Richard Hunter_icap Bucharest 4-12

7/31/2019 Richard Hunter_icap Bucharest 4-12

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Credit Risk ManagementVolatile Times

Richard Hunter

Group Head,

European and Asian Corporate Ratings

Bucharest, April 2012


2/40

All About Europa?

Velocracy

Sovereigns

Banks

Corporates

Conclusion


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14/05/2012

3

www.fitchratings.com

Some Very Plastic Questions

Where do I put my deposits?

What currency do I take out my loan in?

What growth do I expect from my trade partners?

Who do I think will be providing capital?

Can I escape the problems?

A Very Abstract Answer

Source: ritholtz.com, Factiva


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14/05/2012

4


Velocracy at Work


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5


Authoritative Voices?


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6




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7




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8


The Plastic Premium

Opaque

Transparent

ExpensiveCheap


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14/05/2012

9


Outlooks Were Stabilising

Negative Outlooks

05

10

15

20

25

3035

40

45

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Sovereign Banks Corporates Structured Finance

(% of portfolio)

Source: Fitch Ratings


10/40

All About Europa?

Velocracy

Sovereigns

Banks

Corporates

Conclusion


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14/05/2012

11


GEO Forecasts, March 2012

2012 revision 2013

United States 2.2 0.4 2.6

Euro-zone -0.2 1.0 1.1

UK 0.5 0.7 1.9

Romania 1.6 0.9 3.0BRICs 6.3 0.4 6.6

World 3.5 0.8 4.0


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14/05/2012

12


If the Euro Area were a Sovereign...

Euro Area

GDP = USD12,200bn

Population = 330m

Govt debt = 85% of GDP

Govt deficit = 6% of GDP

Net ext. liabilities = 13% of GDP

External deficit = 0.4% of GDP

United States

GDP = USD14,700bn

Population = 310m

Govt debt = 87% of GDP

Govt deficit = 10.6% of GDP

Net ext. liabilities = 17% of GDP

External deficit = 3.2% of GDP


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13


A Crisis of Management

Spain is not Greece. (Elena Salgado, Spanish finance minister, February 2010)

Portugal is not Greece. (The Economist, 22 April 2010)

Greece is not Ireland. (George Papaconstantinou, Greek Finance minister, 8 November 2010)

Spain is neither Ireland nor Portugal. (Elena Salgado, Spanish Finance minister, 16 November

2010)

Neither Spain nor Portugal is Ireland. (Angel Gurria, Secretary-general OECD, 18 November

2010)

Ireland is not Greece, Im getting that printed on a T-shirt. (Irish Finance Minister Michael

Noonan, 23 June 2011)

Source: ritholtz.com, Factiva


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14/05/2012

14


Where to Next?

A. Fiscal union?

B. Muddle-through?

C. Greek Exit?

D. Orderly Defaults/Restructurings?

E. Euro break-up?


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14/05/2012

15


Focus on Romania

Returned to investment grade

Progress on deficits

Public debt improved

Solid reserves

Governance improving

Bank exposures

NPLs still an issue have they peaked?

FX lending driving otherwise weak credit growth

Exposure to French and Austrian banking systems

Inflation Still Volatile

Elections in November expect some policy slippage


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Doing Business Rankings Improving

Overall Investors External Trade Insolvency

Getting Credit Paying Taxes Contracts

Singapore 1 8 2 4 1 12 2

Bulgaria 59 8 46 69 91 87 90

Romania 72 8 46 154 72 56 97

Croatia 80 48 133 32 100 48 94

Albania 82 24 16 152 76 85 64

Italy 87 98 65 134 63 158 30

Serbia 92 24 79 143 79 104 113

Greece 100 78 155 83 84 90 57

Kosovo 117 24 174 46 131 157 31

Bosnia/ Herzegovina 125 67 97 110 108 125 80


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Risk of Contagion

Issuer Default Ratings

Banca Comerciale Romana BBB+/Stable

Erste Group Bank AG A/Stable

BRD-Groupe Societe Generale BBB+/Stable

Societe Generale SA A+/Stable

Raiffeisen Bank AG A/Stable

Alpha Bank AE B-/Stable


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18


Room in the Eurobond Markets?

Public Eurobond Issuance

0

20,000

40,000

60,000

80,000

100,000

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

($mln)

EMEA - Mature Markets (75% of GDP)

EMEA - Growth Markets (25% of GDP)

Average

7%


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Room in the Eurobond Markets?

Public Eurobond Issuance

0

2,500

5,000

7,500

10,000

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

($mln)

EMEA - Growth Markets (USD5.1trn)

Russian Issuers (USD 1.3trn)

Average

33%


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All About Europa?

Velocracy

Sovereigns

Banks

Corporates

Conclusion


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14/05/2012

21


Banks in Developed European Markets:Ratings Evolution

0

2

4

6

8

1012

14

16

18

AAA

AA+ AA A

A-

A+ A A-

BBB+

BBB

BBB-

BB+ BB B

B-

B+ B B-

CCC CC

(%) 2012 2006

Source: Fitch Global Bank Rating Trends Q211, December 2012


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Those Bank Cost Savings in Full

30

50

70

90

110

130

150

2006 2007 2008 2009 2010 H111

UK France Spain Italy Germany Scandi Benelux(%)

Cost/Income

Source: Fitch


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Getting to 9%

Level of 9% a happy medium, at lower end of solid range

8% - EUR20-30bn less capital

10% - EUR 50n-60bn more capital

Few actual public capital issuances expected

Governments - may subscribe to hybrid capital

Prices for financial assets will fall on fire sales

Obvious bidders unexcited as yet

Selling at a loss creates its own capital hole

MTM debate will continue to rage

De-leveraging out of country most likely route...


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Risk of Contagion - Eurozone Bank Public IssuanceSuffers Heavily

0

20

40

60

80

100120

140

160

Jan09

Feb0

9

Mar09

Apr0

9

May09

Jun09

Jul09

Aug09

Sep0

9

Oct0

9

Nov09

Dec0

9

Jan10

Feb1

0

Mar10

Apr1

0

May10

Jun10

Jul10

Aug10

Sep1

0

Oct1

0

Nov10

Dec1

0

Jan11

Feb1

1

Mar11

Apr1

1

May11

Jun11

Jul11

Aug11

0

10

20

30

40

50

60

70

Unsecured issuance in EMEA (LHS) Covered bonds (LHS)

O/w proportion of guaranteed issues (RHS)(USDbn) (%)

Debt/covered Bonds Issued in EMEA and Proportion of Guaranteed

Source: Dealogic


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Comparative Default/Failure Rates 1990-2009

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%6.0%

7.0%

8.0%

1yr 2yr 3yr 4yr 5yr

FailedBanks Defaulted Corporate Defaulted Banks(Default/Failure Rate %)

The value of support

Source: Fitch


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All About Europa?

Velocracy

Sovereigns

Banks

Corporates

Conclusion


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14/05/2012

27


What About the Real Econony?

Shock Case pitched below our conservative Base Case (used for ratings)

Above a Eurozone default stress Worst Case


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Precedents

85

90

95

100

105

T T+1 T+2 T+3 T+4 T+5

Finland Banking Crisis 1991

Sweden B anking Crisis 1991

Avg Latin America mid-90s

Former Sov Union Break Up(T = 100)

GDP Recovery in Crises

Source: Fitch /OECD/Rheinhart & Rodo ff85

90

95

100

105

T T+1 T+2 T+3 T+4 T+5

Avg "B ig 5" B ank Crises

Fo rmer Sov Union B reak Up

Eurozone 2008/09

EZo ne Shock Case (T=2011)(T = 100)

GDP Recovery in Crises

Source: Fitch /OECD/Rheinhart & Rodoff

Pitched between Average of Big 5 Bank Crises and break-up of the Soviet Union


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Shock Scenario: Conclusion

Leverage & FFO

-120%

-100%

-80%

-60%

-40%

-20%

0%Metals

CapGoods

Integrated

Util

RegUtil

Oil&Gas

HBM

Telco

Chemicals

Retail

Auto

AlchBev

(x)

-1.8

-1.5

-1.2

-0.9

-0.6

-0.3

0

FFO Decline FCF Shock vs Rating Case Leverage increase (x) inverted


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Shock Scenario: Southern European Blow-Up

Current RatingsImpact of Shock Case

Source: Fitch

Oil

Utilities Industrial Telecom

BBB+

AA+

A+

BB+

B+

CCC

Autos

Retail

Drinks


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Shock Scenario: Southern European Blow-Up

Current Ratings Shock CaseImpact of Shock Case

Source: Fitch

Oil

Utilities Industrial Telecom

BBB+

AA+

A+

BB+

B+

CCC

Autos

Retail

Drinks


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14/05/2012

32


What About a Full Eurozone Default Stress Test?

Not Everybody Dies

Euro Exit Worst Case By Far

Diversification helps

Todays Highest Ratings Dont Always Perform Best

Defaults: Liquidity vs. Restructuring?

Source: Fitch

Utilities Industrials

Country Risk versus Industry RiskSchematic


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Default Scenario 1: Orderly Sovereign Default

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Current Ratings Scenario 1Impact of Scenario 1

Source: Fitch

BBB+

AA+

A+

BB+

B+

CCC

Oil Utilities Industrial Telecom


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Default Scenario 2: Disorderly Default, Keep Euro

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Current Ratings Scenario 2Impact of Scenario 2

Source: Fitch

BBB+

AA+

A+

BB+

B+

CCC



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Default Scenario 3: Disorderly Default, Euro Exit

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Current Ratings Scenario 3 Country CeilingImpact of Scenario 3

Source: Fitch


BBB+

AA+

A+

BB+

B+

CCC


36/40

All About Europa?

Velocracy

Sovereigns

Banks

Corporates

Conclusion


37/40

14/05/2012

37www.fitchratings.com

The Impact

Improvement in Europe and the US will take years not months

Growth will slow further

We see major GDP headwinds going into 2013

Growth markets cannot decouple from stagnant western economies

Credit should get much more expensive Solvency II and Basel III

Recapitalisation/de-leveraging

Benchmark risk-free yields

Loss of top-tier counterparties

Defaults will increase from their current low level


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14/05/2012


The Impact II

Velocracy will grow in power; authoritative voices may diminish further

Instability will drag on growth and continue to generate sub-crises

Currency volatility will increase markedly

Solutions will be partial

So

Where do I put my deposits?

What currency do I take out my loan in?

What growth do I expect from my trade partners?

Who do I think will be providing capital?

Can I escape the problems?


39/40

14/05/2012


Suite of Fitch Eurozone Publications

Scenario: If the Eurozone Crisis Escalates

Underlying approach to ratings in a volatile

environment

Scenario: Corporate Shock Case Full Study

A sector-by-sector review of how a near-break-up

could affect corporate ratings

Scenario: Corporate Shock Case FAQ

A 3-Minute Primer on the Shock Case

Sovereign Corporate Linkage

An updated review of the influence of sovereign

ratings on corporates in the Eurozone
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=661269http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672255http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673449http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673350http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673350http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673449http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672255http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=661269


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Disclaimer

Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings

are inherently forward-looking, embody assumptions and predictions that by their nature cannot be

verified as facts, and can be affected by future events or conditions that were not anticipated at the

time a rating was issued or affirmed.

The information in this presentation is provided as is without any representation or warranty.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are nota recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE

LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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