(CS) European Autos : Financial Services balance sheets – the rising danger to e

Financial Services balance sheets – the rising danger to equities

* Financial Services biggest risk. We see several factors in place that could provide the perfect storm for OEMs' Financial Services units in a potential downturn, a risk which seems largely ignored by the investment community. Over-earning in FS sets the foundation for strong growth with an inflated upcycle. The danger is that a down-cycle could last longer with bigger losses, since the starting point is worse than previous cycles. Simultaneous weakness of the industrial business could accelerate the equity de-rating, as capital injections into FS will likely be more challenging. German OEMs are most at risk, particularly VW (UP). We reduce our target prices for all the stocks under our OEM coverage to reflect the cuts to our earnings forecasts.

* This time, it could be worse than 2009. Post 2009, FS companies enjoyed a highly favourable environment with windfall gains on residual values, aggressive cost ratios and cheap financing. The inflated up-cycle since 2009 left the industry with less profitable contracts and overstated residual values vulnerable to weakening market dynamics. Thus, the starting point is much worse than in 2009, and a downturn is likely to be both longer and deeper

* Residual value assumptions are too optimistic. The most important driver for Financial Services is the residual value assumption. Based on our comparisons between marketed leasing contracts and market prices of used vehicles (using Schwacke in Germany), we find the residual values are not conservatively valued relative to market prices, which are at peak levels, leaving little room to absorb the impact of falling used car prices. The OEMs now risk under-earning on the down-cycle.

* FS strategies determine resilience to risks. Financial Services can be captive as in the case of the German OEMs and Renault or via JVs and partnerships, as with PSA and FCA. We see bigger risks at captive businesses which over-earned in the up-cycle (German OEMs expanded the FS balance sheet most aggressively, up 63% since 2008, with VW up 83%). We view the strategy of PSA and FCA as more resilient in a downturn

(GS) European banks : reasonable earnings not enough to offset negative sentimen

reasonable earnings not enough to offset negative sentiment

Since the start of the year…
… banks have lost 25% in Europe, 19% in the US and 15% in Asia. Negative sentiment has overshadowed earnings releases. Understandably, when financial stability questions are being asked, quarterly performance barely matters.

22 banks have reported 4Q15 thus far…
… with €1.7 bn of aggregate profits. Results were “noisy” and one-offs (litigation, restructuring, equity stake and goodwill impairments) made the difference between a solid top-line (and PPP) and a miss at the bottom line. Still, for the banks’ reporting thus far, capital was up 20bp (rising to 11.9% CET1).

Commercial and retail banks thus far solid…
Nordic banks (+4%-9% on results day) had decent results, and the domestic Spanish banks outperformed low benchmarks (+2%-12%). Of the large cap banks, the French / Dutch national champions reported strong numbers, and Spanish / Italian mixed.

… whilst investment banks have struggled
4Q was a challenging quarter for the European IBs reporting thus far – especially for CS and DBK. FICC revenues were down sharply (yoy: -60% for CS, -17% for DBK) underperforming the US peer group. Capital generation was positive at UBS (+20bp), but negative at DBK (-40bp) and CS (proforma capital missed consensus by -80bp).
Outlook for 1Q16 was subdued.

CL-Buys: BARC, BNP, BPER, CS
Amongst the European banks, our CL-Buy stocks fall into two categories: (1) “self-help” potential aided by a clearer regulatory outlook (BNP, BARC, CS), and (2) restructuring of the Euro area banking sector, especially amongst smaller Italian banks (BPER). On this point we expect the recent market turmoil to add to policy makers’ sense of urgency. Amongst banks reporting thus far, we find BNP to have had the more encouraging 4Q15 performance. In a European sector-relative context, we see BNP as offering positive capital formation, low and falling NPL ratios, strategic optionality and cash dividend. We make changes to our PTs and estimates for a number of banks in our coverage.

>>> What to look at today - 10th of February 2016

Dow-0.08% S&P-0.07% Nasdaq-0.35% Russell-0.56%
US Market closed on th highs of the day after a final hour rally and a volatile day. Uncertainty ahead of Yellen Testimony today(10am NY Time), inccreased volatility. Nikkey Action & European Banks move increased pressure on US Markets. WTI crude tumbled 6.0% to $27.93/bbl after IEA Report, API to be published today. IBB rebound from lows. materials (+1.2%) and health care (+0.7%) showing the largest advance. The remaining advancers posted gains between 0.7% (health care) and 0.4% (utilities). FB & GOOGL closed lower. volume @ 1.12bil shares above average. US After Hours LLNW +20%, AKAM +15.7%, PAYC +13.8%, MKTO +9.9%, SCTY -32.6%, OESX -23.8%, DIS -2.9% following earnings/guidance. Asia Trade lower again. Declines in Tokyo are heavier again, with USD remaining on the back foot against the yen as traders anticipate a considerably more dovish set of remarks from Fed Chair Yellen in Congress tomorrow. Japan's new Econ Min Ishihara reiterated that the country's economic fundamentals have improved recently, attributing volatility to external factors. PM Abe deferred to the BOJ on guiding monetary policy and expressed confidence in Gov Kuroda's decisions despite continued volatility in the bond markets.

Nikkei -2.31% Hang Seng Closed Shanghai Closed

Eur$ 1.1290 CNH 6.5513 CNY 6.5743 JPY 114.76 GBP 1.4477 CHF 0.9726 RUB$79.48 WTI$28.46 (+1.86%)

S&P -0.26% EuroStoxx+0.22% Dax+0.215 SMI+0.37%

Macro :
- ECB’s Villeroy Sees Downside Risks to European Recovery
- Gross: Global Margin Call Forces De-Risking, Hold Cash Reserves
- Obama’s Clean-Power Plan Put on Hold by U.S. Supreme Court
-
Villeroy Says He’s Not Worried About Situation of French Banks
Keep an eye on :
- ABG SM : Abengoa Sees EU700m in Short-Term Liquidity Needs: Efe
- ATC NA : Altice Cablevision Purchase Should Close 2Q, COO Combes Says
- BP IM : Banco Popolare CEO says important progress made in merger talks - Il Messaggero
- DAI GY : Daimler Recalls Airbags on 840k U.S. Vehicles;Sees EU340m Charge
- DBK GY : Deutsche Bank Said to Mull Multibillion-Euro Bond Buyback: FT
- DSM NA : Third Point Reports Smaller DSM Stake of 2.66% in AFM Filing
- GFI FP : GFI Group Loses Bid to Dismiss Shareholder Suit
- LI FP : Klepierre FY EPRA NAV EU34.7 Per Shr; FY EU705M Goodwill Charge
- LUN DC : Lundbeck FY Revenue Beats Ests.; Sees Return to Growth
- ML FP : Michelin to Present Reorganization Plan by End-March: Les Echos
- OPERA NO : Opera Software Reports Recommended Cash Offer at NOK71/Shr
- ORP FP : Orpea FY Rev. EU2.39B; Targets EU2.72B Rev. in 2016
- RNO FP : Renault Expects to Double India Sales in 2016 on Kwid Demand
- SAB LN : Asahi Reaches Agreement With SABMiller to Buy Brands: Nikkei

>>> Europe : Brokers Upgrade & DOwngrade - 10th of February 2016

>>> Up
*ACTELION RAISED TO BUY AT HSBC
*BANCO POPULAR RAISED TO EQUAL WEIGHT AT MORGAN STANLEY
*CASINO RAISED TO EQUAL WEIGHT VS UNDERWEIGHT AT MORGAN STANLEY
*DOMINO'S PIZZA RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
*H&M RAISED TO BUY VS NEUTRAL AT UBS
*KRONES RAISED TO HOLD AT HSBC
*NYRSTAR RAISED TO BUY VS NEUTRAL AT BOFAML
*PROSEGUR RAISED TO OUTPERFORM AT BBVA
*SYNGENTA RAISED TO BUY VS HOLD AT KEPLER CHEUVREUX
*VESTAS RAISED TO NEUTRAL VS UNDERPERFORM AT MACQUARIE
*VIVENDI RAISED TO OUTPERFORM AT MACQUARIE
*ZURICH INSURANCE RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN

>>> Down
*GAS NATURAL CUT TO HOLD VS BUY AT SOCIETE GENERALE
*RIO TINTO CUT TO UNDERWEIGHT VS OVERWEIGHT AT CBA

>>> PT Change


>>> Initiation
*EUTELSAT RATED NEW UNDERPERFORM AT RBC CAPITAL
*NORDEX RATED NEW OVERWEIGHT AT BARCLAYS, PT EU32
*SHIRE RATED NEW NEUTRAL AT GUGGENHEIM
*STANCHART REISTATED AT EQUALWEIGHT AT BARCLAYS; PT 500P
*TELECOM PLUS RATED NEW UNDERPERFORM AT RBC; PT 850P
*VIRGIN MONEY RATED NEW BUY AT NOMURA; PT 445P

>>> Call
>> Stock
*BARCLAYS REMOVED FROM CITI FOCUS LIST EUROPE
*TOTAL ADDED TO CITI FOCUS LIST EUROPE

>>> Banco Popolare CEO says important progress made in merger talks (translated)

Banco Popolare CEO says important progress made in merger talks 

Banco Popolare CEO Pierfrancesco Saviotti has said that important progress has been made in merger talks with another lender, Italian language daily Il Messaggero reported. The report cited Saviotti as saying that he was optimistic of a positive outcome.

While Saviotti did not name BPM, there was no doubt that this was the lender in question. The report, without citing sources, said that progress had been made on the delegation of powers in the merged entity.

The report said that the two sides are now focusing on technical, legal and regulatory issues. Saviotti is likely to travel to Frankfurt with BPM CEO Giuseppe Castagana in the next few hours to meet with representatives of the European Central Bank to lay out their merger plans.

The report said that the merged entity will have assets of EUR 173bn.

Il Messaggero

>>> Asian Update

Asian Market Update: Nikkei tumbles again with dollar pressured ahead of Yellen testimony; Australia's consumer confidence improves and CBA posts strong results even as ASX200 enters bear market


***Economic Data***
- (AU) AUSTRALIA DEC HIA NEW HOME SALES M/M: +6.0% (2-year high) V -2.7% PRIOR
- (AU) AUSTRALIA FEB WESTPAC CONSUMER CONFIDENCE INDEX: 101.3 (3-month high) V 97.3 PRIOR, M/M: +4.2% V -3.5% PRIOR
- (NZ) NEW ZEALAND JAN RETAIL CREDIT CARD SPENDING M/M: 0.3% V 0.3%E; TOTAL M/M: 0.6% V 0.1%E
- (JP) JAPAN Q4 HOUSING LOANS Y/Y: 2.2% V 2.4% PRIOR
- (JP) JAPAN JAN PPI M/M: -0.9% V -0.7%E; Y/Y: -3.1% (smallest decline in 6 months) V %-2.8%E
- (PH) Philippines Dec Exports: $4.7B v $5.1B prior; Y/Y: -3.0% v +1.0%e

***Index Snapshot (as of 04:30 GMT)***
- Nikkei225 -2.4%, S&P/ASX -1.4%, Kospi closed, Shanghai Composite closed, Hang Seng closed, Mar S&P500 -0.3% at 1,842

***Commodities/Fixed Income***
- Apr gold -0.6% at $1,191/oz, Mar crude oil +1.9% at $28.48/brl, Mar copper -0.3% at $2.03/lb
- GLD: SPDR Gold Trust ETF daily holdings fall 1.5 tonnes to 702.0 tonnes; first decline after 6 straight increases
- (US) API Petroleum Inventories: Crude: +2.4M v +3.8M prior; 4th straight week of build
- (JP) BOJ offers to buy ¥450B in 5-10yr JGBs, ¥260B in 10-25yr JGBs and ¥180B in JGBs with maturity over 25-yr
- (AU) Australia MoF (AOFM) sells A$600M in 4.25% 2026 Bonds; avg yield: 2.4382% v 2.755% Jan 12th; bid-to-cover: 3.15x v 2.82x on Jan 12th

***Market Focal Points/FX***
- Japan and Australia markets are trading notably lower yet again, even though the losses are somewhat less pronounced than overnight. Declines in Tokyo are heavier again, with USD remaining on the back foot against the yen as traders anticipate a considerably more dovish set of remarks from Fed Chair Yellen in Congress tomorrow. Recall the last FOMC statement renewed concerns with global market volatility, stating "Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation". This round of talks from Yellen should allow her the opportunity to temper the official Fed projections of 4 rate hikes this year when the future markets is hardly pricing in any tightening. USD/JPY was down about 100pips from Asia session highs below 114.30, EUR/USD consolidates its thrust higher in US hours above 1.1280, while AUD/USD is contained to a 40pip range above 0.7040 despite some more benign economic data.

- Australia house sales growth rate rose to a 2-year, while Westpac Consumer Confidence rebounded to a 3-month high. Westpac economist noted there has been little net movement in either share markets or the oil price in January, and the improved number is indicative of respondents' relief that markets did not follow on from the steep declines. Australia earnings is also in a higher gear - most notably CBA is up nearly 2% as profits rose to A$4.8B v A$4.6B y/y. Accompanying metrics were somewhat softer, as NIMs fell to 2.06% v 2.11% y/y and ROE to 17.2% v 18.6% y/y. Nevertheless, ASX200 is at a 2 1/2 year low and in a "bear market", with oil names particularly softer on lower oil prices in US hours.

- Among notable speakers, Japan's new Econ Min Ishihara reiterated that the country's economic fundamentals have improved recently, attributing volatility to external factors. PM Abe deferred to the BOJ on guiding monetary policy and expressed confidence in Gov Kuroda's decisions despite continued volatility in the bond markets. After Japan's 10-year JGB yield turned negative yesterday, the yield on the 20-year has also come in several basis points, as investors continue to bet on deeper negative rates at the BOJ. In the energy space, Mar WTI contract briefly rose on a slightly smaller build in API crude inventories, and added to gains after reports that Iranian Oil Minister signaled willingness to negotiate with Saudi Arabia over current oil market conditions.

- Stateside, New Hampshire primary elections went to Sanders (D) and Trump (R) as widely anticipated by the polls, with fewer surprises than in Iowa. Ohio Gov Kasich also did surprisingly well with a 2nd place showing, while the momentum of Marco Rubio wilted to a 5th place finish.

***Equities***
US equities / ADRs:
- AKAM: Reports Q4 $0.72* v $0.62e, R$579M v $567Me; approves $1B buyback (114% of market cap); +16.8% afterhours
- PAYC: Reports Q4 $0.10 v $0.08e, R$65.1M v $61.2Me; +15.6% afterhours
- PNRA: Reports Q4 $1.88 adj v $1.78e, R$691M v $696Me; +3.4% afterhours
- WU Reports Q4 $0.42 v $0.41e, R$1.38 v $1.40Be; Boosts dividend 3% to $0.16/share; +0.9% afterhours
- CSC: Reports Q3 $0.71 adj v $0.69e, R$1.75B v $1.86Be; +0.2% afterhours
- DIS: Reports Q1 $1.63 v $1.44e, R$15.2B v $14.9Be; -3.5% afterhours
- SGEN: Reports Q4 -$0.18 v -$0.17e, R$93.5M v $86.7Me; -3.6% afterhours
- USNA: Reports Q4 $1.83 v $1.90e, R$232.6M v $225Me; -9.8% afterhours
- SCTY: Reports Q4 -$2.37 adj v -$2.57e, R$115.5M v $104Me; sees slower growth in Q1 and FY16, but still over 40%; -33.5% afterhours

Notable movers by sector:
- Consumer discretionary: Stockland SGP.AU -1.1% (H1 result); Asahi Group Holdings 2502.JP -7.7% (9-month result, speculation of offering); Seiko Holdings Corp 8050.JP -12.2% (9-month result)
- Financials: Computershare CPU.AU -8.4% (H1 result); Commonwealth Bank of Australia CBA.AU +1.8% (H1 result)
- Industrials: CIMIC Group CIM.AU +9.3% (FY15 result); Boral BLD.AU +2.4% (H1 result); Daikin Industries 6367.JP +2.2% (9-month result); Taisei Corp 1801.JP -0.7% (9-month result)
- Technology: Veda Group VED.AU +0.4% (Equifax deal approval); Toshiba Corporation 6502.JP +0.5% (no need to correct past earnings)
- Materials: OZ Minerals OZL.AU -1.7% (FY15 result); Mitsubishi Materials 5711.JP -14.0% (9-month result)
- Energy: AGL Energy AGL.AU -0.5% (H1 result)
- Telecom: KDDI Corp 9433.JP -8.7% (9-month result, share buyback)