2011 Is Not 2008: Why Lehman Was The Last 'Lehman' (Part 2)

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 |  Includes: BCS, CS, DB, ING, SCGLY, UBS
by: AssetInflation

Yesterday we explained that 2011 is not 2008 in part 1, and described how the market is infected with Lehman Flashback Syndrome (LFS). We gave concrete examples of improvements in the health of U.S. financial institutions. While the U.S. companies are unquestionably ahead of their European rivals, we will today present a snapshot of a few large European Institutions (in their own words). .

From Barclay's (NYSE:BCS) earnings report on August 2:

We continue to strengthen our capital position and our net asset value. Our Core Tier 1 ratio stood at 11.0% at the end of June, up from 10.8% at the year end.

Our Core Tier 1 ratio has now doubled from 5.6% since the end of 2008, and a significant proportion of this increase has been as a result of the sustained profitability of Barclays over this period. We will continue to generate internally any additional capital that we will be required to hold to meet regulatory change over the coming years.

We have also maintained strong liquidity, with a surplus liquidity pool, of £145B which protects us from funding stress; a Basel iii Liquidity Coverage Ratio up to 86% from 80% at the year end and a Basel iii Net Stable Funding Ratio of 96%, up from 94% at the year end. We pre-financed all our wholesale term funding which matures in 2011. Our adjusted gross leverage is consistent at 20x.

From Deutsche Bank's (NYSE:DB) earnings report on July 26:

Dr. Josef Ackerman, Chairman of the Management Board said :

“Despite increasingly difficult market conditions, our business model has proven to be robust. Our efforts to recalibrate and rebalance our platform are paying off nicely. Whereas Corporate Banking and Securities was impacted by the adverse environment – particularly by the sovereign debt crisis in Europe - this was counterbalanced by strong performance and healthy year-on-year profit growth in our other businesses, which contributed half of the bank’s profit in the quarter."

Tier 1 capital ratio was 14% at the end of the second quarter, up from 13.4% at last quarter end. The Core Tier 1 capital ratio was 10.2% up from 9.6% at previous quarter end, both the strongest ratios ever. Risk-weighted assets decreased EUR 8 billion to EUR 320 billion at the end of the second quarter 2011.

From Societe Generale's (OTCPK:SCGLY) earnings report on Aug 3:

Frederic Oudea, the Group's Chairman and CEO, stated:

The Q2 results testify to the Group's resilience in an uncertain and financial environment. In addition to reflecting our businesses' solid performance, these results incorporate the write-downs booked on Greek government bonds, whose impact is nevertheless limited, as expected. Once again, the Group has demonstrated its ability to significantly boost its capital in H1.

By the end of 2013, the Societe Generale Group will achieve a Basel 3 Core Tier 1 ratio of at least 9% thanks to solid results, and with the same priority given to the very disciplined management of its capital and risk-weighted assets and the rigorous control of costs and risks, even if the Group net income target of EUR 6 billion in 2012 now appears difficult to achieve within the scheduled timeframe.In light of our achievements in H1, I remain confident regarding the continuing growth of our results and the achievement of our transformation objectives set out in the Ambition SG 2015 plan.

From Credit Suisse's (NYSE:CS) earnings report on July 28:

Cost adjustments

To position the Group to perform well in the continued challenging market, a number of efficiency enhancements are being implemented that target CHF 1 billion in cost savings and resulting reductions in the expense run-rate during 2012. This program includes targeted headcount reductions of approximately 4% of the total headcount across the Group. The initiatives will involve implementation costs in 2011 of CHF 400 million to CHF 450 million, of which CHF 142 million were recognized in 2Q11, with further amounts to be recognized during the rest of the year. As a result of these implementation costs, the program will provide for limited net savings in 2011 with the full benefits of the initiatives expected to be realized during 2012.

Capital Management

Credit Suisse’s capital position remains very strong. The BIS tier 1 ratio was stable at 18.2% as of the end of 2Q11, compared to the end of 1Q11, reflecting a decrease in tier 1 capital and lower risk-weighted assets (RWAs). The core tier 1 ratio increased to 13.1% as of the end of 2Q11 compared to 13.0% as of the end of 1Q11.

From UBS's earnings report on July 26:

The increase in our regulatory capital more than compensated for the increase in risk-weighted assets, improving our BIS tier 1 capital ratio to 18.1% on 30 June 2011 from 17.9% at the end of the previous quarter. Our BIS core tier 1 capital ratio increased to 16.1% from 15.6%. Our risk-weighted assets increased by CHF 2.9 billion to CHF 206.2 billion, while our balance sheet stood at CHF 1,237 billion, CHF 55 billion lower than on 31 March 2011.

Commenting on UBS's second quarter 2011 results, Group CEO Oswald J. Grübel said: "Banks' returns have declined overall in the last 12 months, reflecting deleveraging and the actions being taken in advance of increased capital requirements. We are responding to this changed environment and the weakening economic outlook by adapting our business and increasing efficiency. While our target for pre-tax profit set in 2009 is unlikely to be achieved in the original timeframe, our strong competitive positioning and our capital strength give us confidence for the future."

From ING's (NYSE:ING) earnings report on August 4:

ING maintained strong capital ratios during the quarter following the 13 May 2011 payment of EUR 3 billion to the Dutch State. The Bank's core Tier 1 ratio remained robust at 9.4%, or 10.7% on a pro-forma basis including the impact of announced divestments. The Insurance IGD solvency ratio strengthened to 252%.

Given the uncertain financial environment, increasing regulatory requirements and ING's priority to repurchase the remaining outstanding core Tier 1 securities, no interim dividend will be paid in 2011.

"ING reached important milestones in the second quarter as we work towards the separation of the Group and the establishment of strong stand-alone banking and insurance companies," said Jan Hommen, CEO of ING Group. "In May we paid EUR 3 billion (including EUR 1 billion premium) to the Dutch State, while maintaining strong capital buffers to withstand potential shocks given the uncertain economic environment. We reached an agreement to sell ING Direct USA, meeting one of the principal restructuring requirements imposed by the European Commission. And last week we announced an agreement to sell our Latin American life and pension businesses for EUR 2.7 billion, marking the first major step in the divestment of the Insurance and Investment Management activities.

We will let the readers decide if these managements understand the issues, and if the maniacal fervor of 2011 is the same as it was in 2008. We believe, as argued with U.S. financials in part 1, that diligent attention has been paid to the issues of concern. Thus, the current overreaction is merely the flashback of another Lehman (LFS). We repeat:

While we don't attempt to call the absolute bottom, we do believe that this market has driven prices of top-tier companies to opportunistic levels. It is time to scale-down buy this market, and understand that Lehman was the last 'Lehman'.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.