European investment banks will take a ``material hit'' to earnings from the fallout of rising U.S. subprime-mortgage defaults, according to Lehman Brothers Holdings Inc. analysts.
Deutsche Bank AG and Credit Suisse Group were downgraded and had their share price estimates cut by London-based Jon Peace and Robert Law, who predicted that European banks will suffer after- tax writedowns of as much as 25 percent of full-year earnings this year, based on the pace of first-half gains. The impact would not threaten the solvency of the banks, the analysts wrote.
Central banks have pumped more than $350 billion into the world's money markets in the past month after U.S. subprime mortgage delinquencies sparked an increase in credit costs. Deutsche Bank Chief Executive Officer Josef Ackermann yesterday said markets are stabilizing, a day after UBS AG analysts cut their 2008 earnings estimates for firms including Deutsche Bank.
``The year 2007 has been a rollercoaster year,'' the Lehman analysts wrote in a note to clients yesterday. ``While we expect more earnings downgrades and negative news flows near term, we note that, once greater certainty over loss potential and revenue generation emerges, if markets do start to recover, the investment banks are typically quick to react.''
Investment-banking divisions may see a 40 percent decline in second-half revenue from the first six months, as income from fixed-income trading drops and debt issuance and mergers and acquisitions slow, they said in the report.
`Turbulent Market Conditions'
Ackermann said ``turbulent market conditions'' in August crimped the value of holdings in the sales and trading division, which accounts for about half of revenue. ``Market corrections, triggered in part by the drying-up of liquidity, have been significant and impacted mark-to-market valuations in our trading books and leveraged loan book,'' Ackermann said in a statement.
Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors refuse to buy debt secured by assets including subprime mortgages. IKB Deutsche Industriebank AG and Landesbank Sachsen Girozentrale had to receive emergency funding last month to keep them afloat after vehicles that they supported couldn't refinance in the markets.
The European Central Bank added more than 200 billion euros of extra cash to stabilize the money market between Aug. 9 and Aug. 14. It said today it may act tomorrow to soothe money markets if needed. The U.S. Federal Reserve and the Bank of England have also taken steps to address the credit crunch.
`Bad to Non-Existent'
Disclosure by European banks about subprime-related assets, collateralized debt obligations, leveraged lending obligations and asset-backed commercial-paper conduits ``ranges from the bad to the non-existent,'' the Lehman analysts wrote.
The analysts cut their recommendation on Frankfurt-based Deutsche Bank, the biggest German bank, to ``underweight'' from ``overweight.'' They slashed their price estimate to 94 euros ($127.7) from 146 euros.
They also reduced their recommendation on Zurich-based Credit Suisse, the second biggest Swiss bank after UBS, to ``equal weight'' from ``overweight'' and their price estimate to 90 Swiss francs ($74.28) from 123 francs. They kept their ``equal weight'' recommendation on UBS and reduced the price estimate to 71 francs from 91 francs.
Deutsche Bank fell 2.1 percent to 92.22 euros in Frankfurt trading. Credit Suisse declined 1.5 percent to 79.7 francs in Zurich and UBS dropped 1.3 percent to 63.45 francs.
New York-based Lehman itself, along with Morgan Stanley, will report lower third-quarter earnings because of declining fixed-income revenue, Citigroup Inc. analyst Prashant Bhatia wrote to clients today. Goldman Sachs Group Inc.'s profit will rise, in part because of an asset sale. Shares of New York-based Morgan Stanley, the No. 2 securities firm by market value after Goldman, offer the best risk-reward ratio for investors, he said.
The following is a table of Lehman's other changes to the ratings of European bank stocks. Bank New rating Old rating
Credit Suisse 2-equalweight 1-overweight
Deutsche 3-underweight 1-overweight
UBS 2-equalweight 2-equalweight
Banco Espirito Santo SA 1-overweight 2-equalweight
Credit Agricole SA 1-overweight 2-equalweight
HBOS Plc 1-overweight 3-underweight
Banco Popolare Scrl 3-underweight 1-overweight
Banco Comercial
Portugues SA 3-underweight 2-equalweight
Bradford & Bingley Plc 3-underweight 1-overweight
Northern Rock Plc 3-underweight 2-equalweight
Societe Generale SA 3-underweight 2-equalweight
Unione di Banche
Italiane Scpa 3-underweight 1-overweight
Deutsche Bank AG and Credit Suisse Group were downgraded and had their share price estimates cut by London-based Jon Peace and Robert Law, who predicted that European banks will suffer after- tax writedowns of as much as 25 percent of full-year earnings this year, based on the pace of first-half gains. The impact would not threaten the solvency of the banks, the analysts wrote.
Central banks have pumped more than $350 billion into the world's money markets in the past month after U.S. subprime mortgage delinquencies sparked an increase in credit costs. Deutsche Bank Chief Executive Officer Josef Ackermann yesterday said markets are stabilizing, a day after UBS AG analysts cut their 2008 earnings estimates for firms including Deutsche Bank.
``The year 2007 has been a rollercoaster year,'' the Lehman analysts wrote in a note to clients yesterday. ``While we expect more earnings downgrades and negative news flows near term, we note that, once greater certainty over loss potential and revenue generation emerges, if markets do start to recover, the investment banks are typically quick to react.''
Investment-banking divisions may see a 40 percent decline in second-half revenue from the first six months, as income from fixed-income trading drops and debt issuance and mergers and acquisitions slow, they said in the report.
`Turbulent Market Conditions'
Ackermann said ``turbulent market conditions'' in August crimped the value of holdings in the sales and trading division, which accounts for about half of revenue. ``Market corrections, triggered in part by the drying-up of liquidity, have been significant and impacted mark-to-market valuations in our trading books and leveraged loan book,'' Ackermann said in a statement.
Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors refuse to buy debt secured by assets including subprime mortgages. IKB Deutsche Industriebank AG and Landesbank Sachsen Girozentrale had to receive emergency funding last month to keep them afloat after vehicles that they supported couldn't refinance in the markets.
The European Central Bank added more than 200 billion euros of extra cash to stabilize the money market between Aug. 9 and Aug. 14. It said today it may act tomorrow to soothe money markets if needed. The U.S. Federal Reserve and the Bank of England have also taken steps to address the credit crunch.
`Bad to Non-Existent'
Disclosure by European banks about subprime-related assets, collateralized debt obligations, leveraged lending obligations and asset-backed commercial-paper conduits ``ranges from the bad to the non-existent,'' the Lehman analysts wrote.
The analysts cut their recommendation on Frankfurt-based Deutsche Bank, the biggest German bank, to ``underweight'' from ``overweight.'' They slashed their price estimate to 94 euros ($127.7) from 146 euros.
They also reduced their recommendation on Zurich-based Credit Suisse, the second biggest Swiss bank after UBS, to ``equal weight'' from ``overweight'' and their price estimate to 90 Swiss francs ($74.28) from 123 francs. They kept their ``equal weight'' recommendation on UBS and reduced the price estimate to 71 francs from 91 francs.
Deutsche Bank fell 2.1 percent to 92.22 euros in Frankfurt trading. Credit Suisse declined 1.5 percent to 79.7 francs in Zurich and UBS dropped 1.3 percent to 63.45 francs.
New York-based Lehman itself, along with Morgan Stanley, will report lower third-quarter earnings because of declining fixed-income revenue, Citigroup Inc. analyst Prashant Bhatia wrote to clients today. Goldman Sachs Group Inc.'s profit will rise, in part because of an asset sale. Shares of New York-based Morgan Stanley, the No. 2 securities firm by market value after Goldman, offer the best risk-reward ratio for investors, he said.
The following is a table of Lehman's other changes to the ratings of European bank stocks. Bank New rating Old rating
Credit Suisse 2-equalweight 1-overweight
Deutsche 3-underweight 1-overweight
UBS 2-equalweight 2-equalweight
Banco Espirito Santo SA 1-overweight 2-equalweight
Credit Agricole SA 1-overweight 2-equalweight
HBOS Plc 1-overweight 3-underweight
Banco Popolare Scrl 3-underweight 1-overweight
Banco Comercial
Portugues SA 3-underweight 2-equalweight
Bradford & Bingley Plc 3-underweight 1-overweight
Northern Rock Plc 3-underweight 2-equalweight
Societe Generale SA 3-underweight 2-equalweight
Unione di Banche
Italiane Scpa 3-underweight 1-overweight
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