20160712-法国巴黎银行-BREXIT_THE_PATH_AHEAD__MARKET_UPDATE_AND_FOCUS_ON_FINANCIALS_20页_981kb

BREXIT THE PATH AHEAD: MARKET UPDATE AND FOCUS ON FINANCIALS

Core Content Overview

This document provides a comprehensive market update and financial perspective on the implications of Brexit for the UK and European markets, particularly focusing on the banking and credit sectors. It outlines the political developments, market reactions, and investment strategies in the wake of the UK's decision to leave the EU.

Main Political Developments

UK Leadership and Article 50

• Conservative Leadership: Theresa May was confirmed as the new Prime Minister and leader of the Conservative Party after Andrea Leadsom withdrew.
• Labour Leadership: Jeremy Corbyn lost a confidence vote, but challenges the ruling. Angela Eagle is the official candidate.
• Article 50: The UK will not invoke Article 50 immediately. The new government needs time to define its strategy, and an Act of Parliament may be required.
• Political Contagion: Brexit has caused political instability, a fall in the British pound, and a severe economic slowdown. This has raised concerns for Italian banks, which are struggling with non-performing loans (NPLs) and need to raise equity.

Market Prognosis Post-Brexit

• Volatility: Realised volatility and volatility of volatility are expected to remain high.
• Flight to Quality: USD, core government bonds, gold, and JPY are likely to benefit.
• Interest Rates: Global rates are expected to remain low or flatten, with the UK experiencing lower real and nominal yields and wider ASW spreads.
• Equity Impact: Risk-off sentiment is expected to hit UK and EU financials, autos, airlines, UK retail, homebuilders, and cyclical stocks.
• Credit Outperformance: Credit assets are expected to outperform equities due to ECB support through programs like TLTRO, CSPP, and PSPP.
• Currency Impact: GBP is expected to remain weak, while EUR is less affected as sentiment shifts away from Brexit.
• Banking Sector: Banks are expected to suffer from lower returns on equity (RoE) and cost of equity (CoE), with a potential 28% earnings loss by 2018.

Financials Equity Perspective

Eurozone Banks

• ROE and PBT: Eurozone banks are expected to generate a ROE of 6.8% in 2016, with a potential -28% PBT by 2018 due to increased funding costs, slower loan growth, higher impairments, and lower capital market revenues.
• Price-to-Book Ratio: At 0.47x, the sector appears cheap, but this is due to underlying weakness.
• NIM and COE Sensitivity: The bottom right table shows the sensitivity of eurozone bank share prices to changes in NIM and COE. For example, a 1% increase in NIM leads to a 7% increase in returns, while a 1% increase in COE leads to a 9.5% drop.
• Italian Bank Impact: If Italian banks are forced to raise equity, the COE could rise by 2%, but a resolution could bring it down to 10-11%.

Derivative View

• Sector of the Year: Eurozone banks are the worst performing sector, with high put and call open interest.
• Volatility: Eurozone bank volatility is expensive relative to SX5E, with levels returning to 2012 levels.
• Skew: High demand for puts has driven SX7E skew to stretched levels.
• Investment Strategy: Investors are advised to consider selling SX7E calls to finance SenFin receivers or to compress Sub/Sen CDS or Cash positions.

UK Commercial Property and Banks

• Property NAV Decline: UK commercial property NAVs are expected to fall by 20% by 2018 due to rising gilt yields and falling rental values.
• REITs Discount: Major UK REITs are currently priced at 26-31% discount to end-2016e NAV.
• UK Banks: Lloyds and RBS are most exposed to commercial property loan risks, with 46% and 66% of their tangible book value in property lending.
• Leverage: Current leverage is lower than in 2008, which could limit the downside.

Financials Credit Perspective

European Bank Spreads

• Not a Lehman Moment: European bank spreads are not at Lehman levels, but there are still concerns about NPLs and capital adequacy.
• Stress Tests: Stress Tests on 29 July will not be a pass or fail test, but will focus on capital planning, deleveraging, and asset sales.
• Political Uncertainty: The UK's new PM in September, Italian referendum in October, and French/German elections in 2017 will influence the credit cycle and negotiations.

Italian Banks

• NPLs: Italian banks have EUR 360bn in NPLs, with bad loans ('Sofferenze') at EUR 200bn, marked at 45c on average.
• Coverage Ratio: Coverage ratio is at 49%, with an estimated EUR 30bn in additional provisions needed if Sofferenze loans are valued at 30c.
• Solutions:
  • GACS: Securitisation of NPLs with a government guarantee for the senior tranche and at least 50% of the junior tranche sold.
  • Atlante Fund: EUR 4.25bn fund to recapitalize weakest banks and support NPL sales; currently EUR 1.75bn remains.
  • New Bankruptcy Law: Expected to increase market price by 5%.
• MONTE: MONTE is not at imminent risk of resolution or recapitalisation. It may need EUR 3-6bn in equity to align with market prices, but a bail-in is unlikely.

Key Takeaways

• Brexit has created significant political and financial uncertainty, leading to market volatility and a flight to quality.
• Eurozone banks are underperforming due to low ROE, high COE, and NPL challenges.
• The ECB is supporting credit markets through various programs, but peripheral banks, especially Italian ones, are under pressure.
• UK banks are facing challenges from falling mortgage growth and rising bad debts in commercial property.
• Derivative strategies suggest a bias towards credit over equity, with a focus on managing volatility and skew.
• The long-term profitability of European banks is expected to remain subdued due to low interest rates and regulatory pressures.