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Summary of Document: Europe: Banks

Core Content

The document provides an analysis of the European banking sector, focusing on liquidity, profitability, and market conditions. It emphasizes that the risk of a financial crisis re-run is limited, and that European banks are in a stronger position compared to the pre-crisis era due to increased capitalization, improved liquidity, and the presence of ECB backstops.

Main Points

1. Liquidity Status

• Banks have returned over €700 billion to the ECB since the 2012 peak, significantly reducing their reliance on ECB funding.
• ECB liquidity facilities (MRO, LTRO, TLTRO, and ELA) are still available and in place, providing a backstop for banks facing liquidity issues.
• Money markets remain stable, with no evidence of strain in € or US$ funding. Key indicators such as EURIBOR – OIS and cross-currency basis are not significantly affected by share price volatility.
• Customer deposits are growing, contributing to bank liquidity. In particular, Greece and Italy saw strong inflows in 2015, especially in December.

2. Profitability Outlook

• Profitability trends are softening due to:
  • NIM compression (net interest margin decline)
  • Weak loan growth
  • Worsening credit quality outlook
  • Difficulty in cost-cutting
• These factors are not new, and 4Q15 results are expected to reflect reasonable earnings, which may not justify significant share price movements.

3. Market Liquidity

• Market liquidity across all asset classes has decreased, which can amplify volatility.
• Banks have reduced their inventory by over $2 trillion in the past four years, contributing to lower market liquidity.

4. BNP Paribas as a Large Cap Pick

• BNP Paribas is highlighted as a large-cap investment in the Eurozone (EZ) due to:
  • "Self-help" potential through US disposal options
  • Strong 4Q15 performance, with capital increasing by 20 bps quarter-over-quarter
  • TBPVS growth of 8% year-over-year
  • Negative NPL formation of -2% quarter-over-quarter
  • Attractive valuation (0.6x P/TVB, 6% dividend yield)

5. Capitalization Trends

• European banks have raised nearly €800 billion in capital since the start of the crisis, bolstered by retained profits, deleveraging, and asset sales.
• Capital has been sourced from both private and state entities, with private capital contributing more than public.

Key Information

• ECB Funding Reduction: Banks have more than halved their reliance on ECB funding, indicating improved financial health and independence.
• Deposit Growth: The deposit picture remains strong, with consistent growth in most countries, although some, like Greece, have seen a decline in recent months.
• Capital Raising: Capital has been raised through various means, including equity issuance, retained earnings, and asset disposals, leading to improved capital ratios.
• Market Volatility: Lower market liquidity is a concern as it can lead to increased volatility, especially in times of stress.
• BNP Paribas: Stands out as a well-positioned bank with strong fundamentals and attractive valuation.

Supporting Exhibits

• Exhibit 1: ECB funding usage has declined significantly since 2012.
• Exhibit 2: Spain and Italy have sharply reduced their reliance on ECB funding.
• Exhibit 3: Greece's dependence on ECB funding has decreased since summer 2015.
• Exhibit 4: Greek banks account for less than 20% of ECB funding.
• Exhibit 5: No evidence of funding strain in the Euro area.
• Exhibit 6: ECB has implemented a range of liquidity support mechanisms.
• Exhibit 7: Capital raisings across European countries since 2007.
• Exhibit 8: Reduction in inventory by major investment banks.
• Exhibit 9: Total capital raisings amount to nearly €800 billion.

Investment Profile and Strategy

• GS SUSTAIN Strategy: Focuses on long-term, long-only performance with a low turnover of ideas.
• Quantum Database: Used for in-depth financial analysis and comparison.
• Investment Ratings: The document notes the distribution of investment ratings (31% Buy, 53% Hold, 16% Sell) and investment banking relationships (63% Buy, 58% Hold, 52% Sell).

Regulatory and Disclosure Information

• Reg AC Certification: The report is certified to reflect the personal views of the analysts.
• Conflicts of Interest: Goldman Sachs may have conflicts of interest due to business relationships with covered companies.
• Investment Profile: Compares key attributes of securities to their peer groups and market.
• Disclosures: Include information about ownership, compensation, and roles of analysts, as well as regional legal requirements.

Conclusion

Overall, the European banking sector appears to be in a more stable and well-capitalized position than during the crisis, with limited liquidity risk and supportive ECB measures in place. However, market liquidity is lower, which may increase volatility. BNP Paribas is highlighted as a strong investment opportunity due to its improved capital position, growth in TBPVS, and attractive valuation.