Bloomberg editorialized on the European stress test:
What most undermines the credibility of this latest attempt to calm Europe’s financial fears — the third in three years — is that a sovereign-debt default wasn’t among the worst-case scenarios under consideration, even though credit-default swaps already indicate an 87 percent chance that Greece won’t be able to repay its debts. Instead, European authorities looked at the ability of banks to endure an economic contraction of 0.5 percent — in other words, a mild recession — as well as a 15 percent stock-market decline, rising unemployment, a drop in housing prices and trading losses on government debt.
Even so, the unprecedented publication of bank data is laudable. It represents a much-needed step toward improving transparency in an otherwise opaque financial system that has yet to recover from the 2008 collapse of Lehman Brothers Holdings Inc. As analysts pore over the data in the days ahead, investors will finally be able to get a sense of how much of a capital buffer each bank has, and what profitability estimates look like for each in 2011 and 2012. The size and maturities of sovereign-debt holdings by all 90 banks, spread over 21 countries, have also been laid bare, allowing analysts and investors to run their own tests and identify the laggards.
And similar criticism is piling up:
European banks may have to raise as much as 80 billion euros ($113 billion) of additional capital as the stress tests failed to allay investor concern about a Greek default and governments’ ability to bail out their lenders.
The eight out of the 90 banks that failed the July 15 tests had only a combined capital shortfall of 2.5 billion euros, the European Banking Authority said July 15. As many as 20 banks need to bolster capital, JPMorgan Cazenove analysts led by Kian Abouhossein wrote in a report after the results were published.
Regulators didn’t include a Greek default in the tests even though credit default swaps indicate investors see an almost 90 percent chance of one. The EBA included a 25 percent writedown on 10-year Greek government bonds held in banks’ trading books even as the securities trade at about 51 cents on the euro. The exams won’t succeed in reassuring investors until governments put in place a mechanism to stop failing banks weighing on public funds, said Gary Greenwood, an analyst at Shore Capital.
Governments adore the idea of voluntary cooperation:
Germany is insisting private investors be involved in the second bailout, and Merkel indicated on Sunday that if they did not voluntarily agree to a major contribution now, they might eventually be forced into a more costly solution to the crisis.
“The more we can involve private creditors now on a voluntary basis, the less likely it is that we will have to take next steps,” Merkel told public broadcaster ARD without elaborating on what those steps might be.
There is now incentive to get married:
Canadian women in growing numbers are making more money than their husbands, after three decades of gains in post- secondary education and professional jobs. About 31 percent of wives made more than their husbands in 2009, up from 12 percent in 1976, according to the most recent data from Statistics Canada.
Dealbreaker has an entertaining post on the efforts to eliminated credit ratings:
These rules are a consequence of some half-baked thinking that went into Dodd-Frank. Yes, investors relied too much on ratings and didn’t do enough of their own credit work in evaluating bonds and the balance sheets of banks that held them. But that’s hard to fix by just regulating that everyone should do better credit work. The SEC’s proposed rules are a clever compromise, paying pages of lip service to the idea that everyone should think deeply about the creditworthiness of all of their assets while in practice giving brokers a fair amount of leeway to rely on easy-to-read external indicators like ratings and spreads. Particularly with the addition of SIFMA’s friendly amendment, the SEC may be able to follow Congress’s instructions without doing much to change how brokers calculate capital. Which, y’know, will be great until the next crisis in highly rated debt instruments.
It’s easy to criticize credit ratings and the agencies. It’s not so easy to do a better job.
The capital surcharge on globally important banks moved closer to reality:
Global regulators have backed Basel plans that would force banks judged too big to fail to hold as much as 2.5 percentage points in additional capital, as part of efforts to prevent them from collapsing and causing another financial crisis.
The Financial Stability Board said that the extra requirements are necessary because of the threat such lenders would pose to the global economy if they failed. Regulators also endorsed measures including bondholder writedowns to shield taxpayers from bank bailouts.
Systemically important banks will face “capital surcharges of between one and 2.5 percent,” Mario Draghi, the board’s chairman, told reporters after the meeting in Paris today.
I don’t like it – too many edge effects, too much scope for lobbying and corruption. A standard, progressive surcharge on banks based on their Risk Weighted Assets and the size of the national banking sector relative to GDP would be much better.
Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds.
Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 — at about $18 billion for each percentage point — crimping Moynihan’s ability to raise dividends and repurchase shares.
Strategically, the Company is challenged to achieve growth as a mid-sized competitor in a relatively concentrated market where competitive scale is critical. The three largest Canadian life insurance companies control between 60% and 70% of the market in most product lines, forcing IAG to distinguish itself in very specific market niches, where it can exercise a competitive advantage while also pursuing the goal of growth and diversification. The Company has been focused on broadening its product exposure in the Canadian financial services market to include a larger proportion of wealth management products and enhancing its geographic diversification to include the United States and the non-Québec Canadian market. A conscious decision to pursue a multichannel distribution strategy has facilitated this diversification strategy, with a career sales force serving Québec and independent brokers and managing general agents (MGAs) serving the balance of the Company’s markets. Nevertheless, the Company remains disproportionately exposed to the Canadian market and to universal life insurance specifically, which represented 54% of its individual life insurance sales in 2010. Universal life is in turn more highly exposed to interest rate and equity market risks.
…
The Company balances its market vulnerability with a more conservative risk tolerance. For example, IAG’s product design and actuarial assumptions with respect to mortality, reinvestment rates and equity market returns are sufficiently conservative that there is a large cushion available to protect Company earnings in the event of adverse market experience, as seen in the 2008–2009 financial crisis, when the Company came through better than most of its competitors. To mitigate its exposure to low interest rates, the Company has increased the portion of equities backing its liabilities, albeit assuming a higher capital charge as a result. The Company retains a higher proportion of mortality risk than its peers rather than reinsuring it since it is confident that the long-term improvement in mortality will ultimately accrue to the Company’s benefit given the Company’s relative exposure to individual life insurance liabilities. Investment policies are similarly conservative in order to minimize the Company’s capital charge and market exposures.
At the end of Q2 2011, the Bank’s tangible common equity-to-risk-weighted assets ratio, as determined by DBRS, was 8.9%, while the Basel II Tier 1 capital ratio was 12.7%. Although these ratios are at the lower end relative to its Canadian bank peers, it compares favourably with historical levels. As the Canadian banking regulator moves toward the application of Basel III capital rules, TD is in a good position given its capital levels. DBRS’s expectation is for ongoing strength in capital during the period prior to the implementation of Basel III.
…
TD has five segments: four operating lines of business and the Corporate segment. The operating businesses are Canadian Personal and Commercial Banking (Canadian P&CB), U.S. Personal and Commercial Banking (U.S. P&CB), Wealth Management and Wholesale Banking, representing 55%, 20%, 12% and 13%, respectively, of adjusted net income (excluding intangible amortization and the Corporate segment) in H1 2011. Retail businesses (i.e., Canadian P&CB, U.S. P&CB and Wealth Management) generated approximately 87% of earnings in H1 2011. This percentage has been at this level since 2008, which is consistent with TD’s objective to minimize earnings volatility through its strategy of achieving a higher proportion of earnings through retail operations.
DBRS commented on MFC’s asset sale:
DBRS notes that Manulife Financial Corporation (Manulife or the Company) has today announced that it has entered into an agreement to sell its Life Retrocession business to Pacific Life Insurance Company (Pacific Life). There are no rating implications at this time.
DBRS notes that the Life Retrocession sale is expected to result in an after-tax gain of approximately $275 million for Manulife. The sale is expected to increase the Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio of Manulife’s operating subsidiary, The Manufacturers Life Insurance Company, by approximately six percentage points. This MCCSR ratio was 243% as of March 31, 2011. Given Manulife’s higher relative market exposure to the equity markets and the current uncertain economic environment, DBRS regards the Company’s maintaining higher regulatory capital ratios as prudent until its risk-reduction targets are more fully achieved.
The Life Retrocession business was a non-core business for Manulife that did not have a lot of growth potential, in part because of the fact that competitors in other jurisdictions have an advantage as a result of less restrictive capital requirements. The proposed sale is consistent with the Company’s strategy to achieve a better balance of risk exposures while focusing on more profitable and capital-efficient products, with a stronger component of fee-based revenues. The transaction is subject to standard closing conditions, including receipt of regulatory approvals, and is expected to close during the third quarter of 2011.
It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 2bp, FixedResets up 2bp and DeemedRetractibles winning 15bp. Volatility was good. Volume was average.
| 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 | 0.7271 % | 2,436.1 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.7271 % | 3,663.9 |
| Floater | 2.48 % | 2.32 % | 41,372 | 21.41 | 4 | 0.7271 % | 2,630.3 |
| OpRet | 4.86 % | 3.05 % | 62,750 | 0.20 | 9 | 0.1415 % | 2,447.2 |
| SplitShare | 5.24 % | 1.39 % | 55,022 | 0.61 | 6 | -0.0766 % | 2,508.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1415 % | 2,237.7 |
| Perpetual-Premium | 5.68 % | 4.93 % | 129,425 | 0.77 | 13 | -0.0792 % | 2,091.3 |
| Perpetual-Discount | 5.44 % | 5.45 % | 110,634 | 14.70 | 17 | 0.0174 % | 2,201.6 |
| FixedReset | 5.15 % | 3.19 % | 202,795 | 2.66 | 58 | 0.0222 % | 2,320.3 |
| Deemed-Retractible | 5.08 % | 4.78 % | 256,517 | 7.89 | 47 | 0.1472 % | 2,163.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.F | Perpetual-Discount | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-18 Maturity Price : 23.71 Evaluated at bid price : 23.98 Bid-YTW : 5.48 % |
| TRI.PR.B | Floater | 1.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-18 Maturity Price : 22.98 Evaluated at bid price : 23.25 Bid-YTW : 2.24 % |
| PWF.PR.A | Floater | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-07-18 Maturity Price : 22.28 Evaluated at bid price : 22.55 Bid-YTW : 2.32 % |
| HSB.PR.D | Deemed-Retractible | 1.59 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.99 Bid-YTW : 5.07 % |
| FTS.PR.C | OpRet | 1.68 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2011-08-17 Maturity Price : 25.50 Evaluated at bid price : 26.05 Bid-YTW : -11.97 % |
| BNS.PR.Z | FixedReset | 3.26 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.75 Bid-YTW : 4.08 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.O | Deemed-Retractible | 158,425 | Desjardins crossed 150,000 at 26.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-04-27 Maturity Price : 25.25 Evaluated at bid price : 26.29 Bid-YTW : 4.57 % |
| RY.PR.I | FixedReset | 158,081 | Nesbitt crossed 75,000 at 26.20; RBC crossed 48,600 at the sam price; Scotia crossed 10,900 at 26.21. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.17 Bid-YTW : 3.42 % |
| GWO.PR.G | Deemed-Retractible | 57,700 | Nesbitt crossed blocks of 19,900 and 20,000, both at 24.65. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.65 Bid-YTW : 5.44 % |
| TRP.PR.A | FixedReset | 56,105 | Nesbitt crossed two blocks of 20,000 each; the first at 26.00, the second at 26.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.87 Bid-YTW : 3.61 % |
| CM.PR.G | Perpetual-Premium | 46,525 | Nesbitt crossed 40,000 at 25.12. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-01 Maturity Price : 25.00 Evaluated at bid price : 25.09 Bid-YTW : 5.21 % |
| BAM.PR.H | OpRet | 46,477 | Desjardins crossed blocks of 10,000 and 25,000, both at 25.16. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.19 % |
| There were 32 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.I | OpRet | Quote: 25.65 – 26.00 Spot Rate : 0.3500 Average : 0.2264 YTW SCENARIO |
| PWF.PR.F | Perpetual-Discount | Quote: 23.98 – 24.34 Spot Rate : 0.3600 Average : 0.2484 YTW SCENARIO |
| BAM.PR.O | OpRet | Quote: 25.70 – 26.29 Spot Rate : 0.5900 Average : 0.4907 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.34 – 26.00 Spot Rate : 0.6600 Average : 0.5608 YTW SCENARIO |
| CIU.PR.A | Perpetual-Discount | Quote: 22.60 – 22.89 Spot Rate : 0.2900 Average : 0.1914 YTW SCENARIO |
| NA.PR.P | FixedReset | Quote: 26.98 – 27.35 Spot Rate : 0.3700 Average : 0.2742 YTW SCENARIO |