Financials Update at the Close $GS $XLF

· The financials were some of the best performing stocks in the whole market this week, although nearly all the gains came on Fri following the completion of financial regulatory form. Early Fri morning (5:30amET), the House/Senate reconciliation conference committees reached a compromise agreement on the last big outstanding issue (Lincoln’s derivatives amendment) and passed the bill (w/o any Republican support). The measure will now head to the full Senate and House for a vote next week (the process is expected to start Tues) w/Obama on track to sign the legislation by Jul 4 (meeting his months-long deadline). The finished product will impose new restrictions and costs on the industry, although the final bill was not as bad as some feared (esp. on “Volcker” and “Lincoln”); the initial St takeaway on the legislation can be summed up by the following Bloomberg headline (“banks dodged a bullet as Congress dilutes US trading rules in overhaul”). While investors are relieved for now, a lot of the buying occurring Fri was either short-covering or quicker trader-types “renting” exposure via the XLF; not a lot of people were rushing to make purchases in “single stocks”. Some are looking back to the health care 

Updating Estimates for Mortgage Repurchase Adjusting Estimates for $BAC, $JPM, $WFC and $PNC

Updating Estimates for Mortgage Repurchase
Adjusting Estimates for BAC, JPM, WFC and PNC

• Mortgage Repurchase Impact — In conjunction with the report published today titled: “US Banks: Mortgage Repurchase Risk: Mkt Concerns for Bank Reps & Warranties Risk Seem Overdone” we are reducing our estimates for the mortgage repurchase reserve headwind expected to continue into 2010. In this companion note we analyze the mortgage repurchase risk in depth and estimate $20 bil of remaining mortgage repurchase reserve risk for the banking industry, and $15 bil for the 6 banks in our coverage universe.

• Bank of America — We are reducing our 1Q10 estimate by $0.05 to $0.06 to incorporate mortgage repurchase hit of ~$550 mil. We estimate a mortgage repurchase headwind of ~$2.3 bil in 2010 vs. $1.9 bil in 2009. We are also reducing our investment banking estimate due to lower volumes in the quarter. We are reducing our 2010 estimate by $0.15 to $0.50 (and 2011 by $0.05 to $2.00) to reflect mortgage repurchase costs.

•JP Morgan — We trim our 1Q10 estimate by $0.04 to $0.60 (vs consensus of $0.64) with mortgage repurchase expenses of $1-1.5 bil in 2010 (vs $1.6 bil in 2009), which we see falling to $400 mil in 2011. Given muted primary I-banking volumes and a tougher environment for equity trading YTD, we also trim our 1Q10 I-banking revenue estimates by $900 mil to $7.7 bil. We also reduce our full-year 2010 estimate by $0.10 to $2.70 (vs cons of $3.00) due mostly to mortgage repurchase costs. Our 2011 estimates remain unchanged at $5.15 (vs consensus of $4.73), and we continue to see $6.50 of normalized earnings power (adjusting for normal capital structure).

• Wells Fargo — We are reducing our 1Q10 estimate by $0.03 to $0.46 (vs. consensus of $0.41) to take into account continued mortgage repurchase costs. We estimate mortgage repurchase costs of $1-1.5 bil in 2010 vs. $930 mil in 2009. We are lowering our 2010 estimate by $0.20 to $1.80 to reflect headwinds
from mortgage repurchase (~$0.15) and NSF/overdraft regulation (incremental $0.05). We are also reducing 2011 by $0.15 to $2.70 and 2012 by $0.10 to $3.15 to reflect mortgage repurchase and NSF/overdraft impacts.

Fitch Downgrades Greece to 'BBB-'; Outlook Negative (thats a shocker, downgrade the credit just before the default)

Fitch Downgrades Greece to 'BBB-'; Outlook Negative   
09 Apr 2010 10:28 AM (EDT)

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Fitch Ratings-London-09 April 2010: Fitch Ratings has today downgraded Greece's Long-term foreign and local currency Issuer Default Ratings to 'BBB-' from 'BBB+'. The Outlook is Negative. The agency has simultaneously affirmed Greece's Country Ceiling at 'AAA' and the Short-term foreign currency IDR at 'F2'.

The downgrade reflects the intensification of fiscal challenges in response to more adverse prospects for economic growth and increased interest costs. It also reflects ongoing uncertainties about the government's financing strategy in the context of increased capital market volatility.

The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7% of GDP this year and ensuring that public debt peaks at just over 120% of GDP in 2010 and 2011. Pressures on the banking system underline the adverse spill-over from sovereign risk concerns on the wider economy, while contingent liabilities from the banking sector will increase as the government provides banks with increased guaranteed funding.

Fitch recognises some early indications of improvements in fiscal outturns and the strength of the government's commitment to fiscal consolidation measures, which have been supported by Greece's euro area peer governments. However, given that the credibility of the fiscal consolidation effort will only be established by sustained deficit reduction over a prolonged period of time, it is vital that the Greek authorities import credibility from external institutions, underpinned by a credible commitment of financial support. The agency reiterates the lack of clarity regarding the mechanism for timely external financial support may have hindered Greece's access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets. While Fitch judges that external financial support is likely to be forthcoming, greater clarity on back-stop financial support in the form of an explicit IMF programme is likely to be required to shore up market confidence in the face of still substantial near-term financing needs.

The Negative Outlook reflects substantial uncertainties remaining over the prospects for sustained fiscal consolidation over the medium term.

Applicable criteria, 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com.

Contact: Chris Pryce, London, Tel/email: + 44 20 7417 4342/chris.pryce@fitchratings.com; Paul Rawkins, +44 20 7417 4239/paul.rawkins@fitchratings.com

Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Goldman Sachs spends $690,000 to lobby government

NEW YORK

Goldman Sachs Group Inc. spent $690,000 during the fourth quarter to lobby the federal government on issues related to regulating the banking industry.

The $690,000 spent compares with $530,000 the New York-based bank spent during the same quarter a year earlier when the credit crisis was peaking. Goldman spent $840,000 to lobby the government during the third quarter.

Goldman Sachs has been heavily scrutinized by politicians and regulators because it quickly returned to profitability after receiving $10 billion in government bailout money in late 2008. It also has sparked public angst about big bonuses it pays to its employees.

The bank did repay the $10 billion it received as part of the Troubled Asset Relief Program last summer.

In the final three months of 2009, Goldman spent money to lobby Congress, the Commodity Futures Trading Commission and Export-Import Bank of the United States. Those efforts are focused on regulatory reform, derivatives trading, financial risk management, executive compensation, accounting rules, international taxes, small-business lending and export-import bank financing. link

Morgan Stanley Strategy Forum 02.16.10

Introduction — On the heels of sovereign problems in Greece and peripheral Europe, we recently published a cross-asset report, Sovereign Crisis Roadmap (February 11, 2010) on selling risky assets into strength over the near term. The current problems are about much more than Greece alone, and our global economist Joachim Fels helps to frame the context. Huw van Steenis from our European banks team looks at the European banking system, which could be the transmission mechanism for potential contagion. And global equity strategist Jason Todd assesses the backdrop for global equities, reiterating our call to own the US over Europe.

Link here

Banks Elevated Sovereign Funding Costs and European Banks

Elevated sovereign funding risks pose multiple threats to European bank stocks and we downgrade our sector view back to a “cautious” vs. index (as well as downgrade ratings on SAN, BBVA, Piraeus and EFG). We see five key risks: (i) funding costs materially higher, particularly in Southern Europe, hurting NII, while lower-for-longer rates postpone improvements in liability spreads. We estimate €3.3tn in total wholesale funding, of which ~48% could roll over 2010-12; (ii) loan growth to be challenged; (iii) provisions likely to rise from tighter conditions and some MTM losses; (iv) higher tax rates likely; and (v) higher costs of equity. We also see the risk of regime change from “managed deleveraging” to “accelerated deleveraging” with risks to bank stocks, credit markets and economies.

What’s in the price. We think the market implies ~14.2% 2011 returns from bank stocks on an ~11.5% cost of equity vs. our bottom up base case returns of 8.7% in 10e, 13.3% in 11e and 16.2% in 12e. We run a harsher scenario analysis that see returns fall ~2.4% (or prima facie take ~23% off price targets). We also recently argued bank regulation could shave ~1.5% off
returns before modification. Given our view that elevated sovereign spreads are likely to persist, risk/reward skew and uncertainty, we expect investors will anchor on nearer years and in tandem with our European strategists we downgrade the banks sector to UW vs. the index and see better value in US and EM banks.

Recommendations: We’ve factored higher sovereign risk into our cost of equity & revised views on returns and NPLs for a large number of banks. We would switch out of BBVA and SAN (cut to EW) into our best ideas: CSG, GLE, BNP (upgraded to OW), Baer, SHB, BARC, KBC, ISP or SDR. Least preferred: DX, RI, CBK, SEB, DPB, Piraeus (cut to UW), BKT, BME & LSE.

FULL REPORT HERE