Macro & Equity Global Alpha (MEGA)
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Key takeaways
A bottom-up analysis shows Commerz, Permanent TSB and Banco =PM are most sensitive to rising EUR short rates
We see the first ECB hike in 2019, months later than market =ricing. It is a long wait for the gains from higher rates
Supervisory pressure on problem assets and valuations make =ates only a part of the picture. Buys: Intesa, ING, SocGen, =KIR
FULL REPORT
Sensitivity by bank: a weaker start =akes higher gearing
In this report, we discuss the rate sensitivity by =ank in Europe. It complements Eyes on the prize, but mind the floor 17 March =017, which looked at the strong positive earnings =earing in the system of as much as 25% on profits for a move back in ECB rates to zero.
Top five all have depressed starting =oints
Bank disclosures vary widely and are not =omparable. We have had to make significant assumptions to seek to make them like for like. We =hen cut the figures in several directions: how much sensitivity there =s for a 100bp move in euro rates, summarises and Chart then = the the same banks 100bp ); that relative analysis have to the the for greatest all assets =nterest combined of ). the Table rates bank = level (Chart =Chart of 8 =ensitivities.
But euro rates stable until =019
The levels of sensitivity do not map closely to =ur Buy-rated banks; indeed several of the most positively geared are Underperform-rated =Commerzbank, Popular, Deutsche). This reflects a mixture of company specific issues including elevated =roblem assets; or low profitability even in a higher-rate environment. =aluations are also important: Commerz is valued 50% above the industry =n 2017 PE, with no dividend. But as discussed in Eyes on the prize, it also reflects that we do not expect euro area rates to rise for a considerable time. The market is pricing a more-than 70% likelihood of a rate hike within 12 months, =hile we see 2019 as a more likely date for the first move in short =ates.
Buys more balanced
As such, we retain our preference for banks with a =etter balance of current earnings and distributions, which also have material upside =hen rates do eventually rise. Buy-rated banks include Intesa; SocGen; =ordea; ING and Erste.
European Banks Strategy: Rate sensivity: a =ottom up analysis - Europe - 13pp
Global Research
Rich,
If the other bank =as ING, it's one of our top picks. We generally like owning =anks via optionality (calls or call spreads) into the French elections =rom a risk-reward perspective and then owning outright thereafter. And =iven how you and Jeffrey have more flexibility (you don't answer to =utside investors), since Le Pen seems a low risk, you might be willing =o be more aggressive. Investors are underweight Europe overall and =ithin Europe, underweight European banks. Very low interest from US institutional client base in Europe right now — =ndicating they do not own it or if they own it, they don't own =nough.
We also like the =utch insurance & investment management company NN Group.
Please let me know =f you'd prefer to look at individual names or a basket/index =nd if you prefer options over buying outright, I can send some ideas =cross.
In a =utshell
EUROPEAN BANKS: MOMENTUM SHIFT. RATES TO ZERO = 25% UPLIFT =O PROFITS?
The Rates markets have aggressively re-priced the ECB =utlook: now 12.5bp rate rises priced for 12 months. We =stimate as much as 25% upside for sector profits on a rates move back =o zero. GDP is better, volumes are picking up, markets are stronger; =anks are leveraged macro plays. 2% annual loan growth is low, but three-month =nnualized is approaching 3%. Momentum is finally happening. Stock =arkets at long term highs, credit spreads tight, European Composite =acro Indicator has moved up, earnings revisions are positive. The =utlook for Euro banks is better than it's been for several =ears. Yet on our work, it's still a top-3 =nderweight sector in Europe. The big caveat is margin pressure. Buys ==ING, KBC, Intesa, SocGen, Erste, =KIR. Caution on Spanish banks given valuation, risks around NPAs. More positive Italians post capital raisings: Buy =nicredit. Recently hosted CEOs of both Intesa & Unicredit. Derivs =dea = SX7E Jun 135/145 call spread. Separately, ask for our =autious view on UK Banks.
Rich,
ING has an =DR, ticker ING, that trades US hours.
ING July =1st $15 calls cost $0.85 indicatively ($14.95 =ef)
ING July 21st =15/$17 call spread costs $0.75 indicatively ($14.95 ref)
I prefer buying the call outright vs =he call spread.
I can price =BN with Europe in the morning if you're interested.
Regards,
Amanda
Richard =ahn
HBRK Associates Inc.
575 Lexington =venue 4th Floor
New York, NY 10022
tel
fax
cell =
Mind the Gap — SPX, =KY and SXSE EPS rel to 2008 Peak
And an update from =ate March – basically just saying to use pullbacks as a buying =pportunity
Global =quities
MEGA – Europe
ECB Sources today are =ommenting that markets have over-interpreted the March Meeting in =eference to the trajectory of rates – the market has taken this =s negative for EURUSD + SX7E and positive for EUR Rates
In our MEGA Trade =ortfolio we are long SX7E + EURUSD for higher EUR Rates so thought an =pdate necessary
4 points we would make -
Ralf Preusser =akes the point that this is a further indication of the rift between =he hawks and doves and therefore makes June a more heated meeting.. in =tself the headlines have told you nothing new - Praet yesterday was even more =xplicit than this
Rich Wilson =ur front end trader makes the point some of the schatz (2y) and bobl =Sy) strength may be related to quarter end buying and movement on =eadlines more a symptom of short term positioning... if anything we have seen =ccounts trying to fade the move from here (looking for ways to play a =ate hike at better levels)
Given the clear =isagreement within the ECB and how quickly the market will move to =aking June as a live meeting on a benign French Election outcome - we =till think the larger moves are still for SX7E higher, EURUSD + EUR rates higher =lbeit the path will not be linear
We do not expect =he EURUSD /EUR Rates/SX7E HIGHER as entirely one way because -
(a) If Brexit/US Election =rading Patterns are correct there is likely to be a 'cross =sset panic' moment (10.20 trading days before the 2nd round)
(b) ECB market commentary =n rates likely to be 2 way into the June Meeting given disagreement =ighlighted above
Therefore we view today as an adding opportunity to our core =iew of SX7E higher, EURUSD higher, EUR Rates Higher