Don't knock the Stress Test, but capital raising opportunity missed

- "The CEBS stress test result is of limited value to us as expected by the market. However, it offers new input data transparency especially on sovereign risk exposure - this is positive. Hence, with CEBS data we are able to build a JPMC Acid Test for 35 banks incl. banking book
sovereign haircut with 13 out of 35 banks falling below core T1 6% in 2011E with €8.7bn capital deficit without adjusting for €35bn of gov’t support."
- "However, the CEBS stress test is also an opportunity missed, as EU member states could have encouraged banks to raise equity i) as core Tier I ratio remains low at 7.4% 2011E in our JPMC Acid Test, and ii) to demonstrate to the debt investor ability to access the equity capital markets."
- "Why do we equity holders need happy bank debt investors? The missed equity capital raising opportunity becomes even more relevant when focusing on the upcoming material refi calendar with €245bn senior debt refi remaining (35%) compared to total 2010 €707bn outstanding FY2010 senior refi. Senior debt redemptions remain high in Eurobanks at close to €690bn in each year 2011 and 2012. In addition, within the covered bond market we have €162bn refi remaining or 36% this year."
- "Time for bank differentiation post CEBS stress test: It is interesting to witness the credit market differentiating between quality of issuer whereas Eurobanks are mainly clustered close to 1.0x 2011E NAV. We expect CoE differentiation to start to take place slowly among banks with i) well capitalized banks re-valuing to over 1.0x, and ii) high cashflow generative
banks with low P/pre-provision profits to outperform. The CEBS Stress Test is on a static balance sheet, resulting in material RWAs due to credit migration increases, which is conservative, and helpful in our analysis to differentiate between bank valuations."
- "Within the Eurobanks our preference is for IB geared private banks over credit banks with Fixed Income rates volatility high, low sovereign and traditional credit risk exposure compared to traditional banks with ongoing concern and uncertainty in respect to European traditional credit provision run-rate in 2011E. Within credit banks we prefer high cashflow
pre-provision banks with preference for non-EU exposure. Hence our top picks are: CSG, UBS, DnBNor, HSBC, UCI, SG. We remain cautious on Spanish Banks."
JPMorgan European Banks 20100726