…and around we go. Upside risks dominate
* QE: capturing the imagination
Data is poor enough and inflation low enough that we now
expect further ECB innovation. We think Draghi’s Jackson
Hole speech demands he follow with action; a reversal of
the early summer ECB position. Looser TLTRO
requirements are a possible first step but the end point
could be QE on a grand scale – why not equities, or noneuro
government bonds? Key for us is we are entering a
period where the possibilities may appear endless – fertile
ground for bank stocks.
* AQR/ stress tests: likely a wash
With its other hat on, the ECB will announce its AQR and
stress test results at the end of October. We see the
uncertainty not as where potential underprovisioning lies or
where capital and funding weaknesses are. Six years on,
the market has good clarity on these; we run our own AQR,
analysing write-offs and broadly-defined problem credit to
adjust provisioning quality. The question is what the ECB is
going to ask the banks to do about their weaknesses. Our
base case remains it will ask little – a wasted opportunity.
* …but you never know
Should the ECB find the political backing to deliver a robust
stress test, we see capital risks at the Greek banks,
Popular, Sabadell and MPS. Key Buys are euro area banks
where we see low AQR tail risk but that offer attractive
valuation and QE gearing include Commerz, Intesa, BNP,
Bank of Ireland and Caixabank.
* Margins: rising before falling
Ultimately, very low rates are bad for margins. However,
the benefits of higher liability spreads from the collapse in
sovereign yields will come through quickly, while the
pressure on asset margins will be slow. We see customer
spreads benefiting in 2015 – but analyse the pressure from
fading carry trade income, especially in Spain. Euro area
banks will struggle to meet NII targets further out: low credit
demand, low rates and a flat curve are a difficult
combination. QE compresses credit spreads - and is a
response to weak GDP, not a complement to recovery
* UK offers real growth
In contrast to the central-bank dominated, low growth euro
area, we see the UK offering “normal” stocks, with
accelerating domestic revenue growth and lower-for-longer
bad debts. Capital uncertainty has fallen sharply: owners
can look forward to rapidly and sustainably rising cash
dividends. We have Buy ratings on Barclays, HSBC,
Lloyds, Paragon and StanChart
* M&A: one day
Fragmented industries with weak top line growth are classic
M&A candidates. Were the AQR to prove robust, it could
pave the way for the cross-border consolidation the ECB
desires. However, our own AQR suggests material potential
provisioning shortfalls in many M&A candidates. M&A plays
with credible provisions are Commerzbank and Erste