Wednesday, December 19, 2007

Goldman warns on banks (again)

(FT Alphaville) After all the lazy allegations about its analysts supposedly talking the bank’s own trading book, Goldman Sach’s bank research team are in fact now in danger of talking the bank’s own stock down.

Goldman may have surprised Wall St with forecast-beating fourth quarter numbers on Tuesday, but its own sector analysts on both sides of the Atlantic have immediately issued fresh warnings - that all the bulge bracket firms are facing a rising risk of credit contagion as the deterioration in credit quality spreads from subprime mortgages through credit cards, car loans, small business lending and commercial property.

It could be one reason, perhaps, why Goldman’s own share price closed 3.4 per cent lower in New York.

In London on Wednesday the banks team, led by Christoffer Malmer, reiterated “a preference for relative growth and visibility,” having helped spark a global sell off in equities back on November 20 when Goldman first voiced its worries over the stress on banks’ capital positions, along with the twin risks of credit contagion and the credit crisis hitting economic growth.

Specifically in Goldman’s European sights this time are:

Barclays - Estimates are just too high, in Goldman’s view, and BarCap will not be able to churn the group’s capital as it has in the past.

We expect negative headlines on write-downs and underlying earnings trends across the sector to continue to weigh on Barclays and cause the market to reassess earnings expectations for BarCap, where we forecast earnings to decline 20% in 2008. Our BarCap revenue forecast for 2008 still implies that management will deliver on their target 15%-20% growth across the cycle (starting in any year between 1999 and 2003). While 2007 results may provide further granularity in terms of exposures and capital, we believe the risk remains to the downside in terms of additional write-downs and levels of equity Tier 1.

UBS/Credit Suisse -

In our view, UBS has sufficient capital to weather a further deterioration in capital market conditions, although we believe that the magnitude of its capital raising implies that management believe that there is a probability of further capital destruction in coming months.

We retain a Conviction Sell on Credit Suisse as we believe that the market has not sufficiently lowered its earnings expectations for 2008. Based on issuance league tables, we also believe that the magnitude of CMBS exposure is likely to be higher at Credit Suisse than for UBS.

And HBOS - on concerns over the UK housing market and higher funding costs.

On a standalone basis, HBOS appears to be undervalued when compared to long-term average multiples for the domestic UK Banks of 10x. Despite this, UK Bank valuations have tended to be pro-cyclical and our concern is that the stock ends up being a value trap. Our forecasts for 2008 imply flat earnings, but the risk remains of further downgrades from higher impairments and funding costs. Comments on the recent conference call implied HBOS was currently writing close to zero spread mortgage business, where LIBOR needs to come down for normal profitability to resume or pricing needs to rise further raising the spectre of higher losses. We currently forecast a 16% rise in impairments in 2008; however, as the UK economy slows, the risk is that losses rise faster than expected.

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