Ample liquidity, more capital reduce “crisis re-run” risk; P&L trends soften
Risk of liquidity event? Limited, in our view
Many are asking “crisis” questions: “is there risk of a financial crisis re-run” and “can a large European bank face a liquidity event”? With market confidence fast deteriorating we note:
(1) Liquidity: banks are long: ECB liquidity usage is down €700 bn from 2012 peak; and TLTRO remains barely used.
(2) Money markets open: so far there is no evidence of strain in € or US$ funding. Key indicators (EURIBOR – OIS; cross-currency basis) are barely impacted by share price volatility.
(3) Solid deposit picture: customer deposit growth is adding to liquidity positions further. 2015 in general, and Dec-15 in particular, were strong inflow months (especially in Italy, Greece).
(4) ECB backstops: all to fail, “crisis backstops” remain in place, on a full allotment / fixed rate basis for € (MRO, LTRO, TLTRO and ELA) and US$, at the ECB.
(5) Capitalization higher: External cap hikes ~€800 bn (since crisis start), further aided by retained profits, deleveraging, disposals.
P&L outlook softer, due to known drivers:
(1) weak revenue trends (NIM compression, low loan growth), (2) a worsening credit quality outlook, (3) falling ability to cut costs. None of this is new, and 4Q15 results (see: The aggregate picture, published today) will not result in profit revisions that would justify the share price moves, in our view.
Liquidity of markets, across asset classes, lower
Whilst banks’ balance sheet liquidity is high, market liquidity – across all asset classes – has reduced. Banks inventory plays a role – the 4 European IBs alone have cut inventory by >US$2 tn over the past 4 years. Less liquid markets act as volatility amplifiers – meaningfully so.
Highlighting BNP: our large cap pick in EZ
We recently added BNP, a Euro large cap, to the CL-Buy, and we highlight it here due to: (1) “selfhelp” potential (US disposal options), (2) solid 4Q15 (capital up 20bp Q/Q), (3) TBPVS growth (+8% y/y), (4) negative NPL formation (-2% q/q), (5) attractive valuation (0.6x P/TBV; 6% div yield).