05 October 2011

Dexia in 2 slides and a few words

I warned about Dexia weeks ago, and during private discussions over the summer I discussed with a top official in Luxembourg about its demise and breakdown.

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

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.


Dexia Group: semi-annual report June 2011


Dexia CLF: Rapport financier semestriel au 31 juin 2011


Dexia BIL : Rapport semi-annuel au 30 juin 2011