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Posts Tagged ‘stress tests’

There’s really little doubt about it, American banks are going to have to deal with higher capital requirements.

And according Reuters, Bank of America is lagging behind its peers in the capital raising game, so it’s looking at ways to collect some cash by selling assets. One analyst estimates that the bank will need to raise around $45 billion by 2019.

But what to sell? CEO Brian Moynihan has said he does not want to sell more shares, and since 2010 the bank has already sold $50 billion worth of assets, including most of its stake in China Construction bank.

So, the truth is, the bank is going to have to dig deeper to find big items to put up for sale. 

Right now, it’s considering selling its Indian back-office processing processing operation, some real estate holdings and private equity investments (odds and ends, really).

The real money would come from selling parts of Bank of America’s investment bank or from selling the Merrill Lynch brokerage. They’ll also need to sell off risky loans and and retain profits, but all of that takes time.

Whatever the bank’s executives decide, they’ll have to figure it out fast. Next month it has to submit a capital plan to regulators that will lay out whether or not it will buy back stock or raise its dividend. Plus, the Fed is going to subject the bank (and its peers) to stress tests.

Read the full article at Reuters>>

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• UPDATED: Other Major Financials Are Getting Clobbered After BofA Fell Below $5
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The newest round of European Banking Authority tests of bank capital came out this week, and one thing is clear: everyone’s deleveraging, and fast.

The EBA has told EU banks that they must raise a total of €114.69 ($153.31 billion) in quality capital to meet the 9% core capital to liabilities ratios stipulated in October. But that’s worrisome for European Central Bank President Mario Draghi, who says leaders must ensure that banks don’t raise that capital level by simply deciding not to lend anymore.

When the first round of stress tests came out in July, we weren’t so sure we could trust the EBA’s tests or fundraising recommendations. So we conducted our own round of stress tests by comparing total bank exposure in a specific country to common equity. Our guesses for which banks were under the most stress appear to have been right on the mark, with the failure of Dexia and now the weakness of Commerzbank.

This set of tests provided less information than the last—in July we chose to compare total exposure rather than simply sovereign debt exposure—but we’ve nonetheless repeated our tests, comparing total holdings of PIIGS sovereign debt to common equity in 40 of the largest European banks.

With EU leaders dithering over adequate short- and long-term solutions to the crisis, these are the banks praying that their sovereign debt does not suddenly become worthless.

#20 Barclays (U.K.)

PIIGS sovereign debt exposure: €13.13 billion ($17.56 billion)

Common Equity: €46.83 billion ($62.62 billion)

Market Cap: $36.56 billion

Sovereign Debt Exposure as % of Common Equity: 28.04%

Our Total Exposure Ranking: #18

Source: EBA Capital Exercise (exposure and common equity) and Bloomberg (market cap)

#19 Societe Generale (France)

PIIGS sovereign debt exposure: €30.97 billion ($41.42 billion)

Common Equity: €30.97 billion ($41.42 billion)

Market Cap: $19.91 billion

Sovereign Debt Exposure as % of Common Equity: 41.58%

Our Total Exposure Ranking: #21

Source: EBA Capital Exercise (exposure and common equity) and Bloomberg (market cap)

#18 SNS Bank (Netherlands)

PIIGS sovereign debt exposure: €1.63 billion ($2.17 billion)

Common Equity: €10.30 billion ($13.78 billion)

Market Cap: $675.90 billion

Sovereign Debt Exposure as % of Common Equity: 43.75%

Our Total Exposure Ranking: #44

Source: EBA Capital Exercise (exposure and common equity) and Bloomberg (market cap)

See the rest of the story at Business Insider

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And the beatings resume!

Following the directionless action in the US market today, Dow futures are tanking after hours, and the other indices are pointing to losses on the order of 1%.

News about the Fed doing fresh stress tests isn’t helping calm fears.

Also, Chinese preliminary November PMI came in at 48 (contraction) vs. 51 in the previous month.

And finally, there’s chatter about the Dexia bailout being on the rocks.

Hong Kong is getting slammed again in the early going.

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See Also:

• DEVELOPING: Markets Aren’t Collapsing In Europe
• Markets Just Spiked After More Reports About The ECB And The IMF Doing Something Big
• STOCKS END THE WEEK GOING NOWHERE AND EUROPE IS STILL IN CRISIS: Here’s What You Need To Know

From BTIG’s Dan Greenhaus, some general ideas ahead of tomorrow’ big summit:

While earnings have proven to be an interesting and worthwhile distraction, attention focuses squarely on the Euroarea once again as tomorrow brings the all important “Latest Summit to Save the World.” While there is a fair bit of uncertainty as to what exactly will be announced (the WSJ is reporting tonight that debate still exists), we do have an idea of what might be announced:

• A haircut for Greek bondholders on the order of at least 40% if not 60% (this is still being fought forcefully by the banks)
• A bank recapitalization on the order of €100 billion using the remaining funds from the EFSF (about €300 billion)
• Some EFSF leveraging that will provide the fund with more “firepower”

The last point above apparently remains quite contentious as there is considerable debate as to how this leveraging will be achieved. Indeed, up until the last minute, some parties favor IMF involvement, others want to lure in BRIC nations while others remain focused on ECB participation. Further, the second point, if finalized, is likely to disappoint markets (the FT is currently running a story discussing this exact idea). There is quite a bit of dispersion between sovereign debt value estimates but marking down Italian and Spanish debt by say 10% or so is going to disappoint markets that seem to believe their “true” value is much less. The first point is equally contentious in that it signals, more or less, a Greek default.

Again, as we noted, at this point, if they conclude anything of substance, markets may be very shocked.

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See Also:

• Citi’s Steven Englander: European Leaders Are Ignoring One Thing, And It Will Come Back To Haunt Them
• Hilarious Line From SocGen On The Bank Stress Tests
• SocGen Explains Why ‘Italy’s Growth Engine Is Broken’

Standard & Poor’s GlobalRatings team has updated its own European sovereign stress tests, and the results aren’t pretty.

In fact, if Europe as a whole stops growing or if Spain and Italy need a bunch of help from the EU and IMF, everyone looks sunk.

 

Base-line scenario:

Their base-case scenario still assumes positive — though lackluster — growth in the eurozone of 1.0% to 1.5% over the next year. In this case…

- The IMF and the EU would be able to support 100% of Greece’s, Portugal’s, and Ireland’s borrowing requirements.  They would also be able to support up to 10% of Spain’s and Italy’s.

- They would not be able to support 30% of Italy and Spain’s borrowing (along with 100% of PIG borrowing), however. In fact, they would be €287 billion ($398 billion) short.

- This scenario corresponds with S&P’s current long-term ratings, under which Germany and France are both AAA, Spain is AA-, and Italy is A.

 

Double-dip scenario:

But if the eurozone sees a double-dip recession, then the prognosis looks much more grim. In this scenario, S&P subjects Italy, Spain, and Portugal to a “substantial” level of stress, Ireland, U.S., and Latin America to a moderate level of stress, everyone else — including Western Europe — to a “modest” level of stress:

- France, Spain, Italy, Ireland, and Portugal would all see sovereign downgrades of one to two notches.

- 20 out of 47 banks tested could fall below a 6% tier 1 capital to liabilities ratio. They would need about €78 billion ($108 billion) to be recapitalized to a 7% level.

- This would correspond with 60-85% of the Portuguese, Italian, Spanish, and Greek banking systems.

- The EU and IMF would not be able to provide adequate support under this scenario, which would probably equate to 100% of borrowing costs for Portugal, Ireland, and Greece, and up to 30% of borrowing for Spain and Italy.

 

Worst-case scenario:

But the team also analyzes an even worse scenario — not only do countries see a double-dip recession, they also see an interest rate shock:

- France, Spain, Italy, Ireland, and Portugal would all see sovereign downgrades of one to two notches.

- With higher popular angst, government willingness to adopt reforms could be inhibited. If that happened, more sovereigns (even than those listed above) could be downgraded.

- 21 out of the 47 banks tested would fall under a 6% capital requirement, and it would cost about €91 billion ($126 billion) to recapitalize them.

- This would correspond with 60-85% of the Portuguese, Italian, Spanish, and Greek banking systems.

- Short term borrowing costs could rise by 150-200 baisis points for many borrowers.

- There would be a shortfall of €287 billion ($398 billion) between the EU rescue funds’ (EFSF and ESM) and IMF’s joint lending capacity and the amount of funding needed to support the PIIGS. That amounts to 2.7% of aggregate GDP for eurozone member states.

In both scenarios, S&P expects government borrowing to skyrocket as budget deficits and bank recapitalizations “balloon.”

In sum, the IMF and EU are incapable (at least in their current capacities) of maintaining a firewall around Italy and Spain in all but the best-case scenario.

Of course, S&P has promised to revise these projections based on the outcome of upcoming EU summits.

Their conclusion is terribly ominous (emphasis added):

Although our [adverse] scenarios take into account various debatable assumptions, we believe that they illustrate the likely general direction under given conditions. Beyond the likely downgrade of a number of sovereigns if such events came to pass, our scenarios suggest that current support mechanisms may not be sufficient if conditions deteriorate beyond current expectations.

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See Also:

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• UPDATED: Confusion Escalates Around A Rumor That Germany And France Have Reached Agreement On A €2 Trillion Plan To Rescue The Eurozone
• France And Germany Are Saying Completely Different Things About What’s Going On Right Now