Thoughts on the global banking sector

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Thoughts on the global banking sector

• Simon Pryke, Investment Leader - Global Research
• 26 February 2008

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Idea generation - Themes efficiently focus our
research
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slide library

• Themes are our interpretation of key forces that
  drive change
• Themes provide a stimulus for debate at the
  widest level
• Themes continually evolve prompting a stream of
  new ideas

Themes make us better stock pickers
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Real house price changes last ten years
Real house prices changes over the last ten year
(2006-1996)
Source Bank of England, Morgan Stanley Research
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Betting the bank on house prices... and losing
U.S. home prices quarterly annualised
appreciation change
Source Haver Analytics, Banc of America
Securities LLC - estimates, SP Case Shiller
Index
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The lending machine has broken
Securitisation volumes falling off a cliff
60
CDO Issuance (bn per month, 3 month average)
50
40
billions
30
20
10
0
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Source abalert.com, Newton as at Jan 08
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History repeating itself

•   A sound banker, alas is not one who foresees
  danger and avoids it, but one who, when he is
  ruined, is ruined in a conventional way along
  with his fellows, so that no-one can really blame
  him

John Maynard Keynes, 1931
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Banks need more capital
Source Citi Investment Research analysis
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What happens next?

• The end of cheap credit capital constrained
  banks will raise lending rates the liquidity
  bubble of the past decade will unwind with a
  negative impact on asset prices
• Regulatory reform in the U.S. and European bank
  sectors regulators have been badly caught out.
  Banks will need more capital and more liquidity.
  This will mean dividend cuts, rights issues and
  lower intrinsic profitability
• A rise in the level of non-performing loans
  across all lending categories the focus of our
  Debt and Credit theme. Bad debts have only
  just begun to deteriorate

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