UBS | What’s happening? Banks are trading at distressed PE and P/TNAV multiples. Emerging Market/China/ APAC slowdown and oil going to US$30 are potentially triggering a downturn in the credit cycle and concerns over credit/exposure quality in general. High-yield spreads as a result of this have widened sharply: They almost doubled from summer 2015 to above 800bp now. US HY funds have seen redemptions accelerating recently and they totalled US$20bn Q2 – Q4 2015. Mark- to-market in Q4 losses (more to come in Q1?) are weighing on banks’ profitability which is already low due to low client activity levels, low interest rates and high cost levels and relatively low short – term cost flex.
A vicious circle – Are banks in better shape today?
Yes widening spreads and low profitability of some banks have triggered concerns around the banks’ ability to service and issue AT1 bonds. The most vulnerable ba nks’ share prices were those with 1) EM/energy exposure 2) AT1 issuances ahead 3) low current profitability 4) large capital market/IB positions such as Deutsche Bank or Credit Suisse. In general, the banks’ ability to absorb shocks has improved a lot we think, e.g., the readiness of central banks to provide liquidity to the banks is an additional support.
What can stop the downward spiral and what banks to buy?
A (short-term) stabilisation in credit markets and the oil price or even a recovery could stabil ise the situation. Additional disclosure and statements by the banks would also help to increase confidence (or remove concerns) we think. Short – term rallies are likely. We would focus on primarily domestic driven retail and commercial banks, limited capit al market gearing, strong capital and funding and liquidity positions and yield potential: Lloyds, ING, Partners Group, Cembra, Barclays for those who want to have some IB exposure. CS and DBK are Neutral given exogenous vulnerabilities and low visibility.