Updated with market close information, the European Central Bank's expansion of eligible collateral and a discussion on Regions Financial.
NEW YORK (
(RF - Get Report)
ended up the winner among the largest U.S. financial names on Friday, with shares rising 3% to close at $6.68.
The broad indexes all rose after the European Central Bank boosted available liquidity for eurozone banks, by lowering collateral requirements for its lending activities. The central bank's governing council "reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs)," thus broadening "the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable."
The central bank also added ABS backed by auto loans, leases and consumer loans, as well as commercial loans "which have a second-best rating of at least 'single A' in the Eurosystem's [harmonized] credit scale, at issuance and at all times subsequently" to eligible collateral types, applying a 16% haircut.
In addition, the central bank said it would accept residential mortgage backed securities and "securities backed by loans to small and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least 'triple B'", applying a 32% haircut to the CMBS and a 26% haircut to the other new "triple B" collateral.
KBW Bank Index
rose over 1% to close at 45.09, with all 24 index components rising for the session, except for Capital One, which was down slightly, to close at $52.95. Capital One's shares have risen 25% year-to-date.
The banking sector had a strong showing following the announcement by Moody's Investor Service late Thursday of
for 15 "firms with global capital markets operations."
Credit Suisse analyst Howard Chen said on Friday that "the conclusion of yesterday's review removes a major overhang that has been weighing on the shares" of the largest U.S. banks, but added that "it's a modest negative" that Moody's "has kept the sector (holding company only) on negative outlook given the lack of clarity on [regulatory] resolution authority."
Chen said "we continue to recommend purchase of the major U.S. bank stocks," highlighting "Outperform-rated"
(GS - Get Report)
(JPM - Get Report)
"as among the best positioned to win share in the event that impact from ratings actions are more extreme and drive material share shifts," and adding that "over the near-term, we believe Morgan Stanley should be a relative outperformer given the better than expected two-notch downgrade."
Low stock valuations support Chen's recommendations:
- Shares of Goldman Sachs declined slightly to close at $93.63. The shares trade for 0.8 times their reported March 31 tangible book value of $123.94, and for seven times the consensus 2013 EPS estimate of $12.93, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $11.28. At the holding company level, Moody's lowered Goldman's long-term senior unsecured debt rating by two notches to A3 from A1. Deutsche Bank analyst Michael Carrier on Wednesday cut his price target for Goldman's shares to $135 from $145, but reiterated his "Buy" rating for the shares, seeing 40% upside for the shares.
- Shares of JPMorgan Chase rose 2% to close at $36.10, trading just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.36.
- Morgan Stanley (MS - Get Report) -- which Chen also rates "Outperform" -- rose over 1% to close at $14.14. The shares trade for just over half their reported March 31 tangible book value of $27.37 and for six times the consensus 2013 EPS estimate of $2.25. The consensus 2012 EPS estimate is $1.39.
Morgan Stanley previously disclosing in its first-quarter 10-Q filing that according to the company's stress tests of its March 31 trading positions, its trading counterparties could call "additional collateral, termination payments or other contractual amounts" of $7.2 billion, in the event of a three-notch downgrade of its long-term credit rating by Moody's Investor Service and a subsequent downgrade by Standard and Poor's, along with another $2.4 billion in "increased collateral requirement at certain exchanges and clearing organizations," for total potential collateral calls of $9.6 billion.
Moody's surprised investors by announcing a two-notch downgrade of Morgan Stanley's long-term senior unsecured debt rating to Baa1 from A2, the company faces total collateral calls of $6.8 billion, based on its March 31 trading positions.
After saying Thursday morning that Morgan Stanley seemed "confident" that the ratings downgrade would "not have an outsized impact on the firm," with the "primary revenue impact from the downgrade [to] be in its long-dated, uncollateralized interest rate derivatives, which MS has already de-emphasized," UBS analyst Brennan Hawken said on Friday that the company's "operating subsidiary rating now remains in line with many of its global bulge bracket competitors, instead of being an outlier (as would have been the case in a three notch downgrade)."