Arguing that their uncovered and off-balance-sheet lending liabilities exceed British annual GDP, Morgan Stanley slashes estimates across the board for the banking sector
"We believe 2007 will mark the cycle peak for bank earnings and, as the
bear market effects unfold, fears surrounding profits, dividends and
capital are only likely to build," the Wall Street broker said in a note
to clients.
"Unlike previous cycles, the UK banks are not going to be defensive
relative to European banks, owing to the higher leverage,
country-specific risks and gearing into the credit markets from a
funding and balance sheet risk perspective."
Its key concern was that loans exceed deposits across the sector by an
estimated £564bn. The broker also argued that the banks have a total of
£969bn off-balance sheet funding gap in the form of undrawn loan
commitments. Clearing banks, it estimated, could have to increase their
on-balance loans by between 47% and 80% if the facilities were drawn
down.
"Looking at just loan to deposit ratios understates the potential
funding and capital needs of the banks, " analysts Michael Helsby and
Steven Hayne said in the reseach note.
Relative to UK GDP of £1.3 trillion the combined on and off-balance
sheet funding requirement is clearly material. In our view this
underscores the funding problems that face the whole of the UK banking
system and therefore the likely negative effects on the UK economy as
credit supply is crimped."
A combination of the bad debt increases already priced into the bond
market, and a deteriorating outlook in the UK, US and Europe will return
the sector to the bad-debt levels seen in 2002 and 2003, the analysts
argued. This led the them to cut 2009 earnings forecasts across the
board to about 17% below consensus levels.
Morgan Stanley said that Lloyds
TSB was its No.1 stock to avoid, given its low dividend cover and
concentration in mid-market corporate and domestic lending.
In addition, expected dividend growth at Royal
Bank of Scotland and Alliance
& Leicester look to be at risk because of the structural
reduction in profitability and their low dividend cover. But for A&L,
consolidation hopes should outweigh the threat in the near term, they
added.
Morgan Stanley repeated "underweight" ratings on Royal Bank, Lloyds and HSBC.
It was neutral on Standard
Chartered and A&L, while Bradford
& Bingley, HBOS
and Barclays
were all reiteated "overweight" on reduced price targets.
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UK banks 'face a £1.5 trillion funding gap'
Hemscott, 11/01/08 08:29
Arguing that their uncovered and off-balance-sheet lending liabilities exceed British annual GDP, Morgan Stanley slashes estimates across the board for the banking sector
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"We believe 2007 will mark the cycle peak for bank earnings and, as the bear market effects unfold, fears surrounding profits, dividends and capital are only likely to build," the Wall Street broker said in a note to clients.
"Unlike previous cycles, the UK banks are not going to be defensive relative to European banks, owing to the higher leverage, country-specific risks and gearing into the credit markets from a funding and balance sheet risk perspective."
Its key concern was that loans exceed deposits across the sector by an estimated £564bn. The broker also argued that the banks have a total of £969bn off-balance sheet funding gap in the form of undrawn loan commitments. Clearing banks, it estimated, could have to increase their on-balance loans by between 47% and 80% if the facilities were drawn down.
"Looking at just loan to deposit ratios understates the potential funding and capital needs of the banks, " analysts Michael Helsby and Steven Hayne said in the reseach note.
Relative to UK GDP of £1.3 trillion the combined on and off-balance sheet funding requirement is clearly material. In our view this underscores the funding problems that face the whole of the UK banking system and therefore the likely negative effects on the UK economy as credit supply is crimped."
A combination of the bad debt increases already priced into the bond market, and a deteriorating outlook in the UK, US and Europe will return the sector to the bad-debt levels seen in 2002 and 2003, the analysts argued. This led the them to cut 2009 earnings forecasts across the board to about 17% below consensus levels.
Morgan Stanley said that Lloyds TSB was its No.1 stock to avoid, given its low dividend cover and concentration in mid-market corporate and domestic lending.
In addition, expected dividend growth at Royal Bank of Scotland and Alliance & Leicester look to be at risk because of the structural reduction in profitability and their low dividend cover. But for A&L, consolidation hopes should outweigh the threat in the near term, they added.
Morgan Stanley repeated "underweight" ratings on Royal Bank, Lloyds and HSBC. It was neutral on Standard Chartered and A&L, while Bradford & Bingley, HBOS and Barclays were all reiteated "overweight" on reduced price targets.
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