Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.
There is a Method to the Madness: On to my perspective of the individual sovereigns
We performed a pan-European scan to identify banks with rising loan losses from troubled
exposure. We retrieved an initial list of 510 banks and applied a number of filters based on a) Banks' assets as % of GDP b) Texas ratio c) share
price etc to arrive at 40 banks for deeper analysis.
The selected 40 banks were organized into different sets for analysis based on the country of domicile.
1) Spain - Owing to serious issues surrounding Spanish
banks, we analyzed the four Spanish banks separately. It is observed that Spanish banks are witnessing substantial increase in NPAs. Included in the list is BBVA
which we have already covered (see The
Spanish Inquisition is About to Begin..., which has turned out to be a most profitable trade). Among the four analyzed banks, the weakest bank had the highest Texas ratio of 51.6% and rapidly growing NPAs (increasing 132.5% over the last one year). Banco Satander , Spain's largest (and arguably, strongest) bank, is also witnessing substantial
increase in NPAs growing about 95% over the last one year. The Bank's Texas ratio stands at 37.5%, although low relative to other banks
examined, is still rich and the rising provisions for loan losses are
depressing Bank's profitability. The stock has risen 86% over the last
one year and is currently trading at Price-to-tangible BV of 2.1x. Banco
Satander has an ADR. Subscribers can download a tear sheet on all Spanish banks investigated here: Spanish Banking Macro Discussion Note 2010-02-09 02:48:06 519.40 Kb).
I will continue this post with banks and sovereign stress data for Austria, Belgium, Sweden, Denmark, UK,
Greece and Italy as well as the countries in central and eastern Europe, Asia and other emerging markets over the next few days. In the meantime, let's compare Spain and Greece on an apples to apples basis...
Subjective thoughts on the Spanish Situation: Embedded structural rigidities will prolong the downturn causing the oft sought after "V shaped recovery" to become an unlikely occurrence. The very high private sector debt levels most likely exacerbated the effects of global downturn. A round of consolidation and restructuring seems inevitable as both the NPAs in its banks are increasing on a fundamental basis and the banks are forced to come clean with the true losses on their commercial and residential real estate in the form of increasing NPAs (see The
Inquisition is About to Begin...) as well as the share of NPLs which are also increasing. PWC expected the bad loans ratio to increase to 8% by the end of 2009. It is apparent that the sector will need refinancing. however, Spain's loan-to-deposit ratio of 130% is higher than the Eurozone average of 115%, which shows Spain's high reliance of wholesale funding and securitization channels, both of which have dried up.
What is not publicly touted about Greece? Greek banks exposure to emerging Europe poses an additional downside risk to the economy (I will get into this in detail for subscribers later on this week). Public debt stood at 94% of the GDP with the current account deficit rising to 14% of the GDP in 2008 (deteriorating public fiances is another concern).