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Hey, institutional investors — those Basel III capital rules really are something for European banks to worry about, aren’t they?
Err…
…investors?
And that somewhat more-than-residual fear of sovereign risk is just one among many interesting results from a conference on European banking recently hosted by Bank of America Merrill Lynch.
Here’re a couple more.
First, surprisingly few investors like Italian banks:
While French ones are noticeably light on disclosure:
With all four European investment banks having quantified, to some degree, the impact of Basel III on RWAs, we think French banks face pressure to quantify the impact. At our conference, French management explained their unwillingness to quantify a Basel III impact by citing the significant uncertainty that still remains. While it is true that significant uncertainty remains, the more other banks quantify the impact of moving to Basel III, the larger the discount the market will put on French banks.
More of that sort in the usual place.
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Meanwhile, analysts at RBS also devoted a truly epic note to European banks on Monday — epic in both size and historical sweep:
In this report we present and analyse the financial performance between 1989 and 2009 of 20 major European banks. We use these observations to inform our financial forecasts through to FY13 for the 14 banks currently under active equity research coverage…
And it’s interesting that the analysts’ main finding is, basically, path dependence (emphasis ours):
Even excluding the financial crisis years of 2008-09, we observe a persistently wide RoTCE [return on tangible common equity] differential by bank from 8% at Unicredit to 25% at RBS. Interestingly, if we consider the more recent pre-crisis period from 2000-07 the rank order shows only a few meaningful changes, albeit within a notably wider range as all the banks enjoyed stronger profitability: aggregate RoTCE for 2000-07 was 20% compared to the 1989-2007 average of 15%…
We observe an interesting barbell of RoTCE performance during the pre crisis and crisis periods, with all four of the most profitable banks over 2000-07 requiring substantial government capital and funding support. However, so did three of the six least-profitable banks through the same period. This suggests that, when it comes to balance sheet structures and the quest for profitability, the strategically unpopular “middle ground” is the best place to be when it comes to delivering genuinely through-the-cycle value creation for equity investors.
Fancy that. Although here (in chart form) is a warning just in case you’re thinking of European banks as a pretty diverse bunch:
And as RBS note (emphasis ours again):
As measured by funded assets/TCE, the European banks’ leverage grew every year between 1994 and 2008, from 22x to 36x. The banks came into the financial credit crisis at the end of 2006 with a 32x average. Put differently, the CAGR in funded assets was 11% through this period, compared to 8% for conservative TCE.
We believe the decline in the RWA/funded asset ratio from 58% in 1990 to a low of 42% in 2007 was more a reflection of regulatory capital arbitrage than a signal that the banksÂ' balance sheets were becoming safer.
So investors, Basel III really is quite important — though whether as a forbidding capital regime or fresh opportunity for regulatory arbitrage, well, we’re just not sure yet.
Related links: The once and future sovereign crisis – FT Alphaville The far future of Europe’s fiscal crisis – FT Alphaville
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