Money Never Sleeps
Presentation to the Government Investment Officers Association
David Hendler
Head of U.S. Financial Services
dhendler@creditsights.com
CreditSights - Fundamental Research
Topical, Strategic, Sector and Company credit research on unsecured
bonds, secured bonds, CDS, loans, hybrid securities, and select equities
of the major companies in the U.S. and Europe. A newly established
research team in Asia is expanding our research coverage in the AsiaPacific region.
Benefits

Independence/Investor pays model

Timely

Quality of research

Unique insight

Focus/Time

Third party verification

Cost
2
CreditSights - Coverage
 75 analysts covering 40 industries across 7 broadly defined sectors,
plus U.S., European & Asian Credit Strategy
 700 companies in core coverage, 1,400 companies with written
research
 US
495 Companies
 European/Asian
205 Companies
 High Grade
459 Companies
 High Yield
241 Companies
 55 Industry Outlooks to be published in early 2011
3
CreditSights - Customers
 950 Institutions and 6,000 people
 Mutual Funds
 Insurance Companies
 Investment Advisors
 Hedge Funds
 Dealers/Banks
 Pension Funds
 Government Sponsored Entities
 Government Regulators
 Corporations
4
Policy Time Table Update: 2011
•
Financial Stability and Bank Capital Regime
> Dodd-Frank Wall Street Reform/Consumer Protection Act (July ’10)
 Regulatory interpretations and studies
 Phase-ins and follow-up regs
 Fed’s SCAP-2 for dividends & buybacks
> BIS III and IMF Global Financial Stability Study (August ’10)
 New/higher capital standards/global coordination
 Loss absorbency regime – write-downs/conversions/bail-ins
 Huge global infrastructure overlay on top of market mechanisms
•
U.S. Mortgage Market Dynamics
> Reforming America’s Housing Finance Market (February ‘11)
 GSEs est. losses from $200B to $400B
 Enhanced HAMP released by Obama Administration (March ‘10)
 Proposed Global Servicing Settlement (Fed and State AGs)
 Questions on legality/fairness/loss distribution between 1st and 2nd
liens ($20B?)
 Republican pushback in favor of banks
5
Dodd-Frank Wall Street Reform & Consumer Protection Act
•
•
•
•
•
•
Revamps Twin Engines of Financial Growth Over Last 30 Years
> Consumer lending business
> Capital markets & financial innovation/engineering
Restricts 3Ls: Leverage, Level 2s, Level 3s
Protects consumer borrower rights
Protects tax payers/gov’t interests, prohibits TBTF funding
Unleashes host of potential unintended consequences
> Restrictive economic/loan impacts
> Credit reallocation amongst consumer/commercial spheres
> Securitization market impacts
> Restricts U.S. financial services global competitiveness
> Banks Adaptation/Repositioning
Congressional Republican pushback across various rulings
6
Dodd-Frank Act Deficiencies
• Credit underwriting: under emphasized, over reliance on
capital/liquidity protections
• Automated credit scoring: esp. FICO scores as contributing
factor to poor credit underwriting procedures
• Risk management: still needs to be empowered, improvement
of credit procedures
• Public-Private Partnership: no formalized forum to debate
boundaries of risk & return
7
Dodd-Frank Act – Highlights
Key Provision
Com m ents
Fin. Stability Oversight Council (FSOC)
Monitors systemic trends; sets stricter capital/liquidity rules
Orderly Liquidation Authority
FDIC unw inds failing BHC/NBFCs*; Tsy absorbs upfront costs; afterthe-fact assessment on BHCs >$50 B, other NBFCs
Consumer Financial Protection
Bureau w ithin Fed: ow n budget and director
Proprietary Trading (Volcker Rule)
Phase-in prop. trading ban; carve-out: 3% of capital in PE or HF
Derivatives Activities (Lincoln Amend.)
IR sw aps and some CDS remain in bank; energy, metals, and ag.
commodities move to sep. cap. affiliates
Capital Regime (Collins Amend.)
Tier 1 cap: phase-out Trups over 3 years, beginning in 2013
Banking Regulators
OCC oversees savings banks; OTS activities eliminated
Securitizations
5% risk retention; carve-outs for low -risk mortgages
Debit Interchange (Durbin Amend.)
Fed sets "reasonable/proportional" debit fees, proposed $0.12 cap
Source: U.S. government, CreditSights
*NBFCs = Non-Bank Financial Companies
8
Dodd-Frank Act – Implementation Timeline
Dodd-Frank Provision
Fin. Stability Oversight Council (FSOC)
Orderly Liquidation Authority
Status/Im plem entation
In place
Final rule to be issued by 3/2011, new FDIC NPR
Proprietary Trading (Volcker Rule)
Recent FSOC study; rule adoption/implementation w ithin 9 months
Securitizations
Consumer Financial Protection Bureau
Effective 4/2011; pending proposal and adoption of rules
Effective 7/21/2011
Debit Interchange (Durbin Amendment)
Comment period over; could be diluted/mitigated. Effective 7/21/2011
Derivatives Activities (Lincoln Amendment)
Capital Regime (Collins Amendment)
Effective 7/21/2012
3Y phase-in begins 1/1/2013
Source: U.S. government, CreditSights
9
BIS III Capital Standards
BIS III Capital Standards
Minimum
Conservation Buffer
Minim um + Buffer
Countercyclical Buffer
Com m on Equity
4.5%
2.5%
7.0%
TBD
Tier 1 Capital
6.0%
2.5%
8.5%
TBD
Total Capital
8.0%
2.5%
10.5%
TBD
Source: Basel Committee on Banking Supervision, CreditSights
10
BIS III Phase-in Schedule
BIS III - Phase-in Schedule
2011
2012
2013
2014
2015
2016
2017
2018
2019
Min. Tier 1 Common
3.50% 4.00% 4.50% 4.50% 4.50% 4.50%
4.50%
Conservation Buffer
0.625% 1.25% 1.875% 2.50%
Min. Tier 1 Common + Cons. Buffer
3.50% 4.00% 4.50% 5.125% 5.75% 6.375% 7.00%
Min. Tier 1 Capital
4.50% 5.50% 6.00% 6.00% 6.00% 6.00%
6.00%
Min. Tier 1 Capital + Cons. Buffer
4.50% 5.50% 6.00% 6.625% 7.25% 7.875% 8.50%
Min. Total Capital
8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
8.00%
Min. Total Capital + Cons. Buffer
8.00% 8.00% 8.00% 8.625% 9.25% 9.875% 10.50%
Countercyclical Buffer*
Deductions from Tier 1 Common
20.00% 40.00% 60.00% 80.00% 100.00% 100.00%
Recognition of capital instruments**
90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00%
Supervisory
Parallel run
Final
Pillar 1 migration
Leverage ratio
Monitoring
Disclosure starts Jan 1st, 2015
Adjust.
Liquidity coverage ratio
Observation Period
Minimum Standard
Net stable funding ratio
Observation Period
Minimum Standard
Source: Company reports, CreditSights
*Range of 0% - 2.5%. Consists of common equity or other fully loss absorbing capital, to be implemented on a
discretionary basis by local regulators when deemed that excess credit growth is resulting in a system-wide build-up of risk
** Instruments that no longer qualify as non-common Tier 1 or Tier 2 capital will be phased out over a 10 year period, 1/1/13
Cons. = conservation
11
Dodd-Frank vs. BIS III: Capital Comparison
Capital ratios
Risk components
Preferred stock
Trust preferreds
Subordinated debt
Dodd-Frank
Focus on common equity
No changes
Tier 1 eligible
3Y phase-out
Tier 2 eligible
Basel III
Higher ratios / new focus on common equity
Includes market/counterparty risk
Legacy instruments - 10Y phase-out
Legacy instruments - 10Y phase-out
Legacy instruments - 10Y phase-out
12
U.S. Banks: Liquid Asset Ratio
60%
50%
40%
30%
20%
10%
MTB
BBT
HBAN
FITB
AXP
WFC
ZION
STI
MI
CMA
COF
USB
FHN
PNC
RF
KEY
JPM
BAC
C
STT
BK
NTRS
MS
GS
0%
Source: FFIEC, SNL, CreditSights
As of 4Q10. Green = Strong, Orange = Borderline, Red = Weak.
Bar represents median = 18%
Liquid asset ratio: (cash & equivalents + securities + Fed funds & repos + trading account – pledged securities) / total assets
13
Orderly Liquidation Authority: Hope or Hostage?
•
Key Takeaway: taxpayer bailout prohibited; capital structure vulnerable
•
BIS proposals differ as public monies still available, broader loss
sharing to subordinated debt, possibly to senior debt
•
Harmonizing global regulation – BIS 3 gravitating to Dodd-Frank
•
Investment bank "bail-in" plans now part of BIS proposals
•
Market Discipline: priority of claims, bridge banks, loss assessments
14
Bail-Ins Brouhaha – System Stabilizer?
•
Bail-in part of BIS 3 discussion; could recapitalize “nonviable” SIFIs
•
“Pre-packaged bankruptcy-type" mechanism for allocating losses
across unsecured capital structure, but within a regulatory framework
•
Triggers “automatic” recapitalization plan designed to be activated in a
crisis, before public sector capital support
•
Could preserve franchise value as "going concern", reducing writedown potential of senior unsecured debt
•
Maintains protections for depositors/swaps, through key risk enablers;
repo at FMV according to FDIC Interim Final Rule (1/18/2011)
•
Could work as an alternative, instead of wind-down, bankruptcy
15
Bail-Ins Brouhaha – System Stabilizer?
For Banks:
Maintains access
to regulatory
capital which has
been stymied by
credit crisis and
investor confusion
on bank
resolutions; could
increase cost of
capital
For Regulators:
Enforces market
discipline with capital
structure at risk of
loss upfront;
minimizes systemic
risk and political
fallout
For Investors:
More transparent and
uniform structures and
bond covenants and
triggers; still may raise
return hurdles and/or
exclude participation by
traditional fixed income
investors - the
regulatory desired
investor class
For Investment Bankers:
Innovative compromise
solution; preserves largest
sector for debt deal flow from
global financial institutions;
major underwriting fee
revenues driver and could
enhance fee potential for
some instruments and overall
16
Contingent Capital Notes – Potential Issuance
$35
$30
$25
$20
$15
$10
$5
M
I
FH
N
C
G
S
M
S
U
SB
PN
C
ST
I
C
O
F
BB
T
BK
FI
TB
R
F
KE
Y
M
TB
ST
T
C
M
N A
TR
H S
BA
N
ZI
O
N
BA
C
JP
M
W
FC
$0
Source: SNL, CreditSights
Represents 2% of risk weighted-assets
As of 4Q10. In $ billions.
17
Ratings Agencies: Proposed Changes
•
S&P
 Places greater emphasis on country, economics, and industry risk
 Individual company analysis increases importance of capital/funding
 Earnings de-emphasized
 Short-term debt: brokers more vulnerable to downgrade to A2
•
Moody’s
 Reassesses government willingness and capacity for support
 Higher likelihood of govt. sharing bailout cost with debt holders
 Focused mainly on the ratings impact to bank subordinated debt
 Possible negative impact to acquirers of distressed banks
Source: S&P, Moody’s, CreditSights
18
Mega-Trends: Banks
High margin products
- C&I Lending (small/middle/large)
- CRE Lending
- Affluent Customers
- Pre-paid cards for non-prime
- Overseas Ops.
Higher operating leverage
- Cards: Convenience vs. Credit
- Basic Capital Markets/Transactions Services
- “Nuts & Bolts Banking” vs. “Casino Royale”
19
Mega-Trends: Possible Winners & Divestors
FAVORS
Wells Fargo
ADAPTORS
Bigger Regional Banks
Bank of America
Citigroup
Citigroup
Processor Banks
JPMorgan
Asset Managers
Goldman Sachs
Morgan Stanley
DIVESTORS
Bank of America
Citigroup
20
Top States for Manufacturing
Top 25 States-Manufacturing
State
GSP
CA
$1,846,757
TX
1,223,511
OH
471,508
NC
400,192
IL
633,697
PA
553,301
IN
254,861
MI
382,544
WI
240,429
GA
397,756
NJ
474,936
TN
252,127
LA
222,218
VA
397,025
MA
364,988
MN
262,847
WA
322,778
MO
237,797
AL
170,014
OR
161,573
KY
156,436
CT
216,174
IA
135,702
SC
156,384
AZ
248,888
GSP Contribution
11%
$205,222
15%
177,678
20%
94,952
23%
90,640
14%
87,188
15%
83,666
28%
71,000
18%
69,895
23%
54,911
13%
50,293
10%
48,941
18%
45,779
21%
45,590
11%
41,766
10%
38,282
14%
37,714
12%
37,440
15%
36,597
21%
34,986
21%
34,650
22%
34,205
15%
31,879
23%
31,878
19%
30,442
9%
22,448
Banks in Top 4*
BAC, WFC, C, JPM
BAC, JPM, WFC
PNC, FITB, KEY, HBAN
BAC, WFC, BBT
JPM, BAC
WFC, PNC
JPM, PNC, FITB
BAC, JPM CMA, PNC
MI, USB, JPM
BAC, WFC, STI, SNV
BAC, WFC, PNC
RF, STI, FHN, BAC
JPM, COF, RF
BAC, WFC, BBT, COF
BAC
USB, WFC
BAC, KEY, JPM, WFC
BAC, USB
RF, WFC, BBT
Scorecard**
BAC
14
WFC
12
JPM
9
PNC
5
USB
3
BBT
3
RF
3
FITB
2
STI
2
KEY
2
COF
2
C
1
CMA
1
ZION
1
MI
1
FHN
1
HBAN
1
SNV
1
BAC, WFC
BAC, JPM, WFC, ZION
Source: BEA-US Department of Commerce, CreditSights
$ in millions as of 2008. *Includes banks in CreditSights universe in top 4 in state's deposit market share
**Ranked by number of Top 25 Manufacturing states in which bank is in top 4 in deposits
21
GSE Reform: U.S. Treasury Proposals
•
Government and GSE role in housing finance likely to lessen, more
private sector involvement
•
Three Proposals:
> Option 1: Limited govt role, privatized system of housing finance
> Option 2: Govt backstop, privatized system of housing finance
> Option 3: Govt reinsurance for MBS, privatized housing finance
•
More discussion in 2011, probably punted to next Administration
22
Mortgage Mods: Response vs. Reality
•
eHAMP
> Obama program provides relief to indebted homeowners
> Target of 7-8 million modifications
> To date, 1.4 million trial modifications, 500K permanent modifications
•
Potential Federal Regulators and State AGs Settlement
> Force servicers to offer principal reductions if LTV>100%, subject to NPV test
> May levy fines against infractions, fund programs to avoid foreclosures, etc.
> Settlement costs could add up to $20B
> GOP pushback against government strong arm tactics
> Possible proportionate write-downs of 2nd liens
•
Bank Initiated
> More inclined to extend terms rather than principal reductions
> Driven mostly by NPV tests
23
Reps & Warranties Risks: Estimated Capital Impact (BIS III)
Acceptance Rate
Bank of America: Estimated Tier 1 Common - 4Q12
Repurchase Requests as % of Remaining Loans
2%
4%
6%
8%
10%
12%
10%
8.8%
8.8%
8.7%
8.7%
8.7%
8.7%
15%
8.8%
8.7%
8.7%
8.7%
8.6%
8.6%
20%
8.8%
8.7%
8.7%
8.6%
8.6%
8.5%
25%
8.7%
8.7%
8.6%
8.6%
8.5%
8.5%
30%
8.7%
8.7%
8.6%
8.5%
8.5%
8.4%
35%
8.7%
8.6%
8.6%
8.5%
8.4%
8.3%
40%
8.7%
8.6%
8.5%
8.4%
8.3%
8.2%
45%
8.7%
8.6%
8.5%
8.4%
8.3%
8.2%
50%
8.7%
8.6%
8.5%
8.3%
8.2%
8.1%
Acceptance Rate
JPMorgan: Estimated Basel III Tier 1 Common - 4Q12
Repurchase Requests as % of Remaining Loans
2%
4%
6%
8%
10%
12%
10% 11.8%
11.7%
11.7%
11.7%
11.7%
11.7%
15% 11.8%
11.7%
11.7%
11.7%
11.6%
11.6%
20% 11.7%
11.7%
11.7%
11.6%
11.6%
11.5%
25% 11.7%
11.7%
11.6%
11.6%
11.5%
11.5%
30% 11.7%
11.7%
11.6%
11.5%
11.5%
11.4%
35% 11.7%
11.6%
11.6%
11.5%
11.4%
11.3%
40% 11.7%
11.6%
11.5%
11.4%
11.3%
11.3%
45% 11.7%
11.6%
11.5%
11.4%
11.3%
11.2%
50% 11.7%
11.6%
11.5%
11.3%
11.2%
11.1%
Source: Company reports, CreditSights
In $ millions. As of 3Q10. Assumes tax rate of 35%, and loss rate of 50% for first liens, 100% for second liens.
24
Mortgage Modifications: Underwater Second-lien Loans
Second-lien Exposures
HE Loans
Bank of America
$137,981
JPMorgan **
88,468
Wells Fargo
117,744
Citigroup *
42,000
LTV >100%
$46,914
40,873
39,086
20,000
LTV >100% / HE Loans
34%
46%
33%
48%
Source: Company reports, CreditSights
* Estimated. Excludes Canadian, PR and LTSC HE loans
'** JPM: >100% incl estimate for PCI loans from WM acquisition
As of 4Q10. In $ millions
25
Mortgage Modifications: Potential Capital Impact – Second-liens
Writedown of LTV >100% 2nds
Tier 1 Com m on: Sensitivity to Write-Dow ns of HE >100% LTV
BAC
C
JPM
WFC
0%
7.8%
10.8%
10.0%
10.7%
10%
7.6%
10.7%
9.9%
10.5%
20%
7.5%
10.6%
9.7%
10.3%
30%
7.4%
10.5%
9.5%
10.1%
40%
7.2%
10.5%
9.4%
9.9%
50%
7.1%
10.4%
9.2%
9.7%
60%
7.0%
10.3%
9.1%
9.4%
70%
6.8%
10.2%
8.9%
9.2%
80%
6.7%
10.1%
8.8%
9.0%
90%
6.5%
10.0%
8.6%
8.8%
100%
6.4%
9.9%
8.4%
8.6%
Source: Company reports, CreditSights
Est. impact: Net of estimated reserves, taxes. Includes 2 years of earnings retention.
Potential capital impact of write-down of 2nd lien HE CLTV >100%
As of 4Q10. Basel III Tier 1 common < 7% in red.
26
Potential Capital Impact from Mortgage Headwinds
Potential Capital Impact from Mortgage Headwinds - BIS III Tier 1 Common
Servicer Settlement
Repurchases Home Equity
Total
Bank of America
0.18%
0.29%
0.59%
1.06%
Citigroup
0.09%
0.05%
0.42%
0.56%
JPMorgan
0.15%
0.28%
0.70%
1.13%
Wells Fargo
0.31%
0.20%
0.95%
1.46%
Total Cost
$16,000
$19,950
$58,749
$94,699
Pro Forma
6.31%
10.11%
8.63%
8.91%
Source: Company reports, CreditSights
Est. impact: net of estimated reserves, taxes. Includes 2 years of earnings retention.
Servicer settlement: pro rata based on loans serviced.
Repurchases: based on CreditSights’ estimated mid-case
Home equity: 40% write-down of 2nd lien HE CLTV >100%
As of 4Q10. Basel III Tier 1 common, 7% requirement, when fully phased-in.
27
Big Banks/Brokers Trade Much Cheaper than Industrials
5Y CDS Range for Select Sectors
Consumer
Utilities
Telecos
Oil and Gas
Equip. Manufacturers
Big banks/brokers
0 bps
25 bps
50 bps
75 bps
100 bps 125 bps 150 bps 175 bps
As of 3/09/11
Source: Bloomberg, CreditSights
Big Banks/brokers include: BAC, C, GS, JPM, MS, WFC
28
Sector Recommendations: U.S. Bonds/ CDS
Bond/ CDS Recommendations
Sector
Recommendation
FIN. SERVICES
Overweight
U.S. Banks
Overweight
Big Banks**
Overweight
Regional Banks
Overweight
Specialty Finance
Overweight
ML U.S. Corporate Master
YTD 2011
OAS*
Return
-25 bps
1.65%
-25 bps
1.58%
-25 bps
-18 bps
1.43%
1.22%
*YTD OAS for Merrill Lynch indices **Includes BAC, C, GS, JPM, MS, WFC
As of 3/09/11, YTD excess return represents the aggregate daily return vs. treasuries.
Source: Bloomberg, CreditSights
29
Credit Relative Value Recommendations
Big Banks - Overw eight
Overw eight
Merrill Lynch
Morgan Stanley
Bank of Am erica
Citigroup
Goldm an Sachs
Marketw eight
Wells Fargo
U.S. Bancorp
JPMorgan
Regional and Mid-Sized Banks - Overw eight
Overw eight
Marketw eight
Regions
Fifth Third
Zions
BB&T
M&T Bank
PNC
SunTrust
Bank of New York
Marshall & Ilsley
KeyCorp
Huntington
Com erica
Capital One
Specialty Finance - Overw eight
Overw eight
Ally Financial
Am erican General Finance
CIT (Longer**)
Ford Motor Credit
GE Capital
Sallie Mae
Marketw eight
CIT (Shorter*)
Discover
HSBC Finance
ResCap
Underw eight
Underw eight
Underw eight
Am erican Express
GATX
H&R Block
iStar
Sorted by ‘cheapest’ according to 5Y CDS relative value; *U.S. Bancorp according to 5Y cash
Regionals according to 10Y cash, 5Y cash when applicable. Specialty Finance alphabetical
*Shorter-dated bonds include 2013s, 2014s, 2015s. **Longer-dated bonds include 2016s, 2017s
30
Financials
5Y CDS Relative Values
U.S. & European Senior 5-Year CDS
175
CHEAP
150
MER
BAC
MS
C
125
GS
GECC
100
COF F
WFC
75
HSBC Fin
USB
JPM
50
AA
AA-
A+
A
CreditSights Rating
AXP
COF B
A-
RICH
BBB+
BBB
As of 3/09/11. SLM: Rated BBB-, 280 bps
Source: Bloomberg, Markit, CreditSights
European rating reflect average of S&P and Moody’s
31
U.S. Financials
10Y Cash Relative Values
Ten Year Benchm ark Bond Fair Value
400
CHEAP
350
Spread to 10Y Treasury (bp)
RF
300
250
200
150
100
MER
BAC
GECC
MS
STI
KEY
GS
C
COF
FITB
HBAN
DFS
JPM
BBT
NCC
WFC
AXP
PNC
BK
50
RICH
0
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
CreditSights Rating
As of 3/09/11
Source: MarketAxess, TRACE, CreditSights
32
U.S. Financials
5Y Cash Relative Values
Five Year Benchm ark Bond Fair Value
450
CHEAP
400
RF
Spread to 5Y Treasury (bp)
350
300
ZION
250
MER
200
STI
MS
GS
C
BAC
150
JPM
100
50
0
AA
GECC
CMA
COF
AXP
NCC
PNC
WFC
USB
BK
AA-
KEY
MI
FITB
BBT
RICH
A+
A
A-
BBB+
BBB
BBB-
BB+
CreditSights Rating
As of 3/09/11
Source: MarketAxess, TRACE, CreditSights
33
Bank Hybrids: Trade Recommendations
Preferred Stock: Select Opportunities
Company
Coupon
Price
Zions Bancorporation
11.0%
$27.33
Citigroup
8.5%
25.99
Bank of America
8.2%
26.20
JPMorgan
8.6%
27.74
PNC
8.3%
1,075.00
Wells Fargo
7.5%
1,030.00
Yield
10.1%
8.2%
7.8%
7.8%
7.7%
7.3%
Call Date
06/15/12
06/15/13
05/01/13
09/01/13
05/21/13
NM
STC
2.5%
5.8%
5.0%
2.4%
4.3%
NM
Premium
9%
4%
5%
11%
8%
3%
Trust Preferred Securities: Select Opportunities
Company
Coupon
Price
Yield
Regions Financial
8.9%
26.55
8.4%
Zions Bancorporation
8.0%
25.18
7.9%
Citigroup
7.9%
26.00
7.6%
Merrill Lynch (BofA)
7.4%
25.55
7.2%
Bank of America
7.0%
24.97
7.0%
Merrill Lynch (BofA)
6.5%
23.83
6.8%
Fifth Third
7.3%
25.09
7.2%
JPMorgan
7.0%
25.28
6.9%
Wells Fargo
7.0%
25.32
6.9%
Call Date
06/15/13
09/01/07
12/15/12
09/15/12
02/01/07
06/15/12
11/15/12
01/31/02
08/29/06
STC
5.1%
7.0%
4.7%
5.2%
6.9%
10.1%
6.4%
5.5%
5.4%
Premium
6%
1%
4%
2%
0%
-5%
0%
1%
1%
Source: SNL, CreditSights
As of February 22, 2011. Premium to par value. STC: Yield over comparable UST, based on call date.
Sorted by yield/company. Most $25 par instruments, except WFC & PNC Pfds. ($1,000)
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CreditSights’ Equity Recommendations
1Q11
2Q11
3Q11
4Q11
FY 11
Company
EPS ($) EPS ($) EPS ($) EPS ($) EPS ($)
Bank of America 0.33E
0.35E
0.40E
0.45E
1.53E
Citigroup
0.15E
0.15E
0.15E
0.15E
0.60E
Goldman Sachs
5.00E
4.75E
4.50E
5.25E 19.50E
JPMorgan Chase 1.10E
1.15E
1.20E
1.25E
4.70E
Morgan Stanley
0.75E
0.75E
0.75E
0.90E
3.15E
U.S. Bancorp
0.48E
0.53E
0.58E
0.60E
2.19E
Wells Fargo
0.65E
0.70E
0.75E
0.77E
2.87E
Price
Target ($)
15.00
5.95
195.00
49.00
30.00
31.00
36.00
Investment
Recommendation
Marketweight
Overweight
Overweight
Overweight
Marketweight
Overweight
Overweight
35
U.S. Banks/Brokers: Key Drivers
•
Bank of America
> Revenue: solid capital markets, slow consumer
> Manageable reps and warranties risk
> Could increase dividends/repurchases in 2H11, prudent to wait until 2012
> Provisions could decline to quarterly run rate of $4B, from $10B in 2009
•
Citigroup
> Unique international franchise, expand in BRIC+10
> Strongest capital among traditional banks
> Positioned to return capital, blocked by UST/FDIC TruPS until TLGP ends
> Not a major mortgage originator; limited reps and warranties risk
•
JPMorgan
> Hoping to return capital to shareholders ASAP
> Reps and warranties risk to GSEs/private labels manageable; HE overhang
> Revenues driven by broad client franchise and capital markets
> Expand internationally through wholesale banking strategy
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U.S. Banks/Brokers: Key Drivers
•
Wells Fargo
> Reps and warranties manageable: mostly GSE; large HE run-off
> Focus on cross-selling; impacted the most by debit interchange
> Could look to return capital; capital somewhat lower on BIS III
•
Goldman Sachs
> More focused on share repurchases than dividends
> Revenue helped by broad client franchise in FI, equities, and commodities
> Growth strategy focused on BRIC+10
•
Morgan Stanley
> More work to be done to reach BIS III capital levels
> Revenues hampered by underperformance in sales and trading
> Asset/Wealth Management stabilizing; growth scarce
•
U.S. Bancorp
> Hoping to return capital to shareholders ASAP
> Focus on growth of fee-generating businesses (processing, wealth mgmt)
> Commercial loan growth could become key balance sheet driver
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Strategic M&A Possibilities
Strategic M&A Targets
Buyer
Target
EPS Accretion
U.S. Bancorp
Fifth Third
2%
Regions
3%
SunTrust
0%
M&T Bank
-7%
PNC Financial Fifth Third
0%
Regions
1%
KeyCorp
-2%
SunTrust
-4%
M&T
-12%
BB&T
Regions
7%
SunTrust
1%
Com erica
Zions
1%
BMO Financial Fifth Third
7%
Regions
8%
KeyCorp
4%
Royal Bank of
Regions
4%
Canada
Fifth Third
4%
SunTrust
3%
Capital One
Regions
4%
SunTrust
0%
Source: Bloomberg, SNL, CreditSights
Ratings impact to target. Bold: Financially attractive
IRR
20%
16%
17%
14%
18%
14%
11%
14%
11%
16%
17%
12%
19%
15%
12%
Ratings Im pact
+3-4 notches
+5-6 notches
+3-4 notches
+2-3 notches
+0-1 notches
+2-3 notches
+0-1 notches
+0-1 notches
-1-0 notches
+4-5 notches
+2-3 notches
+5-6 notches
+4-5 notches
+6-7 notches
+4-5 notches
18%
+8-9 notches
23%
18%
13%
15%
+6-7 notches
+6-7 notches
+1-2 notches
+0-1 notches
38
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neither its accuracy and completeness, nor the opinions based thereon are guaranteed. If you
have any questions regarding the contents of this report, contact CreditSights, Inc. at (1) 212 3403840 in the United States or (44) 20 7429 2080 in Europe.
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