Update HSBC (HBC)
Wait! A bank with too much capital?
Hard to believe but analysts at UBS calculate that’s exactly the “problem” that HSBC (HBC) is likely to face over the next four years.
UBS forecast that the bank’s Tier One capital ratio hit 10% by the middle of 2010 after successfully using a rights offering to raise capital. That ratio could well hit 13% by 2013.
That certainly removes any need to raise capital. And also gives HSBC plenty of money to lend: the bank is underleveraged right now, UBS argues, with a loan-to-deposit ratio of about 77%.
And now that HSBC is running down its troubled U.S. mortgage business the bank will start to generate free cash flow. Lots of it. UBS estimates that—after dividend payments—HSBC will generate $48 billion in free cash flow over the next four years.
It’s a wonderful bank
If you were designing a bank now, from scratch, for growth and maximum profits, what kind of bank would you build?
Bank earnings to date—from the biggest and most aggressive investment banks such as Goldman Sachs (GS) to the do-everything behemoths such as JPMorgan Chase (JPM) to the lending-oriented banks such as US Bancorp (USB) to the specialist banks—don’t give a single definitive answer. It’s hard to tell if the old models are in need of serious overhaul or just taking a breather, and there are serious doubts about the future profitability of many classic banking activities.
And I think that’s healthy—even if it makes life hard for investors. The clear consensus on what a bank should be if it wanted to maximize growth and profits was, it turns out, one of the great weaknesses of the banking system before the financial crisis. Too many banks had decided to be the same kind of bank. And that left the industry as a whole exceedingly vulnerable to disruption and failure.
For the moment at least, investors are free again to look for the best bank among many styles of bank—rather than seeing which bank matches up best with a single model for success.
Here’s how the landscape looks to me right now and the names of some interesting banks—of different models.
Earnings up 289%, stock up just 37 cents–why isn’t Wall Street dancing at JPM Chase earnings?
So far, so good for bank stocks.
This morning, July 14, JPMorgan Chase (JPM) reported second quarter earnings of $1.09 a share. Not only was that a 289% increase from the second quarter of 2009 but it beat Wall Street projections for a 159% jump in earnings and earnings of 73 cents a share.
Some—myself included—had worried that Wall Street expectations for bank earnings had gotten way ahead of themselves and that banks would be unlikely to meet those projections. (For more on that worry see my post July 7 post Watch for a buying opportunity on my watch-list banks if earnings disappoint this quarter .)
You can take that worry off your list.
But that’s not to say that Wall Street hasn’t found something to worry about in these numbers.
Today’s best guess is that Euro banks will need $55 to $125 billion in new capital after stress test
Every analyst on—and many off (including yours truly)—Wall Street is trying to put numbers to the results of the Euro Zone’s bank stress test.
In recent days we’ve moved from opinions on which country’s banks will be hit hardest (See my post of yesterday, July 8, Naming names: now we know which 91 European banks will face the none-too-challenging stress test ) to guesses on which banks will pass and which will fail to estimates of how much extra Tier One capital each tested bank will have to raise.
Banks that have to raise a lot of capital but that are shut out of the financial markets right now will require some kind of government rescue. Euro Zone governments have pledged to ride to the rescue but there’s no mechanism yet actually in place for any rescue that’s needed.
All these projections are built on much guess work right now since the terms of the stress test and the Tier One capital requirement that banks will have to meet haven’t been officially disclosed.
One of the best bits of guess work that I’ve seen to date comes out of Credit Suisse.
Naming names: now we know which 91 European banks will face the none-too-challenging stress test
More details last night on who and what are in the stress tests now being administered to European banks in an effort to restore confidence in the financial market.
First, we now know that 91 banks will be included in the test. And thanks to last night’s release from the Committee of European Bank Supervisors (CEBS), the organization conducting the stress tests, we even know which 91 banks are on the list. You can find the 91 names, organized by country, at the end of the CEBS announcement here http://www.c-ebs.org/documents/Publications/Other-Publications/Others/2010/ST_FollowupPR.aspx
Spain tops the list with 27 banks—including 13 from the troubled caja sector. Germany comes in second with 14 banks—including 6 from the Landesbank sector.
Second, like the U.S. stress test that this is modeled on, the European version won’t test bank balance sheets against the worst of all possible worlds.
