Goldman Sachs - Could stress test results lead to significant capital raising?* Stress test results in US, as well as capital restructuring events, remain primary focus in short term. Results expected by end April.
* Default risk at most banks low as liquidity support ongoing, but additional debt exchanges/tenders likely globally.
* Asset quality and profitability remain major concerns.
* Preferred dividend cuts and preferred/debt exchanges likely as means of improving tangible equity levels.
* Government intervention a concern for investors in intermediate term.
* Specialty finance is still under pressure - tight liquidity and viability of business model persist.
* Valuation: Short term: volatility to remain high, especially in Tier 1 securities, but cash could outperform CDS if exchanges/tenders continue. Longer term: recovery may start in 2H, especially if equity capital raises are successful. Negative basis could reverse in banks; buy new supply of non-guaranteed paper; specialty finance need to restructure funding models.
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