Credit Suisse - Peripheral European banks by riteshbhansali

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									                                                                                                                         Global Research
                                                                                                                          Private Banking
                                                                                                                                   Zurich
                                                                                                          Investment horizon: 1-6 months




Research Weekly                                03/04/2013



                                                  Peripheral
                                                  European banks
                                                  under observation




Tactical views                                 Tactical views                                   Tactical views
Softer PMIs, uncertainty                       Moderate spread-widening                         Money flows likely to prove
about Italy, limited                           due to Cyprus page 3                             generally supportive of
Cyprus contagion page 2                                                                         equities page 3

Tactical views                                 Tactical views                                   Tactical views
Grain and oilseed                              JPY: Will the Bank of Japan                      S&P 500 Index heading
markets better supplied                        deliver? page 4                                  toward all-time highs page 4
page 3




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  covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could af-
  fect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
  For a discussion of the risks of investing in the securities mentioned in this report, please refer to the following Internet link:
  https://research.credit-suisse.com/riskdisclosure
2    Tactical views                                                                                03/04/2013    Credit Suisse - Research Weekly



                                                                         50.1 to 50.9 versus 51.2 expected). The US manufacturing
    Tactical views                                                       PMI also dropped visibly (from 54.2 to 51.3), but some of the
                                                                         details were still positive. In particular, the rise in the employ-
    Peripheral                                                           ment component of the survey (from 52.6 to 54.2) is another
                                                                         positive indicator for the probably still solid payroll report on Fri-
    European banks                                                       day (consensus around 200K). The Eurozone remains the lag-
                                                                         gard, with PMIs declining in March and disappointment still
    under observation                                                    most pronounced in the peripheral countries (Spain from 46.8
                                                                         to 44.2, Italy from 45.8 to 44.5). Even Germany declined, al-
                                                                         though much less and from a higher level, from 50.3 to 48.9.
                                                                         Altogether, this points to some softening of global growth mo-
                                                                         mentum after an overall strong start to the year.

                                                                         Italian political uncertainty persists
                                                                         Meanwhile, the political developments in Europe still are not
                                                                         helpful for sentiment. More than one month after the elections
                                                                         in Italy, a government has still not been formed. The president
                                                                         has selected a group of ten “wise men” who are supposed to
                                                                         work on certain measures, including reforms of the electoral
                                                                         system, that could receive the necessary support across the
                                                                         party spectrum. New elections are still likely in the second half
    Olivier P. Müller
                                                                         of the year.
    olivier.p.mueller@credit-suisse.com, +41 44 333 01 46
                                                                         Cyprus contagion limited but some deterioration in bank
                                                                         funding
    With Easter behind us, the catalysts for the financial market
                                                                         The Cyprus “solution” of “participation“ of depositors continues
    are coming from macroeconomic and geopolitical news flow,
                                                                         to raise questions and concerns, especially about other smaller
    with the focus on the political gridlock in Italy, tensions in Ko-
                                                                         economies with big banking systems. Total balance sheet as-
    rea and repercussions from the Cyprus bail-in. Over the last
                                                                         sets of banks are high in Luxembourg (2,172% of GDP), Mal-
    two weeks, however, these events do not appear to have seri-
                                                                         ta (788% of GDP), but fairly low in Slovenia (144% of GDP),
    ously harmed the general risk appetite of investors. With re-
                                                                         which has also been named as a risk candidate. But the share
    gard to peripheral European countries and their banks, the fi-
                                                                         of deposits funding the aggregate balance sheet in Slovenia is
    nancial community is likely to be kept busy these days with
                                                                         very high (72.6% compared to 56.9% in Cyprus and 45.2%
    Italy’s banks under the supervisors’ and investor’s scrutiny.
                                                                         in France) and non-performing loan ratios are also elevated.
    This week’s general mood is that, apart from the macroeco-
                                                                         Luxembourg and Malta both have many links to a large num-
    nomic data scheduled and the Bank of Japan meeting, which
                                                                         ber of bigger banks elsewhere, so that size itself does not auto-
    should have an impact on JPY/USD, there is unlikely to be
                                                                         matically imply that this situation is unsustainable or a major
    anything sufficient to propel risky assets generally higher. On
                                                                         risk for the individual economies. Contagion (e.g. sovereign
    the other hand, these assets seem well supported on the
                                                                         spreads) has so far been limited, but some timely indicators
    downside. Specifically, in his contribution, our technical analyst
                                                                         (CDS for senior bank bonds) point to deteriorated funding con-
    features the S&P 500, which is well supported and now trad-
                                                                         ditions for banks, and evidence on deposit (out)flows could still
    ing just shy of its all-time high, but facing resistance at
                                                                         suggest more stress with a lag. Apart from payrolls, decisions
    1,576/1,580.                                        (03/04/2013)
                                                                         by the European Central Bank in the European context and
                                                                         the Bank of Japan (tomorrow) are in focus this week.
                                                                                                                            (03/04/2013)

    Softer PMIs, uncertainty
    about Italy, limited Cyprus
    contagion
    Thomas Herrmann
    thomas.herrmann@credit-suisse.com, +41 44 333 50 62



    The latest global business survey releases for March have gen-
    erally been softer over the past days. The declines in manufac-
    turing PMIs were broad-based, including the emerging mar-
    kets. One regional exception was non-Japan Asia, with the
    PMI in China gaining, albeit slightly less than expected (from
3    Tactical views                                                                                             03/04/2013              Credit Suisse - Research Weekly



                                                                         pean companies. Until then, we do not expect any major corpo-
    Moderate spread-widening                                             rate news flow and think that equity markets are likely to be
    due to Cyprus                                                        driven mostly by macroeconomic and geopolitical news. While
                                                                         the latter could potentially lead to more pronounced ups and
    Maurice Jiszda                                                       downs over the next few weeks, we think these are likely to be
    maurice.jiszda@credit-suisse.com, +41 44 333 21 41
                                                                         limited as the – still modest – flows into equities should contin-
                                                                         ue to be generally supportive for the asset class as they have
    Among government bonds, longer-dated global benchmark                been over the past few days and weeks, where the Cyprus un-
    yields continued to decline the most last week. Further, Ger-        certainties, Italian political deadlock and even the increasing
    man and Swiss benchmark yields were back in negative territo-        tensions on the Korean peninsula have not led to a noteworthy
    ry in the 2-year segment, highlighting a renewed willingness of      consolidation. Indeed, there is still substantial excess liquidity
    investors to pay a premium for holding very safe assets. Credit      waiting to be put to work that we believe will inevitably have to
    markets saw some spread-widening, as nervousness about               flow into equities, as we do not see any tailwind left from fixed
    Cyprus contributed to a more cautious mood. Anything Italy-re-       income given the record-low yields.                (03/04/2013)
    lated also came under pressure due to the political instability
    that the country is facing. Emerging market USD sovereign
    bond total return was flat, but spreads widened marginally. Lo-      Global Risk Appetite versus CBOE Volatility Index on
    cal currency bonds outperformed hard currency debt by a              S&P 500 (VIX)
    slight margin. Global high yield credit spreads continued to         Equity market volatility (VBOE Volatility Index on S&P 500) re-
                                                                         mains at multi-year lows and the Global Risk Appetite Indicator
    widen at a moderate pace, approaching the levels seen after
                                                                         remains comfortably in neutral territory.
    the correction in early February.
                                                                         6                                                                            Euphoria                      90
         This week, investor focus is likely to be centered on for-
                                                                                                                                                                                    80
    ward-looking surveys and labor market data in the USA. More-         4

    over, the communication following the Bank of England and                                                                                                                       70
                                                                         2
    European Central Bank meetings will be monitored closely, par-                                                                                                                  60
    ticularly the comments relating to the downside risks to growth      0
                                                                                                                                                                                    50
    in the Eurozone. From a tactical perspective, we favor govern-
                                                                         -2
    ment bonds in AUD and USD relative to EUR and JPY. Fur-                                                                                                                         40

    ther, we think that credit, especially high yield, retains many of   -4
                                                                                                                                                                                    30
    its attractions. Default rates remain low, helped by relatively
                                                                         -6                                                                                                         20
    easy refinancing conditions that allow companies to roll maturi-
                                                                                                                                                          Panic
    ties and/or improve their debt maturity profile. The economic        -8                                                                                                         10
                                                                         Mar 08   Sep 08   Mar 09   Sep 09      Mar 10      Sep 10   Mar 11       Sep 11      Mar 12   Sep 12   Mar 13
    cycle is not too strong to warrant a withdrawal of easy central
                                                                                                             Daily Risk Appetite     VIX Index (r.h.s.)
    bank money any time soon and average corporate balance               Source: Bloomberg, Credit Suisse
    sheets remain relatively sound. Adding the sustained strong de-
    mand for yield pick-up to our previous arguments, we reiterate
    our strategic preference for higher-yielding market segments
    within the fixed income universe. Among financials, volatility is
    likely to remain elevated after the Cypriot bail-in of senior        Grain and oilseed markets
    bonds. Tactically, we therefore prefer strong banks from
    strong jurisdictions. More strategically, however, we expect su-
                                                                         better supplied
    perior total returns from lower tier-II banks and subordinated in-   Karim Cherif
    surance paper.                                      (03/04/2013)     karim.cherif@credit-suisse.com, +41 44 334 56 39



    Money flows likely to prove                                          Last week, grains and oilseeds prices corrected sharply follow-
                                                                         ing the release of two important reports by the US Department
    generally supportive of                                              of Agriculture (USDA): the Prospective Plantings report and
    equities                                                             the March Grain Stocks report. The Prospective Plantings re-
                                                                         port is a survey conducted by the USDA during the first two
    Olivier P. Müller                                                    weeks of March to assess US grower planting intentions and
    olivier.p.mueller@credit-suisse.com, +41 44 333 01 46                is highly important for the upcoming 2013/2014 crop. The
                                                                         Grain Stock report, on the other hand, contains the most re-
                                                                         cent data on grain inventories in the USA and gives some indi-
    This short week is likely to be fairly calm and uneventful from a
                                                                         cation of how tightly markets are supplied at present. Both re-
    corporate standpoint, apart from some merger and acquisition
                                                                         ports hinted at looser-than-initially anticipated markets. The
    discussions in the market. Indeed, most companies are now
                                                                         Prospective Plantings report confirmed earlier projections that
    compiling their Q1 2013 results, which they will start publish-
                                                                         next season should see record grain acreage in corn, soy and
    ing next week. First of course are the US companies, tradition-
                                                                         wheat crops. Barring any major weather events, grain output in
    ally beginning with Alcoa, which will publish its results on 8
                                                                         the USA should see substantial increases, notably in corn and
    April 2013 after the market closes, and then later the Euro-
4    Tactical views                                                                                       03/04/2013          Credit Suisse - Research Weekly



    soybeans. With some markets still trading significantly above      be forced to announce further measures. Hence there is an im-
    fundamentally justified levels, and our expectation of lower       plicit “put” on the JPY from the BoJ in place.
    prices once supply conditions normalize, the report reaffirmed                                                    (03/04/2013)
    our negative long-term price outlook for the sector. In con-
    trast, the Grain Stock report came in surprisingly negative. The
    USDA pegged US grain inventories at a much higher level
    than market consensus due to lower animal feed usage. For
    corn, in particular, the agency showed a stock figure at 5,399
                                                                       S&P 500 Index heading
    million bushels almost 400 million bushels higher than consen-     toward all-time highs
    sus, thus causing prices to fall limit down on the day. In our
    view, the price adjustment in corn, wheat and soybeans is al-      Christian Sutter
                                                                       christian.sutter.2@credit-suisse.com, +41 44 333 20 69
    ready completed and we doubt that prices can fall much lower.
    That said, we see limited upward pressure from here. Overall,
    while we would expect some consolidation around current lev-       After a few weeks of consolidation, the S&P 500 Index is now
    els for the remainder of the season, we think downward pres-       breaking out from the range between 1,540 and 1,564. This
    sure in the agriculture sector should resume as we approach        breakout attempt is equivalent to a new challenge of the resis-
    the coming season. We think corn, in particular, is at risk of a   tance zone at around 1,576/80, where we saw the all-time
    sharp move lower, given its strong price overvaluation.            highs in 2007. The 13-month (blue line) and the 34-month
                                                      (03/04/2013)     (red line) moving averages, both in the upper half of the chart,
                                                                       are still rising and remain supportive of the intact long-term up-
                                                                       trend. However, the long-term momentum (shaded indicator in
                                                                       the lower half of the chart) is flattening and could start a new
    JPY: Will the Bank of Japan                                        topping process soon. This scenario would imply that the S&P
                                                                       500 Index could enter a new consolidation or even a minor cor-
    deliver?                                                           rection after the challenge/break of the resistance at
                                                                       1,576/80. We still advise investors to remain overweight in
    Marcus Hettinger
    Head of Global Forex Research
                                                                       global equities on a strategic and tactical investment horizon.
    marcus.hettinger@credit-suisse.com, +41 44 333 13 63                                                                   (03/04/2013)


    There appears to have been a fair amount of profit-taking in       S&P 500 Index
    USD/JPY ahead of this week’s Bank of Japan (BoJ) meeting.          Monthly bar chart with long-term technical indicators.
    Market participants have come to the realization that there is a                                                                                               1600
    limit to what newly appointed Governor Kuroda can do at his                                                                                                    1500
                                                                                                                                                                   1400
    maiden BoJ meeting. Further easing measures, such as ex-                                                                                                       1300

    tending the tenor of government bonds purchased from 3                                                                                                         1200
                                                                                                                                                                   1100

    years to 5 years, have already been widely discussed and dis-                                                                                                  1000
                                                                                                                                                                     900
    counted in the media. The heavier-than-expected fall in the                                                                                                      800
                                                                                                                                                                     700
    US ISM indicator for March is also weighing down on the pair.                                                                                                    600

    As such, USD/JPY encountered heavy selling as it tumbled                                                                                                         400
    from above 94 to around 92.50, but subsequently recovered                                                                                                        300

    to back above 93. Our fundamental view on USD/JPY re-                                                                                                            200

                                                                                                                                                                     100
    mains neutral, pending more clarity of further easing measures
    from the BoJ, but technical indicators still remain positive. As                                                                                               -100

                                                                                                                                                                   -200
    such, our overall view on USD/JPY is still bullish and we think                                                                                                -300

    that, if the JPY were to strengthen, the BoJ would probably                                                                                                    -400
                                                                                                                                                               x10
                                                                       97   98   99   00   01   02   03   04   05   06   07    08   010   10   11   12   13   14

                                                                       Source: MetaStock, Reuters
5     Fixed income trade recommendations                                                                                                                                    03/04/2013              Credit Suisse - Research Weekly



                                                                                                                                  Elena Guglielmin
    Fixed income trade recommendations                                                                                            elena.guglielmin@credit-suisse.com, +41 44 333 57 67


    Intesa bond in USD                                                                                                            The ISPIM 3.875% bond in USD maturing in January 2018
                                                                                                                                  (ISIN: US46115HAJ68) was stopped out of the trading corner
    stopped out of the                                                                                                            due to market pressure following the Cyprus bank restructur-
                                                                                                                                  ing, where the drastic measures taken (loss absorption for de-
    trading corner                                                                                                                positors and senior bondholders) caused a wave of spread-
                                                                                                                                  widening in senior and subordinated bank debt, particularly on
                                                                                                                                  peripheral issuers. We maintain our BUY recommendation on
                                                                                                                                  the ISPIM 3.875% 01/18 as we think it has good risk-reward
                                                                                                                                  aspects, trading at 395 bp over benchmark. Intesa is one of
                                                                                                                                  the top two Italian banks, with the largest deposit base in the
                                                                                                                                  country, strong liquidity and sound capitalization. We are thus
                                                                                                                                  comfortable with remaining positioned in the senior bonds.
                                                                                                                                                                                    (03/04/2013)




    Closed Fixed Income trade recommendations
    Rec. ISIN                          Curr. Security description                     Rating S&P /             Vol.       Du-              Open          Close          Closing           Open             Cur-           Target           Total
                                             Issuer                                   Moody's /                (m)          ra-             date         Price**           date            BM-             rent             BM-           return
                                                                                      Fitch*                              tion                                                           Spread            BM-           Spread              ****
                                                                                                                                                                                             ***         Spread               ***
                                                                                                                                                                                                             ***
    BUY      US46115HAJ68 USD ISPIM 3.875%                                                         1,500
                                                                                      BBB+/Baa2/BBB+                       4.3       07/01/2018 97.50                 03/26/2013              310             395             275        -1.59%
                              1/16/2018INTESA
                              SANPAOLO SPA
    *) e stands for expected rating while p stands for provisional rating, both are subject to receipt of final documentation; u stands for unsolicited rating. **) Prices are indicative only and subject to normal market volatility. ***) BM-
    spreads refer to the yield spread of the relevant government benchmark bond. ****) Calculated since open date
                                                                                                                                                                                                               Source: Bloomberg, Credit Suisse
6     Fixed income trade recommendations                                                                                    03/04/2013         Credit Suisse - Research Weekly




    Important information on derivatives


    Pricing                                Option premiums and prices mentioned are indicative only. Option premiums and prices can be subject to very rapid changes:
                                           The prices and premiums mentioned are as of the time indicated in the text and might have changed substantially in the mean-
                                           time.
    Risks                                  Derivatives are complex instruments and are intended for sale only to investors who are capable of understanding and assuming
                                           all the risks involved. Investors must be aware that adding option positions to an existing portfolio may change the characteristics
                                           and behavior of that portfolio substantially. A portfolio’s sensitivity to certain market moves can be heavily impacted by the lever-
                                           age effect of options.
    Buying calls                           Investors who buy call options risk the loss of the entire premium paid if the underlying security trades below the strike price at ex-
                                           piration.
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                                           maximum loss is the full strike price less the premium received for selling the put.
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                                           lying trades below the lower strike price at expiration. The maximum gain from buying call spreads is the difference between the
                                           strike prices, less the upfront premium paid.
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                                           maximum loss of the difference between the long call strike and the short call strike, less the upfront premium taken in, if the
                                           underlying security finishes above the long call strike at expiration. The maximum gain is the upfront premium taken in, if the se-
                                           curity finishes below the short call strike at expiration.
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                                           um paid. The maximum gain from buying put spreads is the difference between the strike prices, less the upfront premium paid.
    Buying strangles                       Buying strangles (buy put and buy call): The maximum loss is the entire premium paid for both options, if the underlying trades be-
                                           tween the put strike and the call strike at expiration.
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                                           naked strangles or straddles have unlimited potential loss since, if the security trades above the call strike price, investors risk los-
                                           ing the difference between the strike price and the security price (less the value of the premium received) on the short call. In ad-
                                           dition, they are obligated to buy the security at the put strike price (less upfront premium received) if the security finishes below
                                           the put strike price at expiration.
                                                                                                                                                                  Source: Credit Suisse
7                                                                                                   03/04/2013    Credit Suisse - Research Weekly




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8                                                                                                                  03/04/2013       Credit Suisse - Research Weekly




    Disclosure Appendix                                                                Additional disclosures for the following jurisdictions
                                                                                       United Kingdom: For fixed income disclosure information for clients of
                                                                                       Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited,
    Analyst certification                                                              please call +41 44 333 33 99.
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    companies and their securities discussed in this report accurately reflect         suers, please refer to the Credit Suisse Global Research Disclosure site
    their personal views about all of the subject companies and securities. The        at:
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    rectly or indirectly related to the specific recommendation(s) or view(s) in
    this report.
                                                                                       Guide to analysis
    Knowledge Process Outsourcing (KPO) Analysts mentioned in this report
    are employed by Credit Suisse Business Analytics (India) Private Limited.          Equity rating allocation as of (03/04/2013)

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                                                                                       BUY                                       39.9 %                      39.56 %
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                                                                                       HOLD                                     52.24 %                      52.01 %
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                                                                                       SELL                                      5.77 %                       6.02 %
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                                                                                       ally on a 6-12 months horizon based on the following criteria:
    Equity rating history as of (03/04/2013)

    Company                     Rating                     Date
                                                                                       BUY                                     10% or greater increase in absolute
    INTESA SANPAOLO (ISP        HOLD                       18/03/2013                                                          share price
    IM)                                                                                HOLD                                    variation between -10% and +10% in
                                HOLD                       16/11/2012                                                          absolute share price
                                HOLD                       06/08/2012                  SELL                                    10% or more decrease in absolute
                                HOLD                       16/05/2012                                                          share price
                                HOLD                       20/03/2012                  RESTRICTED                              In certain circumstances, internal and ex-
                                                                                                                               ternal regulations exclude certain types
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    Fundamental and/or long-term research reports are not regularly pro-                                                       vestment recommendation during the
    duced for (INTESA SANPAOLO). The Global Research department re-                                                            course of Credit Suisse engagement in
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9                                                                                                                      03/04/2013       Credit Suisse - Research Weekly



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