|
|
Leverage core equity / total assets: 75 x! (36x if using the Basle II Tier 1 capital definition): so, doomed in a recessionary environment where nearly 50% of loans are with local authorities that have difficulties to balance their budgets.
The French part of Dexia (formerly Crédit Local de France) is where most the group
mess is coming from: the same ratio is much worse at 259 x!!! Even LTCM was not
leveraged like this…
Dexia BIL (Luxembourg)
is rather sound with a ratio of 18 x and its exposure to PIIGS (EUR 5 billion including
EUR 536 million of sovereign debt) is manageable. DEXIA BIL will be bought by a
bank like ING. I guess that Dexia BIL “legacy portfolio” (EUR 10 billion) will
be consolidated with the other ones of the group into a bad bank.
Prima facie, the consolidated “legacy portfolio” does not look so bad: “only” EUR 7.7 billion non-investment grade; well, (1) what is investment grade today may rapidly become sub- investment grade tomorrow (see Greece) and (2) the EUR 4.1 billion allocated capital to the “legacy division” is not sufficient to match a 30% loss on the NIG loans.
In 2Q11, Dexia’s portfolio was reduced by EUR 6.8 billion vs.
end of March 2011 with a loss of EUR 4 billion, i.e. ~60% mark-down.
Greece
was provisioned for 21% (the IFF* agreement); the final loss will be between
50% and 75%, somore losses to come.
Short-term Funding need down EUR 47 bn which can only be funded
with central banks, since I guess that Dexia is shut down from the interbank
market.
This is a remake of the Irish banks: Dexia successfully passed
the 2011 EBA test which was meant to be much more stringent: a joke I wrote in
July.
* Institute of International
Finance: the international professional organisation
of banks
Conclusion
After Irish banks last year, Dexia situation exemplify the
inadequacy of EBA tests which were politically motivated. For 3 years, the policy of denial followed by policy makers regarding Greece default and banks recapitalization
has spurred volatility in markets: investors are reacting to
hard facts and hate uncertainty and lack of action. Markets do not want words but
acts.
It also shows how the poor quality of blinded European politicians
made a limited disease become metastatic.
Continue to stay clear of European financial stocks (if you
are a long term investor, there is better value elsewhere – if you are a trader
volatility is always good): with Basle III and other rules, the finance
industry will deliver lower long term returns on equity as written on this blog
for 2 years.
Source:
Dexia Group: semi-annual report June 2011
http://www.dexia.com/EN/shareholder_investor/results/Documents/20110408_financial_report_2Q_UK.pdf
Dexia CLF: Rapport
financier semestriel au 31 juin 2011
http://public-dexia-clf.dexwired.net/DCL/informations-juridiques-financieres/Documents/semestriel-dcl-2011.pdf
Dexia BIL : Rapport
semi-annuel au 30 juin 2011
https://www.dexia-bil.lu/fr/Documents/resultats-financiers/rapport-semi-annuel-dexial-2011.pdf
Posts
