The market moves: The LIBOR spreads have returned to normal, unsecured bank issues were successfully placed, and there were two new collateralized bonds on the Spanish market. The extensive state intervention to stabilize the banking system seems to work.
The market moves: The LIBOR spreads have returned to normal, unsecured bank issues were successfully placed, and there were two new collateralized bonds on the Spanish market. The extensive state intervention to stabilize the banking system seems to work. So we have from the brink of nationalization and the loss of equity holders of the bonds to remove the systemic risk was significantly reduced, and the risk of contaminated sites are now the governments, the debt to hedge. The industry is returning to the usual game of attack and defense, with the clear winners are after can earn commissions again. As a bond analyst, we thought now, as well the fundamentals of corporate bonds issued by individual banks on their way through a deep cycle of credit. This is a change to the concern about a systemic risk contaminated sites and the direction of policy.
The recently completed stress tests of the 19 largest U.S. banking groups were an important step to restore confidence in the U.S. banking system restore. Accordingly, the banks in the next seven quarters of the estimated cost of credit in the amount of 600 billion U.S. Dollar, when a negative economic scenario occurs with a GDP decline of 3.3 percent in 2009, a growth of 0.5 percent 2010 and an unemployment rate of 8.9 percent in 2009 and from 10.3 percent of the 2010th The banks had a total of some 525 billion U.S. dollar capital including capital increases in the 1st Quarter of 2009, making them roughly 75 billion U.S. dollars are missing, the "potential" losses.
It has been criticized that the stress tests relatively stress-free would have been. Probably the weakest part of the tests were the low hurdles, both at the ratio of core capital ratio of the top group (Tier 1) of 6 per cent as well as their common ratio of 4 percent. This was not the banks (with the exception of the auto financing GMAC) forced capital raise in the private market, because the already existing money from the rescue program TARP (Troubled Asset Relief Program) for all banks in order to cover deficits set. Also could easily argue that the definition of Tier-1-common conservative design would be: by the inclusion of the balance sheet item of concern "accumulated other comprehensive income" (other parts of the overall results), alone at the four major U.S. banks already in minus almost 50 billion U.S. Dollar was. This would give industry a bigger hurdle to overcome had.
Good news for bond holders
That may be everything. But the announcement of positive results for the banks opened the tap the private market. Especially the fact that the privatization of bond holders has been averted, the market got the message that the risk of a bank collapse under the weight of the losses will continue to the state and taxpayers should be passed.
From the viewpoint of bond-holders are the good news, and the banks are now queuing to get a glut of liquidity to operate, from investment-grade issuers from other sectors since the beginning of the year in the new issue market. Goldman Sachs & Co. was a common share offering of 6 billion U.S. Dollar, which is a five-year issuance of 2 billion U.S. dollars outside the TLPG (Temporary Liquidity Guarantee Program) followed, before the official announcement of results early on takeoff . JPM Chase & Co. followed with the issuance of ten-year non-TLGP bonds amounting to 3 billion U.S. Dollar against the results and further 2.5 billion U.S. dollars in five-year bonds after the announcement. Morgan Stanley & Co. came with 4 billion U.S. dollars in common shares and non-TLGP emissions, closely followed by the stock offering in the amount of 8 billion U.S. dollars from Wells Fargo & Co. Overall, banks have flooded the market with around 23 billion U.S. dollars of debt outside of TLGP and 29 billion U.S. dollars in shares in connection with the stress tests tapped. A clear sign that the market is more positive compared to banks and the banks are ready, this confidence by improving their balance sheet strength to the test.
The European banks were able to take advantage of this feel-good factor, and said since the US-stress tests primarily collateralized securities without guarantee. For a large proportion of these emissions, it was a song from the category of "primarily unsecured" (senior unsecured) with a maturity 5 p.m. to 10 p.m. years. The development in the secondary market was generally good. We anticipate further debt 5-/10-jährigen priority issues and potential conversions of preferred stock (not from the TARP) in registered capital in the coming months. This situation is for banks and their bond holders undoubtedly positive, with the advantage of continuity of self is expected to strengthen. But the asymmetry of bond yields is forcing us to potential pitfalls to be respected.
Two factors give cause for vigilance
First, the risk is not a legacy of the past that the state has been taken over. It was simply transferred to the state. If, however, the ability of the State of its obligations, in doubt advised the banks could still beckon systemic problems. In many countries there are significant programs for the issuance of bonds and the possible danger that states for their bonds is not enough to find a buyer, worries. If a state can not issue bonds, are expected to banks, the weak state of these guarantees are dependent is excluded from the market quickly, which is just another systemic financial crisis in the country concerned would trigger. This risk exists in any case in certain European markets, where governments try to systems with the bank debt to support its GDP, far beyond.
Secondly, the debt in the banking system, despite intensive efforts by central banks to Reinflation their respective national economies. The Bank survey of the U.S. central bank showed that this debt in a combination of tight credit conditions and a reduced loan demand, especially from the corporate side there. This is a - by the feedback through the real economy-driven - the long-term trend that is independent of the solvency of banks. The reports of the first quarter showed a marked deterioration in credit quality, with sharply rising losses in commercial real estate, loans to small businesses and credit cards as well as rapidly increasing mortgage defaults and continuing high subprime mortgages and losses in individual houses. A series of bank leaders warned that there is still no sign of recovery and that these losses would continue to grow. It is clear that many banks will have difficulties in coming quarters to make a profit - and this despite the advantage of a relatively steep curve of government bond yields. There remains the vulnerability to unexpected shocks persist.
The future could be rosy, but caution is called for
What happens now? Access to capital markets is certainly the first step to get the banks back on their feet to get. Other bond issues with 10-year maturity, coupled with the issue of ordinary shares will take us further on the road to recovery. The quality of bank capital has changed in the years leading up to crisis steadily worsens (especially the increase in preferred shares). Therefore, it is crucial that the industry is trying to redress this imbalance by generating adequate core gains and / or transformation verlustabsorbierender papers in share capital to improve, leading to potential dividends in the house holds. Credit losses especially in credit cards, small businesses and commercial properties are in this cyclical downturn will increase. The system must therefore shift to capital preservation. Accordingly, the TARP funds to be repaid only if the currently still somewhat blurry picture of the downturn became clear.
The current steep yield curve in the U.S. is for the banks, there is certainly helpful, although more than one bank subsidy side of political will. However, the increasing intervention of the authorities (for example, by limiting credit card interest, restriction of account fees, etc.) constitutes a threat for the actual earnings power, which the banks through this cycle brings.
Therefore, we remain cautious and buy bonds backed primarily on bank-holding company level as well as secured and subordinated bonds through preference shares with the strongest and systemically important banking companies. Our caution in issuers with lower credit quality has two reasons. For one, these are structural problems, since the market papers without more maturity and as such than as regards bonds, which to a certain date repaid. On the other hand, the danger of privatization of subordinated secured debt instruments high, as further recapitalization is necessary, especially for the holding company of weaker banks. Recent deals secured subordinated securities mean for many bond holders of the debt total losses and confirm that the issuer does not intend to borrow funds at par to terminate. We consider this fact even as a failure of the gentle art For this reason, we remain cautious, as many of the issuers with lower credit ratings are concerned.
