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Monday, 3 November 2008
Europe’s banks show more financial frailty
Two of Europe’s big banks used newly relaxed EU accounting rules to boost their profits on Thursday while others took state cash and a top executive said he saw no ight at the end of the financial crisis tunnel.
FRANKFURT/OSLO (Reuters) - Two of Europe’s big banks used newly relaxed EU accounting rules to boost their profits on Thursday while others took state cash and a top executive said he saw no light at the end of the financial crisis tunnel.
Deutsche Bank AG, the largest bank in Europe’s largest economy, and Norway’s biggest player DnB NOR, both posted results that were not as poor as the market had expected.
However, they both exploited new EU reporting rules that relax the requirement to value assets at current market prices, softening the blow of write-downs and were very cautious on future prospects.
Elsewhere in the region, Austria’s Erste Group Bank and Kazakhstan’s biggest player BTA BTAS.KZ both said they were taking government cash.
Deutsche Bank made a pretax profit of 93 million euros in the third quarter, dodging a loss thanks to the changed accounting rules that allowed it cut write-downs by more than 800 million euros to 1.2 billion. They would have topped 2 billion euros ($2.6 billion) without the change.
But trading losses were heavy and Chief Executive Josef Ackermann warned of more of the same to come.
“Conditions in equity and credit markets remain extremely difficult,” he said, adding: “We will balance our dividend policy with our commitment to conserving capital strength in a highly uncertain environment.”
Deutsche shares had been trading at a price/earnings ratio of roughly 2.5 times estimated future earnings, a fraction of HSBC’s 7.6 times or the sector average of almost 5.
Deutsche shares rose as much as 20.3 percent after the figures and were up 14.6 percent by 11:51 a.m. EDT, outpacing a 4.2 percent gain in the DJ Stoxx European bank sector index.
Analysts said the bank’s positive capital situation was playing as much of a role in the gains as was its bottom line.
“With a Tier 1 ratio of above 10 percent, we continue to see no need for capital measures simply in order to compensate for losses or to strengthen capital ratios at the moment,” said Andreas Weese, an analyst at Unicredit.
Dresdner Kleinwort analyst Folkert Jan Van der Veer was more critical of the relaxed accounting rules.
While it may limit mark-to-market losses on the bank’s profit and loss statement, using the new rules comes at a potentially high cost, he wrote in a note to clients.
“So far, Deutsche Bank’s Tier 1 ratio looks strong at over 10 percent, but balance sheet leverage continues to look very stretched when measured on a more simplified basis in the form of tangible equity to total assets,” he added.
DnB NOR also reported a smaller-than-expected drop in third-quarter pretax profit, but warned the financial turmoil was making it more difficult to achieve its 2008 target for earnings to be on par with 2007.
“The considerable financial turmoil is expected to weaken the level of economic activity among the banking group’s customers,” the bank said.
The report followed generally weak third-quarter results from rival Nordic banks and insurers which have suffered along with other financial institutions in the global credit crunch.
MORE BAILOUTS
Banks continued to queue up for state aid. In Austria, Erste Group Bank said it will be getting a 2.7 billion euro ($3.4 billion) equity injection from the Austrian government at annual interest of 8 percent, as it posted results in line with estimates.
And Kazakhstan’s BTA BTAS.KZ said it expected the government to inject $2.3 billion into its capital as part of a $5 billion bank bailout package announced earlier this week.
Erste is the first Austrian bank to accept capital from the state’s 100 billion euro bank support program and a major lender in emerging Europe. The move will boost its tier 1 capital ratio to more than 10 percent by the end of the year, when it expected the deal to close.
Erste posted a 17 percent decline in third-quarter net profit before one-off gains, as loan loss provisions more than doubled, its trading profit almost evaporated and costs continued to rise.
And in the UK, Lloyds TSB named its management team following the proposed takeover of HBOS, a deal done before the UK government unveiled its support package for the banking system.
The line-up was dominated by names from Lloyd’s existing team, with only two out of nine coming from HBOS.
Lloyds stepped in to buy HBOS last month in a government-brokered deal, after its rival was hit by the credit crunch and concerns about its exposure to the UK housing market.
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Europe’s banks show more financial frailty
By John O’Donnell and John Acher
30 October 2008
FRANKFURT/OSLO (Reuters) - Two of Europe’s big banks used newly relaxed EU accounting rules to boost their profits on Thursday while others took state cash and a top executive said he saw no light at the end of the financial crisis tunnel.
Deutsche Bank AG, the largest bank in Europe’s largest economy, and Norway’s biggest player DnB NOR, both posted results that were not as poor as the market had expected.
However, they both exploited new EU reporting rules that relax the requirement to value assets at current market prices, softening the blow of write-downs and were very cautious on future prospects.
Elsewhere in the region, Austria’s Erste Group Bank and Kazakhstan’s biggest player BTA BTAS.KZ both said they were taking government cash.
Deutsche Bank made a pretax profit of 93 million euros in the third quarter, dodging a loss thanks to the changed accounting rules that allowed it cut write-downs by more than 800 million euros to 1.2 billion. They would have topped 2 billion euros ($2.6 billion) without the change.
But trading losses were heavy and Chief Executive Josef Ackermann warned of more of the same to come.
“Conditions in equity and credit markets remain extremely difficult,” he said, adding: “We will balance our dividend policy with our commitment to conserving capital strength in a highly uncertain environment.”
Deutsche shares had been trading at a price/earnings ratio of roughly 2.5 times estimated future earnings, a fraction of HSBC’s 7.6 times or the sector average of almost 5.
Deutsche shares rose as much as 20.3 percent after the figures and were up 14.6 percent by 11:51 a.m. EDT, outpacing a 4.2 percent gain in the DJ Stoxx European bank sector index.
Analysts said the bank’s positive capital situation was playing as much of a role in the gains as was its bottom line.
“With a Tier 1 ratio of above 10 percent, we continue to see no need for capital measures simply in order to compensate for losses or to strengthen capital ratios at the moment,” said Andreas Weese, an analyst at Unicredit.
Dresdner Kleinwort analyst Folkert Jan Van der Veer was more critical of the relaxed accounting rules.
While it may limit mark-to-market losses on the bank’s profit and loss statement, using the new rules comes at a potentially high cost, he wrote in a note to clients.
“So far, Deutsche Bank’s Tier 1 ratio looks strong at over 10 percent, but balance sheet leverage continues to look very stretched when measured on a more simplified basis in the form of tangible equity to total assets,” he added.
DnB NOR also reported a smaller-than-expected drop in third-quarter pretax profit, but warned the financial turmoil was making it more difficult to achieve its 2008 target for earnings to be on par with 2007.
“The considerable financial turmoil is expected to weaken the level of economic activity among the banking group’s customers,” the bank said.
The report followed generally weak third-quarter results from rival Nordic banks and insurers which have suffered along with other financial institutions in the global credit crunch.
MORE BAILOUTS
Banks continued to queue up for state aid. In Austria, Erste Group Bank said it will be getting a 2.7 billion euro ($3.4 billion) equity injection from the Austrian government at annual interest of 8 percent, as it posted results in line with estimates.
And Kazakhstan’s BTA BTAS.KZ said it expected the government to inject $2.3 billion into its capital as part of a $5 billion bank bailout package announced earlier this week.
Erste is the first Austrian bank to accept capital from the state’s 100 billion euro bank support program and a major lender in emerging Europe. The move will boost its tier 1 capital ratio to more than 10 percent by the end of the year, when it expected the deal to close.
Erste posted a 17 percent decline in third-quarter net profit before one-off gains, as loan loss provisions more than doubled, its trading profit almost evaporated and costs continued to rise.
And in the UK, Lloyds TSB named its management team following the proposed takeover of HBOS, a deal done before the UK government unveiled its support package for the banking system.
The line-up was dominated by names from Lloyd’s existing team, with only two out of nine coming from HBOS.
Lloyds stepped in to buy HBOS last month in a government-brokered deal, after its rival was hit by the credit crunch and concerns about its exposure to the UK housing market.
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