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European Banks: Overflowing the Proverbial Glass with Rum

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Since the start of the European Crisis, talking heads and investors alike have been yelling "Buy Buy Buy" European Stocks. European Banks are now about as safe as a piggy bank in somalia. I would short everyone of the EU Banks if I could, click to find out what is wrong with the EU Banking System.

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European Banks: Overflowing the Proverbial Glass with Rum

  1. 1. European Banks: As Safe as a Piggy Bank in Somalia Danny Russell, Oso Capital Research, October 2013
  2. 2. European Hopium Since 2010, the pundits have continued to bang the drums insisting the European Stocks were a buy This includes: HSBC, MarketWatch, Forbes , Jim Cramer’s TheStreet.Com , USA Today , and many others Even the famous Warren Buffett was buying European Stocks at the end of 2011 All this enthusiasm, based on hope and optimism that hasn’t come to fruition with the Euro STOXX 50 growing at a 4.25% clip while the Dow Jones growing at 19.64% a year European Hopium Results 25.00% 20.00% 19.64% 15.00% CAGR 10.00% 4.25% 5.00% 0.00% DJIA Source:StockCharts, FEZ
  3. 3. European Banks Versus The World The World’s Non-Performing Loans (NPL) are about half of what Greece’s and Italy’s NPL’s are Average NPL's 2009-2012 14.00% 12.00% 10.00% 8.00% BNP Paribas self reports its NPL’s ex Greek Debt 6.00% Average NPL as % of Gross Loans 4.00% World 2.00% 0.00% That should tell you all you need to know to short every bank in Europe you can The Capital to Asset Ratio in the Eurozone is about ¾ that of the World average and almost half of the US capital ratios Notes: BNP Paribas is ex Greek Debt, Banco Santander self-reported data If 2012 Data wasn;t listed the 2011 Numbers were used Source: WorldBank Average Bank Capital-to-Asset Ratio 2009-2012 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Source: BNP Paribas, Banco Santander, World Bank, , Average Bank capital to assets ratio (%) World Average Bank capital to assets ratio (%)
  4. 4. Spanish Banking System Since the beginning of the Euro crisis Spanish Banks have continued to have exponential growth in bad debts Adding to the bad debts the loans as a percent of deposits took a large hit in 2010, now at the lowest yearly level since 1998 Without loans NIM’s get hit and the entire banking system spirals downwards 100% 80% 60% 40% 20% 0% Spain Credit System Domestic Loans to Credit System Domestic Deposits 1,200 1,000 $250.00 $200.00 800 $150.00 Millions 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 120% Spanish Doubtful Debts & Mortgage Loans Millions Spanish Loans to Deposits and Doubtful Loans Mortgage Loans (LHS) 600 $100.00 400 Spain Doubtful Assets to Total Deposits 200 0 $50.00 Doubtful Debtors (RHS) $0.00 Source: Banco De Espàna Source: Banco de España,
  5. 5. Italian Banking System Italian Banks had a grace period with the initiation of the EUR When the crisis hit the EUR deprecated and the Bad Debts skyrocketed Currently the EUR is in a range while the Bad Debts to Deposits keep climbing, this would be partially the ECB and Fed printing an inordinate amount of money Fixed Assets of Banks has decreased to it’s lowest level since 1998 Lowering retail banking locations through lower fixed assets, makes it hard to gather deposits With no deposits how do Italian Banks expect to make loans? Italian Banks- Bad Debts to Total Loans & EURUSD 12.00% Italian Loans and Fixed Assets 0 6.00% 0.2 10.00% 0.4 8.00% 0.6 5.00% 4.00% 0.8 6.00% 1 4.00% 3.00% Banks - Total Loans to BanksTotal Liabilities 1.2 2.00% 1.4 2.00% 1.6 0.00% 1.00% 1.8 0.00% Italian Banks- Bad Debts to Total Loans Source: Banca d’Italia EURUSD (Inverted) Italian Banks Fixed Assets to Banks-Total Liabilities
  6. 6. U.S.A. Banking System – Best of the Worst? Where European Banking systems have an exponential move up in Bad Debts as a Percent of Loans the US Banks are moving in the opposite direction The Total Mortgages are at the lowest nominal level since 4Q2005 The US is the best of the worst or the cleanest shirt in a dirty basket Source: Federal Reserve FRED
  7. 7. European Macro Deviates from European Markets Since June 2013 the EU Macro Data has correlated very closely with EU Stocks In early October 2013, the Macro data and EU Markets deviated from each other The Eurozone private-sector loan growth came out recently and it was incredibly disappointing, coming in at -2% YOY Source: ZeroHedge, Bloomberg, ECB
  8. 8. The Obvious Trade I have been short EUFN since June 2013 and have been down almost the entire trade I believe this trade is the right and you should continue to short the EUFN (European Banks) The top 10 holdings of EUFN make up 42% of the fund and include some of the worst European Banks Spain 11% France 12% Source: Ishares, Switzerland 13% 4.02% 3.84% BANCO BILBAO VIZCAYA ARGENTA 3.70% 3.56% STANDARD CHARTERED PLC 3.07% LLOYDS BANKING GROUP PLC Germany 11% United Kingdom 33% 4.08% BARCLAYS PLC Sweden 7% 5.40% ALLIANZ SE-REG Italy 6% BANCO SANTANDER SA BNP PARIBAS 4% Finland 1% 10.85% UBS AG-REG EUFN Geographic Breakdown Percentage of Fund HSBC HOLDINGS PLC Belgium 2% Netherlands Company 3.02% PRUDENTIAL PLC 2.71%
  9. 9. Disclosure This is not a recommendation, this presentation is purely for educational purposes For more disclosures and to read more about the Global Macro Environment please visit Oso Capital Research A Bearish Voice in a Forest Full of Bulls