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Wednesday, October 12, 2011

SocGen's 2 cents

SocGen's opinion on EU banks is literally worth 2 cents, probably along with the equity value of their bank.

Playing the equities in the EU banks right now is a game of Russian Roulette.  Each bank will need to get re-capitalized, and they will. But which one will be the bank that looses their equity in the process?  Dexia was supposedly the strongest of the EU banks, and look how that turned out.

The EU banks is a high risk/high reward game, with a ton of uncertainty.  The better high reward lower risk play is the US banks.  The US banks declined in sympathy to the EU banks.  Once the EU banks are re-capitalized, the US banks become relatively safe again.

The only risk to the US banks are the forced selling of assets from the EU banks (that was seen last Friday in the CMBS market) that could depress asset values while the selling takes place. With all the capital the US banks have, this threat is meaningless with respect to their operations and will act as a short-term hickup to earnings potential, via write-downs. (But with real-estate chillen at bottom levels, the missed priced assets from forced selling, actually have real value this go around.)

As I highlighted a week ago with the GS call, banks are in a bottoming process now.

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