Winners from the euro debt crisis? Try emerging market banks

Winners from the euro debt crisis?

Well, sure. Just take a look in the banking sector. Most of the attention has focused on the losers in the crisis, the European banks that are reducing their lending, selling assets, and exiting entire markets in an effort to reduce assets and up capital ratios to the 9% required by suddenly vigilant European banking regulators.

But if somebody is exiting a market, it’s likely that someone is entering. And if somebody is selling assets, somebody has to be buying.

So, for example, for the first 11 months of the year Banco Itau, the investment banking arm of Brazil’s Itau Unibanco (ITUB) has taken over the top spot in Brazil for merger advice, equity underwriting and initial offerings. (Itau Unibanco is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )What banks used to have those spots? Rothschild for merger advice, Citigroup (C) for equity underwriting, and Credit Suisse for IPOs. Banco Itau advised on 27 deals (worth $35.4 billion) including the biggest deal of the year, the $17.3 billion merger of two units of Telemar Participacoes.

Having less competition from developed market banks is a very good thing in a market that’s down in size overall in 2011. Investment banking fees in Brazil fell this year to $783 million for the year through November from $1.2 billion in 2010, according to Dealogic. But by jumping up in the rankings Banco Itau saw its investment banking fees grow.

In Asia a similar process is at work. Read more

Stocks soar as world’s central banks move to support big banks just hours after S&P downgraded them

Put that in your new ratings model and smoke it, Standard & Poor’s.

Hours after Standard & Poor’s downgraded 16 of the world’s biggest banks—largely because the company’s new model for awarding credit ratings decided that governments were less likely to support their big banks—six of the world’s central banks, led by the U.S. Federal Reserve, came to the support of the world’s big banks.

In a coordinated move the central banks lowered the cost of emergency dollar funding by 0.5 percentage points. By lowering the cost of dollar funding from the central banks, the move will make it easier for stressed European banks to fund their dollar-denominated activities. The cost to European banks to fund in dollars had climbed to the highest level in three years.

On the news of the central bank move, the German DAX Index was up 4.9%, and the U.S. Dow Industrial Average had climbed by 3.7% and the Standard & Poor’s 500 by 3.6% as of 11:45 a.m. New York time.

Shares of the banks that S&P downgraded yesterday are performing even better. Read more

Update Itau Unibanco (ITUB)

On November 1 Brazil’s Itau Unibanco (ITUB) reported third quarter adjusted net income, which excludes one-time items, of 3.94 billion reais (or $2.3 billion). That was up from 3.16 billion reais in the third quarter of 2010. That’s a 24.7% increase. The results also easily beat the analyst estimate of 3.65 billion reais for the quarter. (Reais is the plural of real.)

Great numbers.

But before you rush out to buy these shares—and the stock is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ –you need to get your head around this number. In the quarter the bank posted an annualized return on equity of 22.7%. That was up from 22.2% in the second quarter. As you’d expect that measure of profitability at Itau obliterates the return on equity at troubled U.S. banks. The comparable measure at Citigroup (C) is just 6.72% for the last 12 months and a negative 1.45% at Bank of America (BAC). But it also humbles the profitability at some pretty good U.S. banks. JPMorgan Chase (JPM), for example, shows a return on equity of 10.9%, PNC Financial (PNC) 11.92%, and U.S. Bancorp (USB) 14.24%.

That ought to raise a big screaming question in your mind—Is the Itau Unibanco story that good? Or is there some huge burden of risk hanging over the stock that means you shouldn’t buy it even with that kind of differential in profitability? Read more

Looks like a tough earnings season ahead for the biggest U.S. banks

Investors won’t get their next dose of bank earnings reports until JPMorgan Chase releases second quarter earnings on July 14, but earnings season is already looking awfully iffy for the big U.S. trading banks.

Trading revenues are forecast to fall again for the quarter. That would mark the fifth straight quarterly year-over-year drop.

Revenue from fixed income trading at U.S. banks will fall 30% from the first quarter, according to a report from Citigroup this week. Revenue from equity trading will drop by 15%. Total trading revenue at the five biggest Wall Street banks–Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Morgan Stanley (MS)–may drop 4.4% in the second quarter of 2011 from the second quarter of 2011, and 17% from the first quarter of 2011, according to a report by Oppenheimer & Co. Trading accounted for almost a quarter of these bank’s revenues last year.

Analysts have been busy cutting their earnings estimates for the group–according to Bloomberg, seven analysts have cut their earnings estimates for Goldman Sachs and Morgan Stanley, for instance, in the last four weeks. So the question for earnings season will be have the stocks fallen so much—10% or more since March 31—and have estimates come down so much, that bank shares will actually rally on just the expected degree of bad news.

In an earlier quarter—say the last quarter of 2010—I would have voted for “Rally on the bad news.” But I think that’s unlikely this quarter.

Why? Read more

Banks step up their buying of Treasuries–that’s good and bad news

This is only half as reassuring as it seems to be.

If you’ve wondered (worried) about what buyers are going to step in when the U.S. Federal Reserve stops its program of buying Treasury bonds at the end of June, well, now we’ve got part of an answer.

Banks.

U.S. banks are buying U.S. government debt at the fastest pace in nine months. In the last seven weeks, according to the Federal Reserve, U.S. commercial banks bought $65 billion in U.S. debt. That’s the most since the $79 billion they bought in the seven weeks that ended on July 21.

However, the reason that banks are buying is anything but reassuring. Read more