Rising unemployment, bad debts and a continued lack of merger and acquisition activity are expected ...
Rising unemployment, bad debts and a continued lack of merger and acquisition activity are expected to cause further deterioration throughout the European banking sector in 2003.
Jeremy Sigee, European banks analyst at SchroderSalomon SmithBarney, says rising geopolitical pressures have led consumer and management confidence levels to fall, economic forecasts to be cut and stock markets to slip.
He says European investment banks do not appear cheap and suggests investors take a cautious view. His current earnings estimates are already around 25% below consensus and, he says, they may fall further.
'Over the first two months of 2003, equity trading volumes are down 6% on the fourth quarter of 2002 in Europe, and down 13% in the US, while equity issuance and merger acquisition are tracing fresh lows.
'With an equity market down 10% so far in 2003, the investment banks have underperformed: UBS shares are down 18% year to date as of 6 March, Credit Suisse 16% and Deutsche Bank 14%,' notes Sigee.
Raj Shant, head of European equities at Newton, says merger and acquisition activity has plummeted over the past three years. He adds the continued lacklustre economic environment has put directors off doing big deals, because the bear market makes it difficult to be sure of valuations. This is also why so many investment bankers have been laid off.
Sigee adds bond issuance has been a bright spot, well ahead on a year-on-year basis, but he does not believe this has been matched on the fixed income sales and trading side, which is more important for revenues. He says: 'The hot area has been bond issuance, with record volumes in high yield as well as investment grade, especially in Europe. On the trading side, indicators suggest revenue is some 10% to 20% below last year's levels, although they are better than the fourth quarter.'
Shant says: 'With bond issuance, a lot of companies who have been denied access to equity markets have reverted to using the bond market to raise finance. This is a reflection that many banks are unwilling to increase their lending to companies in difficulty and unable to support rights issues; where a company issues new shares in return for money.'
Shant adds unemployment across the eurozone has increased with a figure of 8.6% in January this year compared to 8% in January 2002 and this has led to a growth in bad debt.
'Commercial and corporate lending is already showing increases in bad debts and a rise in loan loss provisions. A lot of institutions have been cutting costs but it has not been enough to keep up with the falling revenues. More cuts are needed going forward,' says Shant.
Sigee adds, while he still believes in eventual recovery and a return to growth, much is already discounted in the share prices of banking stocks.
He says: 'We do not see any reason near term for recovery expectations to pick up. We think it more likely that estimate downgrades will pressure share prices near term and we continue to recommend a cautious stance.'
He adds if the war in Iraq is not prolonged there will probably be a short-term post-war return of positive sentiment but it will have no impact on the long-term fundamentals of the sector.
Increase in bond issuance.
Small post-war rally anticipated.
Eventual recovery expected.
Low levels of merger and acquisition activity.
Increased bad debts and unemployment.
Sector expected to worsen in 2003.
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