EUROPEAN FINANCE AFTER THE CRISIS European crisis is not over, despite tentative signs that the containment strategy is working Two key themes dominate the 2011 banking agenda Local sovereign / banking crises and negative feedback loops Transmission mechanism via funding markets Circuit breakers?: 1) make the banks stronger; 2) provide cheap liquidity to solvent institutions and sovereigns; 3) restructure insolvent entities Regulatory and capital debates Market and regulatory conventions are changing Basel III + SIFI buffers Bail-in & resolution regimes Financial stability vs. growth debate
1
BANK SPREADS & STOCKS – WHAT THE MARKET IS TELLING US Spreads have tightened significantly since January 2011 (iTraxx senior vs sub)
European bank shares have underperformed the broader market (Stoxx 600 vs banks)
Source: Bloomberg
2
PERIPHERAL EXPOSURES NOT FATAL TO SOLVENCY
Exposure to Greece, Ireland and Portugal: (as per theoretical assumptions of 50% haircut on public and bank debt, 15% haircut on corporates)
in â‚Źbn France Germany Italy Spain Eurozone banks
Public sector debt Bank debt Non-bank debt 28 25 53 25 52 82 3 5 10 7 8 55 82 100 247
Total 106 159 18 69 430
% (capital & reserves) Hit to capital & reserves 22% 7% 42% 13% 5% 2% 24.5% 5% 21% 6%
Source: BIS and ECB
3
EUROPEAN BANKS HAVE LARGE REFINANCING NEEDS
Source: Morgan Stanley
4
PERIPHERAL TO CORE EUROPE TRANSMISSION MECHANISM VIA FUNDING MARKETS
Source: Morgan Stanley
5
CAPITAL REBUILDING ACROSS GLOBAL BANKS
Core T1 Ratios of Global Banks 12 10 8
4 2 0
2007
2008
Lloyds
-4
HSBC
-2
2009
2010
Estimated Basel III impact (12e)
Intesa
Santander
Nordea
BNP
Cred Ag SA
RBS
Barclays
D Bank
JPMorgan
Citi
-6 BofA
(%)
6
Source: Company reports, SNL, Morgan Stanley
6
REGULATORY REFORM CATCHING UP WITH CHANGING MARKET CONVENTIONS
Core TI
Capital Conservation Buffer
Old Style T1 Hybrids
New Style T1 Hybrids
Tier II
Counter-Cyclical Buffer
SIFI Buffer
High Trigger CoCo
Low Trigger Coco
20% 18% 16%
6%
14%
2%
12%
2.5%
10%
2%
8% 6% 4% 2%
3%
1.5% 4% 2%
2.5%
10%
4.50%
2%
0% Basel II
Basel III (estimates)
Swiss Finish
Source: Basel Committee, Swiss Expert Commission
7
WHO PAYS WHEN IT ALL GOES WRONG?
Date 18-Feb-08
Northern Rock (UK)
16-Mar-08
Bear Stearns (US)
21-Aug-08
IKB (Germany)
25-Aug-08
Roskilde (Denmark)
15-Sep-08
Lehman Brothers (US)
16-Sep-08
AIG (US)
29-Sep-08
Fortis (Belgium)
29-Sep-08
Fortis (Netherlands)
29-Sep-08
Bradford & Bingley (UK)
29-Sep-08
Hypo Real Estate (Ger)
Sep-Oct 08
3 Icelandic banks
24-Sep-08
Washington Mutual (US)
30-Sep-08
Dexia (Bel/ Fra)
Oct 08- Mar 09 RBS (UK) Oct 08- Mar 09 LLOYDS / HBOS (UK) Oct 08 - Jan 09 ING (Netherlands) 22-Oct-08
BayernLB (Ger)
Oct 08 - May 09 KBC (Belgium) 9-Jan-09
Commerzbank (Ger)
16-Jan-09
Anglo Irish Bank (Ireland)
28-Nov-10
BKIR/ AIB (Ireland)
Oct-Dec 09
CIT (US)
M&A
Gvt. capital injection
X X X X X X X X X X X X X X
X X X X X X
Asset Full nationalisation or guarantee Gvt. majority Bad bank schemes ownership
X X X X X X X X X X X X X X X
X X X X X X X -
X X X
X X X X X X X X X X X X X X X
Debt restructuring or loss
Liquidation
X X X X
X X X X X X X X X X X X X X X X X X X
Prefs/ Gvt economic Lower Upper Senior Tier 1 Non-step Stock onwership Tier 2 Tier 2 T1s 100% -
-
-
-
80%
-
-
-
-
100% 100% 100% 100% -
-
30%
-
84% 41% 11%
-
-
30% 41% 65% 100% 38-93% -
-
Source: PIMCO
8
BAIL-IN – A WORKING EXAMPLE Prior to Conversion conversion
Write-down
Monday Asia open
Assets "Good assets" Doubtful assets Total assets RWAs
900 100 1,000 500
900 100 1,000 500
900 0 900 450
900 0 900 450
Liabilities Deposits Secured debt ST senior unsecured debt LT senior unsecured debt Subordinated debt Preferred stock Common stock Total
650 100 100 100 15 5 30 1,000
650 100 100 0 0 0 150 1,000
650 100 100 0 0 0 50 900
650 100 100 0 0 0 50 900
Common stock / RWAs
6%
30%
11%
11%
Shares of common attributable to each class of capital Conversion # of shares post % of total post ratio conversion conversion Common 30 1 30 0.3% Preferred 0 5 25 0.2% Sub debt 0 25 375 3.6% LT senior unsecured 0 100 10,000 95.9% ST senior unsecured 0 0 0 0.0% Secured 0 0 0 0.0% Total 30 10,430
Source: T. Huertas (FSA)
9