TheChek News Flow

BMPS After mkt hours announced 2Q ’16 results: Interest Income Euro 1.08 bn, total income Euro 2.25 bn, llp’s Euro (772 mn), Net Income Euro 22 mn. CET1 increased by 40 bpts to 12.1% (11.8% FL).

The quarter benefited from EUR 134M fiscal benefits from Alexandria operation and EUR 108M gains from asset disposals.

BMPS also approved measures to de consolidate its entire bad loan portfolio and a capital increase of Euro 5 bn. Plans include: sale of EUR 27.7Bn of gross bad loans (EUR 9.2Bn net) to a securitization vehicle (Sec.Co) at a price equal to 33% of the gross book value. Vehicle to be funded by the issue of notes with some underwriting by Atlante fund.

Il Sole reports comments from CEO Mr Viola that a tie up with another bank is no longer a necessity.

Bloomberg reports comments from the Treasury that is no need for a public back stop for BMPS

BCO POPOLARE / POP MILANO Il Messagero reports comments from CEO that Bco Popolare’s results were solid under the stress tests and that the tie up with Pop Milano was proceeding well.

INTESA SP / BMPS Il Messagero reports comments from Chairman Mr Gros Pietro that even after a clean up of BMPS, Intesa SP is not interested.

UNICREDIT La Stampa reports comments from Mr Caltagiorone that does not exclude increasing stake in Unicredit.

Reuters reports that the bank said it would work with ECB supervisors to assess what it needs to do after stress tests showed its core capital close to the 7% level (under adverse conditions).

MEDIOBANCA Stated after mkt hours on Friday transitional CET 1 ratio fell to 11.5 percent in 2018 under the stress tests' adverse scenario, from 12.4 percent at end-2015, remaining well above a current SREP requirement of 8.75 percent.

POSTE ITALIANE Il Messagero reports that the Treasury will sell another 29.7% and that the board will consider a draft prospectus on Aug2. Timing for sale depends upon referendum-

STRESS TESTS / BANKS After mkt hours on Friday the results of the stress tests were announced. The Adverse scenario Dec 2018 CET1 FL was as follows: BMPS -2.4%, Bco Popolare +9%, UBI +8.9%, Unicredit +7.1%, Intesa SP +10.2% The average for Italian banks was 7.6% vs a European average of 9.2%.

* The rally in risky assets over the past few weeks has continued n and broadened – the S&P 500 has made all-time highs, the VIX has fallen, bonds and ‘safe havens’ started to sell off, and cyclicals have outperformed defensives.

* We think a key driver of the recovery has been a combination of the light positioning into Brexit and the search for yield amid expectations of easing.

* However, given equities remain expensive and earnings growth is poor, in our view equities are now just at the upper end of their ‘fat and flat’ range.

* Our risk appetite indicator is near neutral levels and its positive momentum has faded, suggesting positioning will give less support and we will need better macro fundamentals or stimulus to keep the risk rally going, but market

expectations are already dovish and growth pick-up should take time.

* As a result, we downgrade equities tactically to Underweight over 3 months, but remain Neutral over 12 months. We remain Overweight cash and would look for resets lower in equities to add positions.

Stress Test: Worst fears avoided; capital divergence widens

Ahead of the test, concerns centered on 3 main topics: Italian banks, German banks, risk of bail-in. Overall, the test identified BMPS as the weakest European bank, and highlighted the need for further capital build in G-SIB institutions (notably Barclays, Deutsche, SocGen); neither is surprising to us. Importantly, however, the test shows Italian banks (ex BMPS) in a reasonable position, at odds with market perception of systemic weakness.

EBA’s test does not apply an explicit pass/fail hurdle – its key output is therefore a stressed capital ratio. To identify banks with the strongest capital positions, we apply progressively demanding hurdle rates – calibrated at standard supervisory levels, market levels and finally at levels that allow for capital return – to EBA’s test results. Banks that perform poorly are: (1) wholesale G-SIB banks (Barclays, Deutsche, SocGen), (2) Irish banks and (3) BMPS. Nordic banks and EM operators do best. In all, 35 (of the 51 banks tested) clear all six of our hurdles.

The Texas ratio remains elevated for many. EBA’s data allows for an update: among the 35 banks that clear all of our hurdles, eight banks (JYSK, BAPO, OTP, UBI, ISP, POP, SABE and NORD LB) have a Texas ratio >2x the sector mean. Their capital flexibility will depend on their ability to reduce NPLs at market rates.

EBA’s test included five Italian banks and showed BMPS in a position of weakness. Other Italian banks fared better. Consider: when GS hurdles are applied, Italian banks screen solidly, with the exception of UCI (near pass on “supervisory” hurdles; falls short on hurdles calibrated at market levels).That said, Texas ratios are elevated for all.

Three of our CL banks (KBC, Erste, Santander) clear all GS hurdles. BNP falls marginally short of the “capital flexibility” hurdle. All in, the test reassures us regarding banks rated CL-Buy.

Asian equity markets are mixed, with Shanghai Composite lagging following disappointing set of China PMI (First contraction in 5months) data while other indices continue to rally on expectations of easy Fed for longer after a particularly soft US advance Q2 GDP on Friday. Fixed income markets are no longer pricing in a rate hike until Sept of 2017 as USD consolidated the Friday selloff in the Asia session. Fed is in damage control as traders flocked to Treasuries after disappointing Friday's Q2 GDP report put validity of FOMC assertions of economy prepared for removal of accommodation into question. New York Fed Pres Dudley - one of the more dovish members - said it is still premature to rule out a hike before the end of 2016, adding the market expectations of 1 hike through 2017 is too complacent. Dudley said he still sees US GDP at about 2% over 18 months even with medium-term risks skewed to the downside. He did acknowledge that aftershocks from Brexit could pose some medium-term risks and that a sizeable economic pickup remains unlikely given softer business investment going into US elections. Investors are still digesting the underwhelming BOJ announcement late last week that only expanded ETF program rather than cutting rates deeper and adding to annual asset purchases. Given the rally in financials that have been struggling under negative rate environment, there is a wide range of views whether this was appropriate policy and also what the BOJ will deliver at the Sept meeting after it reviews economic conditions. Nomura argues that Sept meeting could feature changes of how the easing program is structured and may potentially start to target specific level of JGBs rather than the pace of buying, while Barclays claims that while there is some benefits to ETF buying, it will not produce immediate benefits in terms of sparking more inflation. PM Abe's advisor Hamada recommends that Japan acknowledges it is already monetizing its debt and proceed with an aggressive joint monetary/fiscal program.

Nikkei +0.36% Hang Seng +1.46% CSI -0.92% Shanghai -1.05%

Eur$ 1.1172 CNH 6.6347 CNY 6.6342 GBP 1.3245 CHF 0.9694 RUB 66.0993 WTI $ 41.81 (+0.50%)

S&P +0.40% Eurostoxx +1.34% Dax +1.14% SMI +0.55%

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*AB FOODS RAISED TO BUY VS HOLD AT DEUTSCHE BANK