Some interesting thoughts this morning for all those scrambling under the pressure of TINA – and with less than 3 months left in the year, bonus-strapped hedge funds will scramble to find alpha anywhere – from Mint’s Bill Blain, on what may be the most contrarian trade of the day. Since not many will agree with Blain’s argument, one can at least agree with his overarching argument: buying European banks here, with the recent risk flare up in Deutsche fresh in everyone’s mind – is certainly a contrarian view as of this moment.
Blain’s Morning Porridge
The news across the European banking sector remains utterly and completely dire. Who would possibly want banks when they are “not really investible as a sector”, and “under siege”. These comments are made more shocking as they’re direct from the lips of bank CEOs!
The press is full of woe – front pages speak of utter despair about the dismal outlook for financial institutions in the face of regulatory overkill, and that is only one aspect. Dismal ROE, overbanked markets and the inability of banks to swiftly restructure due to red-tape labour laws and political “forces” contribute to the pain. Informed comment analyses the effect of margin dilution on the back of ZIRP, and fears the unintended consequences and future unwind costs of the great monetary experiment that was QE.
Great analysis this morning from Gavekal pointed out nothing is really being resolved – banks like Monte Dei Paschi have been zombies for years, but are still open. $15 bln of new capital has been squandered on a bank now worth a mere $546mm (capitalisation) today! (Any SWF thinking about buying DBK cheap.. think about that extraordinary lesson!) Why are difficult decisions being delayed? Difficult political decisions will not be taken.
The banking landscape looks like a battlefield after the event. Over the past few days the news flow has been shocking. It’s not just Deutsche Bank and Unicredit (which I remind everyone remain challenged but unfixed), but Commerzbank, BPE, ABN and ING are shedding over 20,000 jobs, while others are desperately selling back books as a ravening hoard of distressed debt scavengers look to pick the bones clean. This morning City AM says European banking has shed 150k staff in less than 10-years.
It’s difficult to see how Europe stages any kind of recovery with a banking system that’s essentially close to a cardiac crash? New capital rules mean it simply doesn’t make sense for banks to be investing in anything that isn’t 100% AAAA and a liquid as water – great in terms of restricting further losses, but means they ain’t financing risk and growth.
Without a functioning banking transmission mechanism, remind me what the point of extraordinary monetary policy, including QE, was? Perhaps some junior lieutenant in the ECB will shortly announce: “In order to save European banking we had to destroy it”. It might not be as silly a comment as it sounds.
If bank CEO’s think banking is un-investible.. what about investors?
Who would be a European stock buyer when the outlook is so dire? And who would buy bank debt? The AT1 CoCo bonds look extremely vulnerable to regulatory events, and even bank senior debt is at risk of bail-in in a crisis.. Run away, run away…
However, just when the market looks at its darkest…. That’s the moment to be thinking about picking the winners.
Whatever happens.. every European bank is not going to vanish in a puff of green smoke. Decimation sounds horrendous, but remember it means one in ten. Europe might benefit from it. One or two banks, (actually 3 Italians and maybe a German or two), might be led to the slaughter room, but generally the rest of Europe’s banks will probably survive. Picking the bottom is the trick.
It’s the big contrarian trade.
Back in 2008-2012, buying European bank bonds following the crisis proved an absolute winner. Perhaps it’s time to be thinking about that game again – pick winners brought down by the current noise. Or do you wait for the inevitable shock when a few banks are allowed to fail? Anyone who’d like to see our bank debt runs let me know.
Or, if you believe nothing is likely to go wrong and banks will follow the long expected European recovery (ahem.. some doubts myself), how about a general gamble on the sector recovery. Perhaps it can’t get any worse?
I’m even thinking about taking a pop on the ETF market – buying the iShares Euro Stoxxs ETF which tracks the Eurozone’s 30 biggest banks {SX7EEX GY Index Des <go>}. Guess what? Despite the travails of DB, Commerz, Unicredit, and the rest, its up 14% over the last quarter – that’s no guide to future performance (it saw a 42% decline high-to-low over the last year), but it also suggests it’s not the end of the world.
Or play the detail in this banking crisis – banks are selling assets cheap. Pick the winners who buy the crown jewels banking cows for a few beans..
Curiously… I’m less enthusiastic on UK banks this morning after Teresa May (determined to show she is nothing to do with the past) blanked the City. She’s sent the message to UK banks they are on their own when it comes to Brexit. I’m assuming her advisors reminded her that 12% of UK output comes from financials?
The story seems to be she’s confident no major financial players will really swap London for the dismal tumbleweed filled strasse of Frankfurt or Paris.. but as one office wag noted yesterday: it will be easy for US banks in London to relocate themselves to Europe in the wake of the Brexit vote. Frankfurt is going to be full of empty bank office space and cheap as strudel staff….
I understand DB’s outplacement team has a special offer: hire one German banker and get another half dozen absolutely free…
via http://ift.tt/2dORsIZ Tyler Durden