Goldman Sachs – US banks: Stress tests and capital raises to settle the pre-provision vs. NPA debate
Bear market rally vs. bank bottom: Banks are down 70% from the peak and for two years investors had been paid to stay away. That being said, banks are up 100% from the March low as part of a broader rally in risk assets and investors fret missing the next leg. The debate:
Pre-provision has surprised: Revenues have been better than forecasted, giving hope to banks “earning their way out.” Capital markets, mortgage, and bond gains may prove hard to fully sustain, but the 1Q run-rate has surprised.
NPA acceleration continues: Nonperforming asset formation is set to hit a new high in 1Q. We do not believe banks will bottom until growth in nonperformers decelerates. No loan is safe: cards, mortgage, C&I, construction, and commercial real estate have all been cited as problems by banks.
Capital raises break the tie: Banks now trade 33% above CAP strikes, implying (1) no capital is needed following the stress test results or (2) the market will provide it cheaper. We do not think this is the case and note the two big 2008 rallies were ended by $30-40 bn of capital raises.
Disentanglement: a simple, long-term theme: Banks that can disentangle from TARP will be long-term winners.
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