Monday 28th July 2014
slib33
FRIDAY ANALYSTS TICKER: July 25th 2014 - According to Adam Cordery, global head of European fixed income, Santander Asset Management, and fund manager for the Santander Euro Corporate Short Term and Euro Corporate bond funds, “Pricing of risk assets doesn’t offer much of a margin for error at the moment. And now Europe is starting to go on holiday, market liquidity may get poorer than normal, and any buys today may well have to be holds until September. It is always interesting to note what yields are required to attract clients to financial products. Twenty years ago, bond funds offering yields of 10%+ could generally attract lots of client interest very quickly. However as rates have come down over the years, so the yields clients demand have fallen. Now 4% seems to be the new 10%, he say. Cordery thinks that unfortunately, investors often want today the yield/risk mix that was available last year, so the products that get launched, sold and bought in size may be more risky than people think. “Products with 4% yield will sell well today, but to get to a 4% yield in Euro you need to invest in a portfolio with an average rating of single-B, and that is far from being risk-free. I get the impression the conventional wisdom today is to think that interest rates must surely go up soon and the main risk to bond portfolios is an increase in bund yields. Because of this many investors are buying short-duration products and floating rate notes, perhaps viewing them as a safe choice, almost like cash. It is possible however that these products may yet prove to have a considerable sensitivity to changes in credit market spreads and/or bond market liquidity, and may prove to be no protection at all.” - Commenting on the RBS share price jump, Dr Pete Hahn of Cass Business School, says “It's hard to tell whether the RBS share price jump today is more about relief or optimism. The former is about fewer fines, fewer losses on loans, and fewer costs in a shrinking business and possibly dividends for shareholders. And there's the rub, owning shares (as opposed to interest bearing debt) should be about optimism and long-term growth in dividends. But from a shrinking business? Few would argue that RBS' retail and corporate bank had efficiencies to be gained and cash flow that might be converted to dividends; yet like most banks, RBS' cost of equity remains stubbornly and appropriately above its ability to provide a return on that equity. For shareholders, current improvements should mean dividends in the medium term but a recognition that RBS may lack any merit for new investment and delivering any long-term dividend growth - not good. While many large retail banks are getting safer, in some aspects, and we often speak of them in terms of moving toward utility type models, banks take risks, are cyclical, face competition, have new business challengers, and are simply are not utilities. Investors shouldn't get ahead of themselves here.” - According to the monthly survey held by the central bank of Turkey, the country’s capacity utilization (CU) rate declined slightly to 74.9% in July from 75.3% in June. Meanwhile, seasonally adjusted (SA) CU also declined to 74.3% from 74.7% in June, writes Mehmet Besimoglu at Oyak Yatirim Research. As for manufacturing confidence, the index declined to 109 from 110.7 in May. On SA basis, the index also edged down slightly to 106.4 from 107.2. SA capacity utilisation was broadly stable in 1H14, averaging at 74.7%. This is the same level with the 2013 average. Despite the political turmoil and volatility in financial markets, activity has been relatively resilient. Export recovery & government spending supported production in 1H. Following the elections, public spending relatively decelerated. The turmoil in Iraq also decelerated export recovery from June. Nevertheless, we still expect 3.5% GDP growth in 2014, writes Besimoglu.

Will Global Trends Call the End of the Long Summer for Nordic Banks?

Thursday, 01 September 2011
Will Global Trends Call the End of the Long Summer for Nordic Banks? Nordic banks appear to have remained resilient in the face of the stresses on the euro and European sovereign debt woes and the sector looks set for steady growth. Even so, the region’s banks have been through their own share of troubles in the near past. Nordic banks have worked hard to extend funding maturities away from short-term debt, recover losses and build liquidity and by and large sailed through the European Banking Authority’s (EBA) health check of 90 European banks in July. However, it looks like the current rosy picture will be marred by the impact of the global economic slowdown; a development which has already impacted on some of the second quarter’s reporting banks. http://www.ftseglobalmarkets.com/

Nordic banks appear to have remained resilient in the face of the stresses on the euro and European sovereign debt woes and the sector looks set for steady growth. Even so, the region’s banks have been through their own share of troubles in the near past. Nordic banks have worked hard to extend funding maturities away from short-term debt, recover losses and build liquidity and by and large sailed through the European Banking Authority’s (EBA) health check of 90 European banks in July. However, it looks like the current rosy picture will be marred by the impact of the global economic slowdown; a development which has already impacted on some of the second quarter’s reporting banks.

Swedbank, Nordea and Handelsbanken all reported solid earnings over the second quarter of this year benefiting from strong economic growth in Norway and Sweden, where margins are on the rise and capital is building up once more. It is a distinct contrast to the fortunes of other banks in Europe. However, any well earned crowing on the part of the region’s banks might soon be curtailed. Swedbank’s economic outlook paper suggests that while Swedish growth continued strong in the first half of 2011, the downturn in global markets is expected to dim the picture somewhat in the second half of the year: “we are seeing a significant slowdown for the remainder of the year. Exports will be affected by a slowing of global growth, and falling confidence of households and companies will limit consumption and investment growth.”

In consequence, the bank has revised the country’s growth rate downwards for 2012 to 2.2%, and, for 2013: “we expect growth to reach 2.3%. The current economic situation presents a policy challenge, and we expect monetary policy to scale back rate increases, but fiscal policy to become too tight. Thus, targeted, timely, and temporary actions will be required to push unemployment down.”

For its part, Swedbank reported an operating profit of SKR4.32bn ($666m), almost double the profit of the same period last year; helped in large part by Sweden’s swift economic recovery up to now, export growth and strong domestic demand. Moreover, margins on lending are expected to rise as the Swedish central bank is expected to raise interest rates. The bank noted in its performance statement that funding costs were easing, as the bank rebuilds its balance sheet following restructuring resulting from loan losses from its Baltic businesses. Two years ago, Swedbank posted second quarter losses of SKR2bn (around $300m) losses as it suffered loan losses from exposure to the troubled economies of the Baltics and the Ukraine. In the event, those losses have been lower than expected and some of the provisions have been written back into the bank’s balance sheet. It is a positive note over the outlook for the Baltic states; a view mirrored by competitor bank DnBNor in its second quarter statement, where it anticipates that over the next two years, growth in the Baltic States will again surpass European levels.

Swedbank has continued to refinance state loans, extended through the financial crisis, with capital market financing at lower cost and undertake some small level share buybacks. Chief Executive Michael Wolf noted in a journalists conference call that. “We continue to believe that there will be some margin expansion on the lending side and cost control is also going to be very helpful.”

Nordea meantime reported second quarter operating profit of €949m, better than forecast, which helped buoy its stock after competitor SEB reported less than stellar earnings over the same period, of which more later. Even so, Nordea’s performance statement could not hide the fact that its second quarter profits were down on the first quarter of the year, when operating profits had risen by 21% over the last quarter of 2010. The bank noted that the continuing crisis elsewhere in Europe and continued “imbalances in the global economy have increased economic uncertainty. “Income from customer areas increased by 5% in the quarter and both operating and risk-adjusted profit are higher than last year. Loan losses are at the lowest level since 2008 and credit quality. At the same time, the trading result decreased from last quarter’s high levels due to volatility in the financial markets and interest income was affected by increased and prolonged funding,” highlights Nordea chief executive officer Christian Clausen.

Nordea said lower income in treasury due to higher funding costs offset increased customer activity, and its CEO said the bank would need to be more efficient to reach its goal of 15% returns on equity (ROE). “Nordea’s relationship strategy has laid a solid foundation for our New Normal [sic] ambition to reach an ROE in the top leave of European banks of around 15%. In the autumn, we will continue to improve capital efficiency and implement plans to contain cost growth in the latter part of 2011 and thereafter keep costs largely unchanged for a prolonged period of time.”

Elsewhere in the region, DnBNOR achieved a profit of NOK3, 546m in the second quarter of 2011, an increase of NOK723m on the same period a year earlier, an uptick of almost 500%. “This is our second best quarterly performance since the financial crisis, surpassed only by the particularly healthy profits recorded in the fourth quarter of 2010. Rising interest rate levels and low write-downs had a positive impact on the quarter, though there is still intense competition for both loans and deposits in the Norwegian market,” noted Rune Bjerke, DnB NOR group chief executive in the bank’s performance statement.

“Norway is doing well, with low unemployment and strong growth, both in GDP and in the population. This provides a sound basis for our growth ambitions, as we are influenced by increased investment willingness among our customers. In the personal customer market, intense competition and pressure on home mortgage margins will continue,” noted Bjerke.

Against expectations however, Swedish banking group SEB’s second quarter earnings were SKR4.3 billion crowns ($665.2m), down 2% on the first quarter, with net interest income down at SKR4.2bn. Most of the bank’s business (over 60%) is sourced from the Swedish market; though it has expanded operations to cover Germany (a key market for the bank) and the Baltics. “In the wake of the uncertain global environment and the potential negative impact on funding markets, we have continued to safeguard balance sheet resilience,” chief executive Annika Falkengren noted in the bank’s performance statement.

MOODY'S SURVEY REVEALS NORDIC BANKS' HIGH, SINGLE-CLIENT CONCENTRATIONS

Moody's Investors Service published a Special Comment in early August that underscored the relatively high levels of average concentrations across the region, between 2008 and 2010, although in some cases, these levels are reducing. According to the ratings agency, this means that many of the rated Nordic banks score poorly in terms of credit risk concentration on the agency's banking scorecard, with this weakness reflected in their bank financial strength ratings (BFSRs). The survey captures the 20 largest exposures of banks rated by the agency in the Nordic region. As the survey only considers rated banks, the results of the survey should not be construed as indicative of the region as a whole, says Moody's.

According to the comment, the Nordic region, defined by the survey included Denmark, Finland, Norway and Sweden. Iceland was excluded due to a small sample size. The high levels of single client concentrations primarily reflect the limited size of many rated banks, which increases their sensitivity to a small number of large exposures; the desire of many small banks to be involved with corporations of all sizes within their regional footprint; and the general trend for relatively low banking profitability, which affects metrics that investigate profits in relation to exposure size.

In terms of Nordic regional disparities, the survey suggests that Swedish banks' concentrations are, on average the lowest, followed by Finland and then Denmark and Norway. However, the exact ranking is less clear and depends on the metric used. The agency quotes, for example, the ratio of the top 20 exposures to either tier I capital; gross loans to customers; total assets; or pre-provision income (PPI)). The survey also shows that the Nordic banking systems have relatively high concentration levels compared to other, similarly developed banking systems, although well below some of the more developing systems.

The survey also shows a general trend of improving concentration metrics in the Nordic region over 2010 following a much more mixed story during 2009, due in part to movements during 2010 in the metric denominators such as Tier 1 capital (from capital raisings during the financial crisis) and improved profitability. However, it also reflects actual reduced exposure concentrations as banks looked to reduce their risks in this area.

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