Cautious Signs Of Hope Seen At Europe's Invest Banks
10 April,2009
ZURICH (Dow Jones)--Twenty months after the credit crunch began, the shape of the post-crisis investment banking sector in Europe is beginning to emerge.
While risks, including more big write-downs, remain for the first quarter, analysts are beginning to voice cautious optimism about banks with large market shares in healthy areas such as foreign currency dealing.
"Overall we think that we are beginning to see the outline of the surviving European banks sector," Deutsche Bank analyst Matt Spick wrote in a note to investors.
Specifically, investment banks are already showing tangible evidence that competition for business has thinned, with banks such as UBS AG (UBS) making major cuts, and Spick says he expects returns in areas able to quickly raise fees when business recovers - investment banking, corporate advice-giving and trade finance - to snap back.
Morgan Stanley sees investment banks netting better prices from fatter loan margins and underwriting fees.
"Our industry forecasts for 2009 suggest a profit rebound before markdowns and provisions, with strength in a number of areas such as rates [interest rate products], foreign exchange and commodities," Morgan Stanley analyst Huw van Steenis wrote in a recent study compiled with conjunction with consultant Oliver Wyman.
This would mean previously ailing investment banks, which have needed transfusions of government aid in various countries after marking upward of $100 billion in writedowns, are convalescent at last, according to JP Morgan's estimates.
"Within the banking sector we prefer investment banks relative to the traditional credit banks," JP Morgan analyst Kian Abouhossein said. He says that, after $20.4 billion in fourth-quarter write-downs, banks such as BNP Paribas SA (BNP.FR) and Credit Suisse Group (CS) look "relatively clean" with $1.1 billion and $1.2 billion of further write-downs expected this year.
But the post-crisis sector will see a shift away from some of the areas which bolstered profits for several years, but caused major write-downs and losses in recent quarters. These include structured derivatives, leveraged loans for major buyouts and proprietary trading, or buying and selling securities on the bank's own book.
To be sure, obstacles remain. Investment banks are set to post hefty first-quarter write-downs when they begin reporting the period later this month, mainly because of monoline insurers, who insured certain types of credit derivatives banks bought. These insurers are now looking increasingly vulnerable, and banks which bought protection from them are likely to see the value of their assets fall.
Regulators are also promising a crackdown, spurred by taxpayer anger at bailout packages, which will directly hit earnings by curtailing what types of risks banks can take. And banks can no longer bolster profits by multiplying bets with cheap leverage.
Investment banks must also cope with smaller boutique operations such as Evercore Partners Inc. (EVR), which in recent months has picked up plum assignments such as advising Swiss Reinsurance Co. (RUKN.VX) as the reinsurer tapped Warren Buffet's Berkshire Hathaway Inc. (BRKA) for fresh funds, or the $68 billion takeover of Wyeth Inc. (WYE) by Pfizer Inc. (PFE).
Boutiques such as Evercore are expected to continue taking market share off major investment banks, but mainly in areas where not much capital is needed, such as research and advice, Morgan Stanley says.
By contrast, the industry giants are set to benefit from better margins in businesses many firms are shrinking, such as prime brokerage, which is business for and with hedge funds.
"The flip side (of shrinking funding units) is margins on products like consumer unsecured loans are growing 50% to 300% on the examples we've found, offering opportunities for those with strong balance sheets," Morgan Stanley's van Steenis said.
However, recovery in the more battered areas of the banks' businesses could take well into next year, van Steenis said.
Credit Suisse is both van Steenis' and JP Morgan's Abouhossein's top European pick, even factoring in write-downs on real estate securities and private equity investments. The bank, which began dramatically scaling back its investment bank late last year, is in a strong operating position and is also healthily capitalized, both analysts said.
Source: http://online.wsj.com/