Bill Fitzpatrick: Central Banks May Be Coming To Their Senses

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That's your Bloomberg at F report. I'm Katherine Cowdery. This is taking Stock with PIM Box and Kathleen Hayes on Bloomberg Radio. All right, I'm actually filling in for Kathleen Hayes. Matt Miller here with PIM Fox, and we're gonna bring in Bill Fitzpatrick right now global equity analysts and Manu Life Asset Management UH to talk about the Bank of Japan and international equities. And Bill, let me start with the b o J because it's I think such an

exciting story. Um, but they kind of disappointed markets today. They didn't lower interest rates though into further negative territory. Does that mean that they get negative rates are bad for banks? Yes, I think they finally figured that out. And the good news is that other policy makers around the globe I think around the same page. Oh, absolutely, dragging has sent a very clear message that bank equity

prices matter. I think you're unlikely to see them go further negative in Europe, and in fact, whatever policymaker moves you see, I think there's going to be a notion to protect the bank stocks. And I think that's that has to happen in Europe only because the whole economy is financed by the banks. They don't have a very deep capital markets. So I think that message is is uh, it's finally coming through. I think that's very encouraging. Bill.

And what if you could describe for people in your in your in your mind, what are the problems in European Union banks? While there are there are several h The first problem is that you're just in a low growth economy. UH, so you're not seeing a lot of loan growth. It's very difficult for them to grow the loan book. Uh. The second component, which I think is probably most pressing today, is that we never really got

the bad assets off the balance sheets. So if you think back to the tarp here in the US that was done all the way back in two thousand and eight, two thousand nine with cleans the balance sheets and we're able to get the banking environment operating smoothly right away. We never really did that here. Now a few countries did. They did in Spain, they've done in Ireland. Uh, not to say that they're growing dramatically, but they did a nice job there to clean up the balance sheets. But

we still haven't done that in Italy. Uh. That's the biggest overhang today. And until we can address that problem, I think you're going to see the bank stocks are probably going to be stagnant. Does this mean that you'd be willing to take on more risks outside of bank stocks? Well, I think generally speaking, Uh, there's a lot of value. There's certainly a lot of value in the banking system

in Europe and Japan. And I think once we get this uh this issue addressed in Italy, which will likely be in the next couple of days, only because we get the stress tests out today. But the only speaking, there's this plain better value in Europe and Japan than there is in the United States. Uh. There's a few of the more stable areas of healthcare and consumer stables where you're seeing relatively lofty valuations, but any of the more cyclical areas have sold off dramatically, and I think

there are a lot of good opportunities there. I just wanted to bring our listeners the headline just crossing the Bloomberg terminal, the Italian Treasury is saying that no public backstop is needed for Montepachi, and we know that of course, uh, Montapachi is going to try and raise money here an additional five billion dollars and get rid of its bad loans, as we've been talking about for the past couple of hours. Past hour, I should say, um, I wonder who would

want to buy stock in an Italian bank? I mean, isn't it just a losing investment. Well, it's certainly for the deeper value and deeper value oriented investor UH somewhere who just seems to navigate in the distressed areas in the marketplace. But I have to say, just see look at the headline. Now, this is very encouraging that there is private capital available. So you have to assume that this money is coming from folks who have who have

really fowered the balance sheets of these different banks. Uh, they're getting very favorable terms. I'm sure I haven't seen exactly what kind of a discount of getting it's going to be massively dilutive to existing shareholders. So UH, this outside money is going to committed very favorable terms. But I think there's an effort to say, hey, you know, we think the balance she's collectively in Italy are going

to be cleansed. And if if that's the case, now there's about a thirty or forty billion eurosword fall collectively in Italy. But if there are efforts to address those in unison, then there may be some value in this particular Italian bank. We are seeing UM in the news that JP, Morgan, Goldman, Sachs, UH, City Bank America they're all going to get together with a bunch of European banks as well to UH to underwrite this share sale. So it looks like those banks at least believe that

they can do it. Bank, UH Bank, Amounted, Depasta d Sienna. I want to remind listeners was bailed out twice already since UM, since two thousand nine. But if we get past this issue, does that make the EU stronger and a better place to invest? Oh? I think so if this goes a long way, Like I said, there are other areas that have already removed some of the bad assets. Uh. That's not to say there aren't a few more of bad apples out there that will need to be addressed.

But what we'd really like to see is move from a balance sheet concern to an income statement. And if we can get beyond the balance sheet saying, Okay, the income statement is still weak. We know that interest rates are so low, the margins are down, that's going to be a weight. But if there's a comfort in the balance sheets, then there's really no reason for these bank stocks to trade at half their book value. So I

think there are real good opportunities for value investors there. Well, let me just challenge a little bit here, because I note that you're describing the European Banking Authority is due to give its a stress test results for sixteen that will take place at ten pm Central European time. That's

just in about the six minutes from now. And there's another study that has done from the New York University that says that the European banks such as HSBC, Deutsche Bank, UNI Credit that they're gonna need to raise two hundred and eighty billion dollars in capital in order to meet the same standards that have been specified by the US Federal Reserve. Uh. Do you concur that they're gonna need

that much money? Well, I don't know exactly the terms of the scenario that would require a capital raise of that magnitude, but I suspect that's an armageddon end of the world scenario that would trigger such a capital needs UH to that degree. Uh. So you again, I haven't seen the survey in great details, So Uh, technically that may be true, you know, but I think we'd have to see just a very massive recession. It's a trigger of conditions like that, and I just think that's that's

unlikely today. So Europe's largest banks, they've gotten rid of about thirty of their market value that's declined since UH as of June, and UM their average ratio of market value to book value was like se that's got to be concerning for for the bank's managements. Well, that's certain. That's a message that the marketplace isn't very comfortable with with what resides on the balance sheet. And it's also

a reflection of the returns. So the book you really can't talk about the book value without talking about the return on equity. UH. And for most of these banks, you're still seeing high single digit leaves, but from evaluation perspective, and get that up to ten, which is uh, certainly nothing spectacular. It's just a head of your cost of equity. Uh. And then I think you're probably look for valuations should

push closer to book value. So if you go from seven tents of book value, as you say, uh, towards book value or maybe just a slight premium, you're talking about a gain that is available. So and we think if the balance you took good uh. And we are seeing from the earnings releases that have come out thus far, credit quality has improved. Uh. You know, then there's no reason why why we can't get closer to that temper

cent r OE. And you also have nice downside protection if you think the balance sheets are good, so reasonable downside protection and very good upside. I think that's uh, that's an area where investors should look to find some games. Thank you very much, sure for joining us. A. Bill Fitzpatrick is a global equity analyst at Manual Life Asset Management, looking for some value and some bargains, perhaps in European banking shares. I'm pim Fox. My co host today Matt

Miller filling in for Kathleen Hayes. We're gonna take you through to the close and also get you details about the European Banking Authority and its stress tests. They will be released at the market close, four pm Wall Street time. This is Bloomberg h