Sabadell
Bankinter
Popular
MPS
R = 0.556
0
100
200
300
400
500
600
700
800
900
1000
2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%
Source: SG Cross Asset Research, Bloomberg
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APPENDIX
ANALYST CERTIFICATIONThe following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his orher personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related,directly or indirectly, to the specific recommendations or views expressed in this report: Hank Calenti, CFA, Philip Richards, James Invine
SG RATINGSBUY: expected total return of 10% or more over a 12 monthperiod.
HOLD: expected total return between -10% and +10% over a 12month period.SELL: expected total return of -10% or worse over a 12 monthperiod.
Sector Weighting Definition:The sector weightings are assigned by the SG Equity ResearchStrategist and are distinct and separate from SG research analystratings. They are based on the relevant MSCI.
OVERWEIGHT: sector expected to outperform the relevant broadmarket benchmark over the next 12 months.
NEUTRAL: sector expected to perform in-line with the relevantbroad market benchmark over the next 12 months.
UNDERWEIGHT: sector expected to underperform the relevantbroad market benchmark over the next 12 months.
Equity rating and dispersion relationship48%
40%
13%
50%
39%
48%
0
50
100
150
200
250
Buy Hold Sell
Companies Covered Cos. w/ Banking Relationship
Source: SG Cross Asset Research
MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Withoutprior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated orused to create any financial products, including any indices. This information is provided on an as is basis. The user assumes the entirerisk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling theinformation hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particularpurpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or anythird party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, MorganStanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may beprovided by or approved in advance by MSCI.
IMPORTANT DISCLOSURESBanco De Sabadell SG acted as joint bookrunner in Banco Sabadell's bond issue (4.5% 11/02/13 EUR).Banco Popolare SG acted as co-lead manager in Banco Popolare's capital raising.Bankia SG is acting as as co-lead manager in Bankia's IPOBarclays SG acted as bookrunner in Barclays's covered bond issue.BBVA SG acted as Joint Bookrunner in BBVA's rights issue.BBVA SG acted as joint bookrunner of BBVA's bond issue.BNP Paribas SG is acting as financial advisor to SFPI, 100% owned by the Belgian State, which holds a 25% stake in Fortis Bank
SA/NVCrdit Agricole SG acted as joint bookrunner in Crdit agricole's covered bond issue.Crdit Agricole SG acted as joint book runner in Credit Agricole's covered bond issue.EADS SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from
EADS Group.HSBC SG acted as joint manager in HSBC's High Grade Covered bond.HSBC SG acted as co-manager in HSBC's bond issue.HSH Nordbank SG acted as joint book runner in HSH's bond issue (2.5% 28/07/14 EUR).
Intesa Sanpaolo SG acted as co-lead manager in Intesa Sanpaolo's rights issue.Intesa Sanpaolo SG acted as Joint lead manager in Intesa San Paolo's bond issue (3.25% 01/02/13 EUR).Intesa Sanpaolo SG acted as joint lead Manager in Intesa San Paolo's senior bond issue (4% 08/11/18 EUR).Intesa Sanpaolo SG acted as joint bookrunner in Intesa San Paolo's subordinated bond issue (9.5% 01/01/49 EUR).
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Intesa Sanpaolo SG makes a market in Intesa Sanpaolo warrantsLa Caixa (Caja de Ahorros y Pensionesde Barcelona)
SG acted as joint lead manager in La Caixa's bond.
La Caixa (Caja de Ahorros y Pensionesde Barcelona)
SG is acting as joint bookrunner in La Caixa's senior bond issue.
Nordea SG acted as joint bookrunner in Nordea's covered bond issue.PKO Bank Polski SG acted as joint bookrunner in PKO's senior bond issue.Royal Bank ofScotland
SG acted as joint lead manager in RBS's covered bond issue (4% 15/03/16 EUR).
Santander SG acted as joint bookrunner in Santander's covered bond issue (4.625% 21/06/16 EUR).Santander SG acted as joint lead manager in Santander's senior bond issue (4.125% 04/10/17 EUR).SNS REAAL SG acted as joint bookrunner in SNS Reaal's covered bond issue.Swedbank SG acted as joint bookrunner in Swedbank's covered bond issue.UniCredit SG acted as joint bookrunner in Unicredit's bond issue (18/07/12 EUR).UniCredit SG acted as joint lead manager in Unicredito Italiano's senior bond issue (14/09/12 EUR).UniCredit SG makes a market in Unicredito warrants
Director: A senior employee, executive officer or director of SG and/ or its affiliates is a director and/or officer of UniCredit SpA.
SG and its affiliates beneficially own 1% or more of any class of common equity of BBVA, Intesa Sanpaolo.SG or its affiliates act as market maker or liquidity provider in the equities securities of BBVA, BNP Paribas, Banco De Sabadell, BancoPopolare, Banco Popular, Bankinter SA, Commerzbank, Crdit Agricole SA, EADS, ING Group, Intesa Sanpaolo, Santander, UniCredit SpA.SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from BNP Paribas,Bank of Ireland, Commerzbank, Crdit Agricole SA, Dexia, EADS, ING Group, Intesa Sanpaolo, KBC, Royal Bank of Scotland, Santander,UniCredit SpA.SG or its affiliates had an investment client relationship during the past 12 months with BBVA, Banco De Sabadell, Banco Popolare, Bankia,Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones de Barcelona), PKO BANKPOLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SG or its affiliates have received compensation for investment banking services in the past 12 months from BBVA, Banco De Sabadell, BancoPopolare, Bankia, Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones deBarcelona), Nordea, PKO BANK POLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of BBVA, Banco De Sabadell, BancoPopolare, Bankia, Barclays, Crdit Agricole SA, HSBC, HSH Nordbank, Intesa Sanpaolo, La Caixa (Caja de Ahorros y Pensiones deBarcelona), Nordea, PKO BANK POLSKI, Royal Bank of Scotland, SNS REAAL NV, Santander, Swedbank, UniCredit SpA.SGAS had a non-investment banking non-securities services client relationship during the past 12 months with BBVA, BNP Paribas, Banco
Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, Intesa Sanpaolo, KBC, PKO BANK POLSKI,Royal Bank of Scotland, Santander, UniCredit SpA.SGAS had a non-investment banking securities-related services client relationship during the past 12 months with BNP Paribas, BancoPopolare, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, Intesa Sanpaolo, KBC, PKO BANK POLSKI, Royal Bank ofScotland, Santander, UniCredit SpA.SGAS received compensation for products and services other than investment banking services in the past 12 months from BBVA, BNPParibas, Banco Popolare, Banco Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, HSBC, ING Group, IntesaSanpaolo, KBC, PKO BANK POLSKI, Royal Bank of Scotland, Santander, UniCredit SpA.SGCIB received compensation for products and services other than investment banking services in the past 12 months from BNP Paribas,Banco Popolare, Banco Popular, Bank of Ireland, Barclays, Commerzbank, Crdit Agricole SA, Dexia, EADS, HSBC, ING Group, IntesaSanpaolo, KBC, PKO BANK POLSKI, Royal Bank of Scotland, Santander, UniCredit SpA.
FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON SECURITIES
OTHER THAN THE PRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL RESEARCH DISCLOSURE
WEBSITE AThttp://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.
The analyst(s) responsible for preparing this report receive compensation that is based on various factors including SGs total revenues, a portion ofwhich are generated by investment banking activities.
Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below. U.S.analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be associated personsof SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public appearances and trading securities held
in the research analyst(s) account(s): Hank Calenti, CFASocit Gnrale London, Philip RichardsSocit Gnrale London, James InvineSocitGnrale London
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securitiesand has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness. SG does, fromtime to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or derivatives thereof, of
persons, firms or entities mentioned in this document and may be represented on the board of such persons, firms or entities. SG does,, from time totime, act as a principal trader in debt securities that may be referred to in this report and may hold debt securities positions. Employees of SG, orindividuals connected to them, may from time to time have a position in or hold any of the investments or related investments mentioned in thisdocument. SG is under no obligation to disclose or take account of this document when advising or dealing with or on behalf of customers. The viewsof SG reflected in this document may change without notice. In addition, SG may issue other reports that are inconsistent with, and reach different
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