European Banks: As Safe as a Piggy Bank in Somalia

Danny Russell, Oso Capital Research, October 2013

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

19.64%

4.25%

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5.00%

10.00%

15.00%

20.00%

25.00%

DJIA FEZ

European Hopium Results

CAGR

Source:StockCharts,

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

!  BNP Paribas self reports its NPL’s ex Greek Debt

!  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

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2.00%

4.00%

6.00%

8.00%

10.00%

12.00% Average Bank Capital-to-Asset Ratio 2009-2012

Average Bank capital to assets ratio (%)

World Average Bank capital to assets ratio (%)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Average NPL's 2009-2012

Average NPL as % of Gross Loans

World

Source: WorldBank

Notes: BNP Paribas is ex Greek Debt, Banco Santander self-reported data If 2012 Data wasn;t listed the 2011 Numbers were used

Source: BNP Paribas, Banco Santander, World Bank, ,

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

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$250.00

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1,200

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ions

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ions

Spanish Doubtful Debts & Mortgage Loans

Mortgage Loans (LHS)

Doubtful Debtors (RHS)

Source: Banco De Espàna

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

0%

20%

40%

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120%

Spanish Loans to Deposits and Doubtful Loans

Spain Credit System Domestic Loans to Credit System Domestic Deposits

Spain Doubtful Assets to Total Deposits

Source: Banco de España,

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?

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Italian Loans and Fixed Assets

Banks - Total Loans to Banks-Total Liabilities

Italian Banks - Fixed Assets to Banks-Total Liabilities

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8 0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Italian Banks- Bad Debts to Total Loans & EURUSD

Italian Banks- Bad Debts to Total Loans EURUSD (Inverted)

Source: Banca d’Italia

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

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

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

United Kingdom 33%

Switzerland 13%

France 12%

Spain 11%

Germany 11%

Sweden 7%

Italy 6%

Netherlands 4%

Belgium 2%

Finland 1%

EUFN Geographic Breakdown

Company Percentage of Fund

HSBC HOLDINGS PLC 10.85%

BANCO SANTANDER SA 5.40%

UBS AG-REG 4.08%

ALLIANZ SE-REG 4.02%

BNP PARIBAS 3.84%

BANCO BILBAO VIZCAYA ARGENTA 3.70%

BARCLAYS PLC 3.56%

STANDARD CHARTERED PLC 3.07%

LLOYDS BANKING GROUP PLC 3.02%

PRUDENTIAL PLC 2.71% Source: Ishares, StockCharts.com

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 www.OsoCapitalResearch.com

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