Eight European banks failed their stress test:
Eight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion).
The banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.
The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.
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Rating company Standard & Poor’s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn. In contrast, a survey of 113 investors by Goldman Sachs Group Inc. (GS) last month showed they expect banks to raise 29 billion euros after the tests.
It is not clear just how stressful the tests were – the last batch involved a rise in government yields, but no defaults – which was a rosy projection even at the time.
This test included what are referred to as write-downs on EU government bonds:
European Union regulators’ stress tests on the region’s banks include a 25 percent writedown on Greek government bonds. The market has already driven down the price of 10-year Greek debt to 52 cents on the euro.
Regulators didn’t include the possibility of a sovereign default in the tests even though credit-default swaps indicate about an 87 percent chance that Greece won’t be able to repay its debts. The tests included a 22.3 percent writedown on Portuguese 10-year securities, while they currently trade at 54 cents per euro.
“Current market expectations regarding sovereign risk are not incorporated in the tests,” Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London, wrote in a note to clients today.
… but it is not clear to me whether these were actually write-downs, or merely market value adjustments (which affect the trading book but not the banking book). Last time ’round, the test included only a temporary decline in the market value of government debt, not a permanent impairment.
There is more discussion from the Peterson Institute:
Second, and perhaps more importantly given the importance of “tail-end events” for bank stress tests, it remains unclear what the “sovereign risk shock” will entail in terms of assumed haircuts for sovereign bonds. Here it is clear that the stress test focus on “a shock on [government bond] interest rates” in its sovereign component is a clever way to avoid explicitly stating the politically explosive number for just how large a haircut on sovereign bonds banks should be expected in the EU “adverse scenario.” On the other hand, as anyone can calculate the “implied bond haircut” from the assumed increase in the interest rate, the avoidance of any explicit reference to a default is clearly a political exercise.
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Several “press leaks” suggest that differentiated haircuts are being assumed in the EU stress tests, with some reports stating that Greek bonds will suffer a 17 percent haircut and Spanish bonds 3 percent. Other reports suggest that the implied Greek haircut could be 20 percent, 8 percent for Spanish bonds and 5 percent for Portugal.
C-EBS states merely:
The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to a deterioration in the EU government bond markets.
… which is not the same thing as a default. This is more than just a little disingenuous. There is more than one dimension of risk in bonds, and recent prices are clearly a reflection of credit, not interest-rates.
So the Europeans will do what they do best:
Eurozone leaders will meet in Brussels on July 21 to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.
The summit, which will start at 1000 GMT, could prove a critical moment in determining what role private sector creditors play in further aid to Greece, and how EU leaders will stem the threat of debt contagion to Italy and Spain.
“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek program,” Van Rompuy said in a statement posted on Twitter.
“I have asked the preparatory work to be brought forward inter alia by the finance ministries,” he said, indicating that senior finance officials would meet ahead of time, probably on Wednesday July 21, to agree the agenda.
There’s an ownership change for Betapro:
Jovian Capital Corp. announced Friday it will sell its stake in exchange traded funds business BetaPro Management Inc. to a South Korean firm, confirming plans hinted at last week.
Seoul-based Mirae Asset Global Investments Co. will acquire Jovian’s approximately 58% interest in the ETF business, among other things, based on an enterprise value of about $150-million. Jovian’s portion of the purchase price is expected to be about $90-million.
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The Mirae deal includes: Jovian’s interest in BetaPro; AlphaPro Management Inc. (a subsidiary of BetaPro); BetaPro’s 40% interest in BetaShares Holdings Pty. Ltd. (the parent company of an Australian ETF company); Jovian’s wholly owned subsidiary Horizons Exchange Traded Funds Inc.; and Jovian’s wholly owned subsidiary JovInvestment Management Inc.Jovian’s interest in ETF manager Hahn Investment Stewards & Co. Inc. is not part of the deal.
The amazing thing about this business is that you only have to make one good, well-publicized market forecast to be set up for life (if they’re not well publicized, you just talk about it all the time; then it will be well-publicized to your clients). The latest example is Meredith Whitney:
Time is running out on the credibility of Meredith Whitney, who has yet to acknowledge that her eight-month-old prediction of widespread defaults this year in the market for state and local government debt is proving unfounded.
Defaults fell 60 percent in the first half of 2011 compared with the same period last year, including a $12.5 million Austin, Texas, apartment project that made a late payment in June, according to Distressed Debt Securities Newsletter.
Whitney, the analyst who rose to prominence by predicting Citigroup Inc.’s 2008 dividend cut, predicted “hundreds of billions of dollars” of municipal defaults within 12 months in a Dec. 19 “60 Minutes” broadcast, fueling a wave of selling in the $2.9 trillion market. Instead, the number has fallen as cities slashed spending to balance budgets and state lawmakers stepped in to guard against insolvency and local bankruptcies.
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Whitney, 41, who started New York-based Meredith Whitney Advisory Group LLC in 2009 after leaving Oppenheimer & Co., predicted 50 to 100 “sizable” municipal defaults as states slashed spending, in the interview with CBS Corp.’s “60 Minutes.” As for timing, she said it would be “something to worry about within the next 12 months.”“There’s absolutely nothing about our thesis that has changed,” she said on July 12 in an interview with Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” show in New York. “There are not enough revenues to go around and service all of the debt obligations or debt commitments outstanding.”
Whitney also sought to amend her prediction in the radio interview, saying that she said in December “you’d start to see defaults within 12 months.” She didn’t respond to telephone calls and e-mails seeking additional comment.
The Bank’s ratings are underpinned by its highly diversified business model. This is reflected in its resilient performance, generating average annual ROE of 17.6% since 1994 and a minimum annual ROE over this same period of 11.9% (2009). RBC’s diversified model consists of a superior domestic franchise, growing international businesses (wealth management and capital markets) plus solid credit and financial risk profiles.
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The Bank’s operations are divided into six segments: Canadian Banking, Wealth Management, Insurance, International Banking, Capital Markets and Corporate Support, which represented 51%, 13%, 6%, minus 2%, 32% and minus 1% of pre-tax earnings in H1 2011, respectively.
CIBC has bought a 41% interest in American Century Investments:
CIBC (TSX: CM) (NYSE: CM) announced today that it will acquire a 41% equity interest in American Century Investments, a major U.S. asset management company with US$112 billion under management and a track record of solid earnings and strong investment performance. Total consideration is US$848 million. The 100% cash transaction will be immediately accretive and CIBC’s share of American Century earnings is expected to contribute approximately 15 cents per share of earnings in 2012 on a cash basis.
CIBC is purchasing the minority interest held by JP Morgan Chase & Co. pursuant to a shareholder agreement using a pre-determined valuation methodology conducted by an independent third party.
According to the investor presentation, American Century is:
- Ranked 3rd among its peer group by Morningstar with 65% of assets holding four- or five-star ratings
- 84% of rated funds in first or second quartile rankings by Lipper
- Named “Best Large Mutual Fund Company” by Lipper in 2009
The emphasis on “assets” in the first point is interesting, since the similar statistic for CIBC Asset Management is presented by number of funds. Figures don’t lie, but liars can figure! I note that five out of nine 5-star funds are from the “LIvestrong” class, which are target date funds and another is the Zero-Coupon 2015 Fund.
Kansas City-based American Century, founded in 1958, has $112 billion in assets under management and was named the “Best Large Mutual Fund Company” at the 2009 Lipper Fund Awards. American Century’s majority shareholder is the Stowers Institute for Medical Research.
American Century is known for its focus on growth stocks, or shares in companies whose profit is expected to grow faster than the broader market, fund industry consultant Geoff Bobroff said in a telephone interview.
The growth-oriented American Century Ultra Fund (TWCUX) was once considered the company’s flagship product, Bobroff said. Its assets have fallen from $23.8 billion in 2004 to $6.5 billion as of June 30. Ultra has returned 5.3 percent annually in the past five years, beating 64 percent of competing funds, Bloomberg data show.
“One has to puzzle over why CIBC would want a minority stake, unless it saw the opportunity to either buy more or use American Century as a platform for the entry of its own products into the U.S.,” Bobroff said.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 8bp, FixedResets losing 14bp and DeemedRetractibles winning 23bp. Volatility was fair, volume was average-to-sub-par.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.6277 % | 2,418.5 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.6277 % | 3,637.4 |
| Floater | 2.50 % | 2.35 % | 41,977 | 21.33 | 4 | -0.6277 % | 2,611.3 |
| OpRet | 4.87 % | 2.87 % | 63,744 | 1.79 | 9 | -0.2182 % | 2,443.7 |
| SplitShare | 5.24 % | 1.37 % | 54,110 | 0.61 | 6 | 0.1112 % | 2,510.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2182 % | 2,234.5 |
| Perpetual-Premium | 5.68 % | 4.63 % | 131,188 | 0.77 | 13 | 0.1037 % | 2,092.9 |
| Perpetual-Discount | 5.44 % | 5.49 % | 112,078 | 14.65 | 17 | 0.0820 % | 2,201.2 |
| FixedReset | 5.15 % | 3.17 % | 205,956 | 2.67 | 58 | -0.1421 % | 2,319.8 |
| Deemed-Retractible | 5.08 % | 4.79 % | 254,850 | 8.03 | 47 | 0.2295 % | 2,160.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BNS.PR.Z | FixedReset | -6.20 % | A nonsensical quote, although it is not clear whether the culprit is the market-maker or the TMX (for its habit of providing “Last” quotes rather than “Closing” quotes). The issue traded a big 200 shares in a range of 24.00-52 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.00 Bid-YTW : 4.53 % |
| TRI.PR.B | Floater | -3.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-15 Maturity Price : 22.68 Evaluated at bid price : 22.97 Bid-YTW : 2.26 % |
| FTS.PR.C | OpRet | -1.65 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-08-31 Maturity Price : 25.00 Evaluated at bid price : 25.62 Bid-YTW : 4.57 % |
| PWF.PR.A | Floater | 1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-15 Maturity Price : 22.03 Evaluated at bid price : 22.26 Bid-YTW : 2.35 % |
| BAM.PR.N | Perpetual-Discount | 1.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-15 Maturity Price : 21.46 Evaluated at bid price : 21.76 Bid-YTW : 5.49 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.B | FixedReset | 183,002 | RBC crossed blocks of 14,900 and 157,200, both at 25.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-15 Maturity Price : 23.39 Evaluated at bid price : 25.43 Bid-YTW : 3.30 % |
| TD.PR.M | OpRet | 126,004 | Desjardins crossed 25,000 at 25.54; Nesbitt crossed 100,000 at 25.52. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-08-14 Maturity Price : 25.50 Evaluated at bid price : 25.53 Bid-YTW : 0.72 % |
| CM.PR.H | Deemed-Retractible | 89,340 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-08-14 Maturity Price : 25.75 Evaluated at bid price : 25.73 Bid-YTW : 3.14 % |
| RY.PR.B | Deemed-Retractible | 84,485 | RBC crossed blocks of 49,100 and 20,000, both at 25.04. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 4.78 % |
| CM.PR.G | Perpetual-Premium | 68,462 | RBC crossed 49,100 at 25.08. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-01 Maturity Price : 25.00 Evaluated at bid price : 25.07 Bid-YTW : 5.22 % |
| CM.PR.J | Deemed-Retractible | 68,408 | Nesbitt crossed 50,000 at 24.77. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.77 Bid-YTW : 4.61 % |
| There were 29 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IAG.PR.C | FixedReset | Traded 200 shares in a range of 26.86-87. Ha-ha-ha! Quote: 26.78 – 33.78 Spot Rate : 7.0000 Average : 3.8283 YTW SCENARIO |
| BNS.PR.Z | FixedReset | Quote: 23.00 – 24.70 Spot Rate : 1.7000 Average : 0.9783 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.32 – 26.00 Spot Rate : 0.6800 Average : 0.4519 YTW SCENARIO |
| TRI.PR.B | Floater | Quote: 22.97 – 23.70 Spot Rate : 0.7300 Average : 0.5262 YTW SCENARIO |
| FTS.PR.C | OpRet | Quote: 25.62 – 26.10 Spot Rate : 0.4800 Average : 0.2975 YTW SCENARIO |
| BNS.PR.Y | FixedReset | Quote: 25.21 – 25.64 Spot Rate : 0.4300 Average : 0.3092 YTW SCENARIO |