Monday, September 13, 2010

More On Basel III

¹²More On Basel III

By Bill Cara | 13 September 2010

The major impact of the regulations will not be felt for many months and years ahead. In fact, Europe's governments will not even be required to ratify this measure until November. But the federation of European bankers is already screaming that these regulations will put Europe into recession through 2014, costing "millions of jobs". Since when has that been the concern of bankers?

Sounds like the "We're Europeans first and bankers second" nonsense that was presented to Congress by the CEO of Wells Fargo Bank. Bankers will do what they have to do to (i) increase their profits, and (ii) increase their personal compensation. Basel III makes that a tougher challenge and that's the reason— not recession and jobs— for the complaint.

Bottom line— Basel III and the 'Volcker Rule' are showing these bankers that regulators and governments are listening to the complaints and worries of the people. Whether the bankers accept this as a 'sea change' or not, we'll have to wait and see. But, when the CEO's of HSBC and Barclay's both resign and Deutsche Bank goes out to the market seeking $12 billion, there's an indication the message may be filtering through.

From the Credit Suisse report today:

The new Basel 3 calibration is out, and the de facto new Core Tier One requirement is 7%. This is within the range of our expectations, and the fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst. We would now regard 7% as the bare minimum, 8% as the market standard for "adequately capitalised" and 10% as the level at which surplus capital can be identified.

The implementation period is much longer than expected, which is generous to the sector: In particular, the Basel 3 deductions from Core Tier One are to be phased in between 2014 and 2018. In the case of deferred tax assets, which form 35% of the deductions which we had identified in the sector, the delay ought to allow nearly all of those DTAs which related to crisis period losses to be earned out.

We would recommend a "barbell" strategy, concentrating on those banks which have a genuine opportunity to return capital on one hand, and on those which benefit from the long transition period on the other: We would highlight BNP Paribas (Focus List, TP Eu67), Lloyds Banking Group (TP 87p) and SHB (TP SKr245) as fundamentally attractive stocks with clear surpluses as soon as 2012e, and Credit Agricole (TP Eu12.3) and Banca Popolare (TP Eu6) as companies where the generous transition arrangements will be particularly beneficial. We would also highlight ING (Focus List, TP Eu10.7) as a special situation where the break-up and spin off of insurance operations is greatly facilitated by the new rules.

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