Outlook for Global Wholesale and Investment Banking - BlackRock ...

March 16, 2010Banksestimated normalized return on tangible equity. Wecalculate this implies the market is pricing in 2.5x higherlosses on legacy assets than we estimate and 1.5x higherlosses than the most bearish estimates on the Street,which looks overdone to us.BNP – Overweight, PT €65. We continue to see upsidefrom the Fortis integration, decent market activity, stableretail and cost control. The stock trades at 1.4x last TNAV.We raise our estimates by an average 3%.BME – Underweight, PT €19.1. We still see material risksto earnings from proposed changes to the Spanish marketstructure, based on the losses other exchanges have seento MTFs. The stock trades on 10.5x 2010e, and our pricetarget implies ~5% downside potential from current levels.SDR – Overweight, PT £15.65. Schroders is our preferredasset manager, as we think sales momentum isbroadening from corporate bond focus to equities,commodities, alternatives and multi-asset. At 10x 2011e(adjusted for surplus cash) versus the sector on ~11.5x,we think valuation is undemanding given growth.CBK – Underweight, PT €4.43. We remain UnderweightCBK, as we think the company is still challenged in severalasset quality areas, exposed to sovereign risks in Europethrough ~€133bn public finance exposure (€28bn of whichis in Southern Europe) and with a thin capital base. Wewould want to see the common equity component ofCBK’s capital addressed before we turn more positive, andcurrently calculate a €15bn shortfall of core T1 capital (>2xmarket cap).DX – Underweight, PT €4. Dexia’s 4Q results confirmedour cautious view on the stock. With credit markets underpressure, we expect Dexia to suffer from the doubleimpact of higher cost of funding and higher cost ofdeleveraging, which will likely impair group earningsgeneration and erode excess capital. Deleveraging is likelyto be more challenging on the back of negative creditmigration, which will not ease further asset disposals.Although we believe much of this is priced in, we remainUnderweight on the stock due to: (1) low visibility ontiming/level of normalized earnings; (2) uncertainty overexcess capital in 2012; (3) the impact from wideningsovereign spreads and (4) the lack of upside to our pricetarget, which makes the stock a relative Underweightwithin the sector.Key stock ideas – North AmericaBAC – Overweight, PT $28. BAC is our top pick amongUS large cap banks. It has a skew to early cycle capitalmarkets revenues (25% of revenues) and card (18% ofmanaged loan balances). We expect provisions and NPLsto start declining in 2010. BAC should begin to regain lostcapital markets share as TARP has been paid back,management has stabilized and the US economyrebounds, driving corporate America to increaseinvestment, strategic and financing activities. We think BACis attractively priced at 0.7x book, 1.5x tangible and 5x2012e normalized EPS, versus peers on an average 1.0xbook and 7x 2012 normalized EPS.JPM – Overweight, PT $59. We expect JPM will be oneof the first banks with materially declining NPLs, given itsskew to early cycle card and below-average CRE. InInvestment Banking, we expect JPM will continue to takeincremental share beyond its already #1 position in IBfees, given recently increased IT investment, Asia focusand talent management. We expect that electronic tradingplatforms, equities and commodities will drive $1 billioneach in incremental revenue over time. The fixed incomeinvestment is more about cost saves at this point. Weexpect more investment in Asia, where JPM would like todouble its share. JPM is priced equal to the group at 1.1xbook, 1.6x tangible and 7x normalized 2012e EPS. Fasterexit from the credit cycle with lower NPLs, lower provisionsand faster dividend hikes drive our Overweight view.TD – Overweight, PT C$85. TD is our top pick inCanadian banks, with the most leverage to the USrecovery (25% of loan book). TD targets a 75% retail /25% capital markets business mix. Trading andunderwriting/advisory revenues remain strong. In fiscalQ110, fixed income trading increased 16% sequentiallyand underwriting/advisory was up 6%. Equities tradingcontracted 43% q/q, but only comprises roughly 20% oftrading. TD saw strong new issue origination on the debtside during the quarter. TD is trading at 11.4x 2010eversus Canadian peer group of the sector at 12.8x. Ourprice target implies ~20% upside from current levels.AMTD – Overweight, PT $28. We are Overweight AMTDbecause we believe the Street underappreciates thecompany’s asset gathering ability, and thus gives the stocka lower multiple, despite a similar growth profile to comps(management has eliminated past issues). In theDecember quarter, AMTD once again grew net new assets(NNA) at a higher rate than Schwab, the industry leader interms of total assets.BX – Overweight, PT $18. BX is a low capital intensivemodel with very low enterprise risk. Factoring ininvestment gains supports best-in-class pretax incomemargins of ~50%, high returns on equity (~20%) and37