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Financials on Friday: All About Credit Quality This Week.

FINANCIALS
  • Deterioration – this was the key risk factor headlining the week, in our view. The last two (small) Danish banks reported with no banana skins. Sadly, Bank of Ireland, Erste and Aareal all showed rather different trends with the former two’s equity hit (-8% and -5%) and Aareal (PE-owned) making a large provision specifically against US office real estate.
  • Dispersion - Canadian banks showed a real dispersion here. Scotiabank and NBC both looked fine, but BMO and RBC saw weakening NPLs trends hitting their equity. BMO’s acquisition of BancWest (from BNP in Feb-23) looks poorly timed now.
  • Desperation – Heimstaden, the Swedish landlord, has moved to scrap the dividend to protect its credit rating (and an equity issue may be on the way). Separately, NYC Bancorp has delayed its 10K, dumped its CEO and admitted “material weaknesses” in its risk systems, again making it feel issuer-specific.
  • Deduction – there are clearly hotspots of weakness (known) and some are over-exposed, so risks remains relatively idiosyncratic and, so far, contained. Contagion is possible, rather than probable, so we continue to monitor the macro.
  • Insurers – a much quieter week with Munich Re profits inline, Aegon missing on operations but better on capital and an upgrade at Coface.
  • Animal spirits - Direct Line received and rejected an “unattractive” GBP3.1bn bid from Ageas but can come back to the table by 27-Mar. Barclaycard did manage to sell some US card receivables though, starting its slow march back to the coast, now Capital One and Discover have eloped.
  • Trading update – there was a financials conference this week which noted mainstream US asset quality as remaining relatively steady with some stress points. For investment banks, it did indicate trading revenues lower than 1Q23 and an IPO market that remains weaker than expected. Not great for PE-owners trying to exit, nor for the big European IBs (Barclays, UBS, Deutsche).
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