Tuesday, October 14, 2008

KBC "Total Mark-Downs On The CDO Portfolio In The Third Quarter Will Come To € 1.6 billion"

If KBC is any guide the next quarter for all banks will be uglier than already feared...... Just take a look at the CDO revaluation ( second column from the bottom of the chart ) over the past few quarters and it probably needs an massive accounting change to avoid massive write downs all over the banking sector..... So far the part of "mark-to market" derivative accounting hasn´t changed ( UPDATE: Surprise , surprise..... The EU has just changed/relaxed the accounting rules for derivatives EU lockert Bilanzregeln (German Link....).......Time to step up the lobbying efforts.....What is probably the most "shocking" is the fact that this write down is not related to real estate...Quote KBC "....and primarily corporate collateral" . And i doubt that other institutions are strong enough to take the same conservative approach like KBC ...... I recommend to read the KBC Details / Presentation

Sollte KBC die Richtung für den Bankensektor vorgeben sieht es noch übler als bereits eh erwartet aus...... Guckt Euch nur mal an wie sich die Abschreibungen auf das CDO Portfolio ( zweite Spalte von unten ) über die letzten Quartale entwickelt haben... Es wird wohl nur eine Änderung der Abschreibungsbilanzierungsrichtlinien eine Welle von mrdschweren Abschreibungen verhindern können.... Bisher sind Derivate wie CDO´s noch nicht von einer Aufweichung der Mark-To-Market Regel betroffen... Bin mir aber sicher das die Lobbyarbeit Wirkung zeigen wird ( ÜBERRASCHUNG.....UPDATE: EU lockert Bilanzregeln )...... Das wird aber sicher den Bankenbilanzen kein neues Vertrauen einhauchen können..... Der eigentliche Hammer ist in diesem Fall aber das nach Aussagen von KBC das CDO Portfolio fast nichts mit Immobilien zu tun hat sondern fast ausschließlich durch diverse Formen von Unternehmensanleihen gedeckt ist....Und ich bezweifle ganz stark das alle Institute in der Lage sind ähnlich wie bei KBC jetzt geschehen einen konservativen Wertansatz zu wählen...... Empfehle für mehr Informationen die KBC Präsentation

KBC Press Release André Bergen, KBC Group CEO summarised the results as follows: ‘Despite the difficult climate, the underlying commercial results are satisfactory. However, as has been repeatedly pointed out, the quarterly results are negatively affected by accounting mark-downs on investment portfolios. Given that KBC has a strong capital position, we have also decided to follow up the Moody’s downgrades by marking down additional amounts. This is a kind of provision to absorb the volatility of future earnings, which should reduce customers’ and shareholders’ uncertainty regarding future results." Total mark-downs on the CDO portfolio in the third quarter will come to 1.6 billion euros, resulting in the provisional net result for the third quarter falling to between -880 and -930 million euros. KBC’s own capital buffer is more than adequate to absorb this and every aspect of KBC's financial position remains very strong. For instance, the Tier-1 ratio for banking activities after this action has been taken will still be well above 8.5%.

Market valuation of the structured credit portfolio
As announced a year ago, KBC has an outstanding portfolio of collateralized debt obligations (CDOs) for an (unchanged) nominal amount of 9 billion euros. In accordance with IFRS accounting rules, this portfolio is marked to market. Falls in value are recorded in full in the income statement (in contrast to some other banks who mark down the value against equity in the balance sheet because the CDOs are classified differently for accounting purposes). On 30 September, the mark-down on the CDO portfolio for the third quarter stood at 386 million euros (104 million for the counterparty exposure to monoline insurers and 282 million for changes in credit market prices and other factors). By comparison, the mark-down through the income statement in the second quarter of 2008 came to 315 million euros.

Anticipating future losses
On 14 October 2008, the rating agency, Moody’s Investors Service, announced that it had downgraded the credit rating of a number of CDO securities. This decision was based on loss assumptions that are far more stringent than any others before them. KBC is sticking to its conservative policy of bringing the value of all securities with a credit rating below Ba3 to zero and is applying this retrospectively to its third-quarter results.

Moreover, KBC has decided to apply the new rating hypotheses to its entire CDO portfolio and to record this mark-down in full in the third quarter. In so doing, KBC is largely preventing its future results being affected by additional rating downgrade. The combined impact of these decisions on the results will amount to around -1.25 billion euros (± -850 million euros after tax).

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Anonymous Anonymous said...

That's the kind of company that I'd like to invest in!

6:59 AM  
Blogger jmf said...

Moin Anon,

it really seems that almost every financial is some kind of a black box....

The irony is that even when you include todays 20% slump KBC has outperformed Barrick Gold (the goldminer with the strongest balance sheet ) over the past 3 month.....

The picture is quite different when you take a longer view of course but this shows you how rational the markets are these days......

7:13 AM  
Anonymous Anonymous said...

I'm from Lithuania,actually was.
Now I'm living in USA. Long time
since i Was last time in Europe. What is your outlook for Germany and Eastern block? Thank you.

11:03 AM  
Anonymous Anonymous said...

Thought I would mention - thx for posting the JPM report on Calculated Risk. Most amuzing, indeed.

So, is the IMF going to play in the East?

Russia sure is feeling the pain.

7:24 PM  
Blogger jmf said...

Moin Anon,

"What is your outlook for Germany and Eastern block"

It really looks very very ugly....

The German Economy has already hit the wall.....

The only thing that kept our economy moving was the export sector.....

At least the leverage from out consumer and the corporations isn´t as high as in the rest of the world.....

I´m not sure about Eastern Europe in general but here is a story about the Baltics from mid 2007

Baltic Real Estate / Bubble World Tour

According to the SEB (Swedish bank) almost 70 Percent!!!!!! in Latvia are using € mortgages......


1:08 AM  
Blogger jmf said...

Moin Barley,

in the end i still think Russia with the large reserves is still in a better position than the rest....

Relatively speeking... :-)

I think in the end it doesn´t matter what the IMF will or won´t do.....

The track record from the IMF is at best subpar.....

1:13 AM  
Blogger jmf said...

Moin again,

here is a good piece on Eatsren Europe

The next domino to fall in eastern Europe?

9:36 AM  
Anonymous Anonymous said...

thank you very much for your input
All the best.

11:16 AM  
Anonymous Anonymous said...

Does this leave UBS still in trouble?

Or are their shares a screaming bargain?

9:35 AM  
Blogger jmf said...

Moin Shtove,

no financial is a bargain for years to come..... :-)

Nevertheless i think it was a good deal for UBS.....

Unfortunately is the business model from UBS broken....

Their key segment wealth managment is losing multibillions from customers month after month....

10:37 AM  
Anonymous Anonymous said...

Hmm. I've been told UBS is picking up a lot of Lehman's clients.

5:10 AM  
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