Locking Up Secrets With Quantum Keys

Commuters inching through rush-hour traffic in the Holland Tunnel between Lower Manhattan and New Jersey don’t know it, but a technology likely to be the future of communication is being tested right outside their car windows. Running through the tunnel is a fiber-optic cable that harnesses the power of quantum mechanics to protect critical banking data from potential spies.

The cable’s trick is a technology called quantum key distribution, or QKD. Any half-decent intelligence agency can physically tap normal fiber optics and intercept whatever messages the networks are carrying: They bend the cable with a small clamp, then use a specialized piece of hardware to split the beam of light that carries digital ones and zeros through the line. The people communicating have no way of knowing someone is eavesdropping, because they’re still getting their messages without any perceptible delay.

QKD solves this problem by taking advantage of the quantum physics notion that light—normally thought of as a wave—can also behave like a particle. At each end of the fiber-optic line, QKD systems, which from the outside look like the generic black-box servers you might find in any data center, use lasers to fire data in weak pulses of light, each just a little bigger than a single photon. If any of the pulses’ paths are interrupted and they don’t arrive at the endpoint at the expected nanosecond, the sender and receiver know their communication has been compromised.

“Financial firms see this as a differentiator,” says John Prisco, chief executive officer of Quantum Xchange, the company that’s been operating the cable in the Holland Tunnel since the fall. Prisco says several large banks and asset management firms are testing his gear, but he declined to name them, citing nondisclosure agreements. The companies are considering using QKD to guard their most sensitive secrets, he says, including trading algorithms and customer settlement accounts. Quantum Xchange, based in Bethesda, Md., says it hopes to stretch its cables from Boston to Washington, D.C., and is also promoting them to U.S. government agencies.

Estimates of the annual QKD market range from $50 million to $500 million, but market researcher Global Industry Analysts Inc. says demand for QKD and related technologies may reach $2 billion by 2024. The Chinese government has created a 1,240-mile QKD-protected link between Beijing and Shanghai. It’s also demonstrated the ability to use QKD to transmit and receive messages from a satellite. And a half-dozen QKD startups are pitching other kinds of clients. Qubitekk Inc., a startup in Southern California, has a U.S. Department of Energy contract for a pilot project to secure the communications that help operate power stations. Telecommunications giants including the U.K.’s BT Group Plc and Japan’s NTT Corp. say they’re considering whether to build the protection into their network infrastructure.

Why bother when most network traffic is already encrypted? Encryption is worthless if an attacker manages to get the digital keys used to encode and decode messages. Each key is usually extra-encrypted, but documents disclosed by former National Security Agency contractor Edward Snowden in 2013 showed that the U.S. government, which hoovers up most of the world’s internet traffic, can also break those tougher codes. Exactly how the NSA accomplishes this isn’t widely known. (One suspicion is that while keys are supposed to be based on multiplying two random large prime numbers together, many systems use a relatively small subset of primes, making it much easier for a computer to guess the key.)

Quantum computers are another potential threat to conventional encryption. Like QKD systems, these machines use quantum physics principles to process information and may one day achieve processing power far beyond that of conventional computers. When that happens—in the next 3 to 15 years, depending on whose estimate is right—quantum computers will give almost any user the code-breaking powers of today’s NSA. In 2016 the NSA warned companies that do business with the U.S. government that their next generation of encryption systems would have to be resistant to attacks by quantum computers.

QKD has limits. It can protect data only in transit, not when it’s at rest, stored in data centers or on hard drives. And because fiber-optic cabling itself absorbs some light, a single photon can travel only so far. Scientists have pushed the boundary ever outward, as far as 260 miles in lab experiments. Yet for high-speed transmissions under real-world conditions, the record is just 60 miles. Farther transmissions require a series of “trusted nodes,” relays that are themselves vulnerable to hackers or physical tapping. China uses armed guards to secure the nodes in its 1,240-mile QKD network, says Anthony Lawrence, a former NSA network security expert and briefing officer who now runs cybersecurity startup Vor Technology LLC.

One sure way to avoid these security and distance issues is simply to cut the cord. British startup Kets Quantum Security Ltd. is working with Airbus SE on using QKD to secure communications between a drone and its operator on the ground. And satellite relays will eventually be able to transmit quantum-encrypted signals almost anywhere on Earth, predicts Lawrence, who’s working to commercialize QKD. For the moment, though, the signals are stuck in the Holland Tunnel.

THE BOTTOM LINE While mass adoption of QKD technology remains a long way off, developers are racing to commercialize it before superpowerful quantum computers become more reliable. ● One estimate puts demand for QKD and related technologies by 2024 as high as $2b


Scrutinising the Draghi tie indicator

Ever wondered if the powers that be like to signal their true intentions to others in the know via secret gestures or codes?

Finance Twitter has.

And the basis of the most popular conspiracy (fanned somewhat by the FT’s own Katie Martin) is that the colour of Draghi’s tie determines what the ECB’s stance on monetary policy will be.

A red tie at night, bullish delight. A cool blue in the morning, hiking is stalling.

The question is: is it just a theory or is there actually some correlation between Draghi’s wardrobe choices and monetary policy outcomes?

In a bit of pre-Christmas fun that’s just come our way, Louis Harreau, ECB strategist at Crédit Agricole, has set out a comprehensive analysis of the would-be Draghi-tie indicator.

Spoiler alert: He does not find any significant results (probably a good thing).

Nonetheless the metholodgy formulated offers a good template for anyone proposing to do a similar comparative analysis of Christine Lagarde’s scarf choices and respective IMF activity. Here’s how Harreau did it (emphasis ours):

The Draghi tie database: 72 speeches, 18 ties

We gather the 69 press conference Draghi held, between November 2011 and October 2018, and we add the three speeches we consider major: 26 July 2012 in London, 22 August 2014 at Jackson Hole and 27 November 2014 in Helsinki. At those 72 events, Draghi wore 18 different ties. We give the colour of each tie a name, so that it is easier for us to manage the data (ie, to make nice charts). This also allows us to test the creativity of our apprentice (working with us is a never-ending challenge).

Harreau notes that in the grand landscape of Draghi’s ties, his analysis is strictly limited to the dark suit and white shirt Presidential era (emphasis ours):

The first thing we highlight is that, when you study Draghi’s ties, you always find yourself in the same environment. The ecosystem in which Draghi’s ties shine is perfectly unchanging: dark suit, white shirt, brilliant President. We find occasions where Draghi does not wear a suit at all, but then he has no tie. We also find occasions when he wears a three-piece suit, but those times were much earlier than the period of our analysis. We even found times when he wears a grey suit – we all make mistakes sometime – but again, this is in the prehistory of the Draghi tie analysis. The Draghi tie analysis is strictly limited to the dark-suit-white-shirt environment. 

The stand out observation being the ties’ range of colours is quite limited, especially when compared and contrasted with the Fifty shades of Merkel:

In terms of forecasting the tie, Harreau discovers some are worn regularly, some infrequently. Among the high-frequency ties is found the mauve taupe, laucous and deep coffee numbers (7 times) and Harreau’s favourite the jet (6 times).

The one-hit wonders, meanwhile, include the storm cloud, the Davy’s grey and the dark electric blue — all seen once only during press conferences.

What tie watchers need to be mindful of is the Christmas and the birthday effect, adds Harreau.

Closer analysis suggests there is certainly something going on.

In January 2012, he wore the dark electric blue tie for the first time: gift for Christmas 2011 .
In October 2012 he wore the Davy’s grey tie for the first (and only) time: gift for birthday 2012. In January 2016: the deep coffee tie: gift for Christmas 2015 .
In October: the Rackley tie: gift for birthday 2016 .

The average lifespan of a Draghi tie, meanwhile, is said to be a little less than two years. The longest-surviving tie has lasted three and a half years.

Forecasting conclusions are:

The risk of a new tie at October and January press conferences is slightly higher.
If a tie has not been worn for more than nine months, it is likely to have definitively disappeared – there are some examples of old ties being revived but they are scarce.
The more neutral a tie is, the more often it will be worn: the ‘ugly’ ties have a shorter lifespan and lower frequency.
If in doubt when playing DraghiTieGuess, just bet on the tie he wore the last time you watched him.
We could provide a formula for forecasting Draghi’s tie, but we do not want to spoil the game. The simplest way to forecast it is to ask the ECB.

With respect to whether the blue tie has a market impact? The answer is … yes. Statistical regression shows if Draghi wears a deep blue tie, it should bring more volatility to the Bund, but there is no insight on which direction the market will move.

Other factors that could deepen the analysis include bow ties and the shape of the knot. Harreau, however, found only two occurrences of Draghi in a bow tie, once a black number once a white number, implying the data sample could be too small to be meaningful.

With respect to the shape of the knot, Draghi uses a four-in-hand knot. Harreau offers the hypothesis that a four-in-hand knot means dovish or at least constructive approach to monetary policy whereas as a Windsor is a hawkish stance, as judged by the preferences of other central bankers:

Make of that what you will.


Source: link


Moody’s: 2019 euro area sovereign outlook is stable, supported by still healthy growth

Moody’s: 2019 euro area sovereign outlook is stable, supported by still healthy growth

Frankfurt am Main, January 08, 2019 — The outlook for euro area sovereigns in 2019 is stable as economic growth will remain healthy in the region and the aggregate government debt burden eases slightly, says Moody’s Investors Service in a report published today.

The report, “Sovereigns — Euro Area: Stable 2019 outlook balances still healthy growth and some deleveraging against political risks and structural issues,” is now available on Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

Most rating actions in 2018 were positive, and, as of today, 15 euro area sovereigns have stable rating outlooks, while four have positive outlooks. For the first time since 2007, no euro area sovereign has a negative outlook.

“While economic growth in the euro area will slow in 2019, at 1.9% it will remain robust enough to be credit supportive,” said Steffen Dyck, a Vice President and Senior Credit Officer at Moody’s. “However, mounting trade tensions and a slowing global economy are among prominent external downside risks to the benign macro-economic conditions we see for the euro area this year.”

Uncertainty over a potential escalation in protectionism and heightened concerns about the direction of economic policy arising from political fragmentation could have a negative impact on both sentiment and investment.

Despite the rapprochement between the US (Aaa stable) and the EU (Aaa stable) in July last year, further US tariffs on vehicles and parts remain a risk. Germany (Aaa stable) and Slovakia (A2 positive) would be the most exposed given the openness of their economies.

Moreover, Brexit uncertainty remains high. The euro area sovereigns most exposed to a no-deal Brexit through trade and financial linkages are Ireland (A2 stable), Belgium (Aa3 stable), the Netherlands (Aaa stable), Cyprus (Ba2 stable) and Malta (A3 positive).

Within the euro area, rising political fragmentation continues to change traditional parliamentary balances. This gives rise to uncertainty regarding policy direction at the national level and limit the prospects for meaningful reforms intended to bolster the resilience of the euro area to shocks.

Following significant improvements since 2011, Moody’s expects no material change to euro area aggregate fiscal and government debt metrics.

Around half of the euro area sovereigns will show fiscal deficits in 2019, and the euro area wide fiscal deficit will widen slightly to 0.9% of GDP. While the region’s government debt burden will continue its gradual decline, at 84% of GDP it is still much higher than the levels recorded prior to the global financial crisis. Elevated government indebtedness will remain a rating constraint for a number of euro area sovereigns such as Italy, Portugal and Spain.

Source: Bloomberg


Trump Blasts Federal Reserve as U.S. Economy’s `Only Problem

President Donald Trump blasted the Federal Reserve, blaming it for the plunge in the stock market, following reports he has considered firing Fed chief Jerome Powell.

“The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders,” Trump said in a tweet Monday. “The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!”

Treasury Secretary Steven Mnuchin sought to reassure financial markets over the weekend that Powell’s job is safe.

Mnuchin said in a pair of tweets Saturday evening that he’d spoken with the president about the matter, and he quoted Trump saying he didn’t believe he had the authority to remove the central bank chief.

Mick Mulvaney, the incoming White House chief of staff, said Sunday he’d spoken to Mnuchin and that Trump “now realizes he does not have the ability” to fire a Fed chairman. Prolific tweeter Trump hasn’t directly addressed the issue himself.

Trump’s latest attack on the Fed follows a report by Bloomberg News on Friday that Trump had consulted advisers many times in the prior few days over the possibility of firing Powell, a move some of those people warned could badly backfire.

Top U.S. financial regulators assured Mnuchin during a hastily organized call Monday that they are seeing nothing out of the ordinary in markets despite the recent stock slump, according to a person familiar with the discussion.

Mnuchin spoke with officials from the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The regulators briefed Mnuchin on their plans for monitoring markets during the government shutdown, and the state of markets, said the person.

Trump’s dissatisfaction with Powell and the Fed, which he’s expressed numerous times in the past few months on Twitter and in interviews, appears to have boiled over after Wednesday’s interest-rate hike and one of the worst single-week U.S. stock market losses in a decade.

Ahead of the central bank’s two-day meeting, Trump again attempted to jawbone the independent policymakers in a tweet that warned against “yet another mistake.”


Almost half of S&P 500 stocks in a bear market

Hurt by worries about global growth, the S&P 500  on Monday fell as much as 1.89 percent before reversing course and ending the session with a 0.17 percent gain, trimming its loss so far in December to 4.44 percent.

The S&P 500 index has been in a correction since October, defined by many investors as a drop of 10 percent or more from a high. It has not crossed the 20 percent threshold, widely viewed as the definition of a bear market.

However, 245 stocks in the S&P 500 – 49 percent of its components – on Monday had fallen 20 percent or more from their 52-week highs. Another 127 S&P 500 stocks had fallen 10 percent or more from their 52-week highs, but less than 20 percent.

Reuters Graphic

(Graphic: Half of S&P 500 stocks in bear market –

The index on Monday was down about 11 percent from its Sept. 20 record high close.

Apple Inc (AAPL.O), until recently Wall Street’s most valuable company and the largest component of the S&P 500, has declined 27 percent from its record high on Oct. 3, accelerating the index’s losses as investors fret over cooling demand for iPhones.

Pessimism has spread beyond the S&P 500 to smaller companies across the U.S. stock market, with hundreds of stocks hitting lows for the year on a daily basis in recent sessions.

Reuters Graphic

(Graphic: Stocks hitting 52-week lows –

S&P 500 components deepest in bear market territory include Nektar Therapeutics (NKTR.O), Coty Inc (COTY.N) and General Electric Co (GE.N), each down more than 60 percent from its 52-week high.

Microsoft Corp (MSFT.O), which in late November dethroned Apple as Wall Street’s largest company, is down 8 percent from its Oct. 3 record high.

Reuters Graphic

Moody’s: Shift to digital public services offers significant opportunities for EU sovereigns

Frankfurt am Main, December 10, 2018 — Digital technology has the potential to improve the institutional strength of European governments, as well as offering cost-savings and increasing tax revenue, Moody’s Investors Service said in a report today. However, current levels of digitalization among European sovereigns is uneven and shifting to a greater use of technology will be costly.

The report, “Sovereigns — Europe, Digitalization offers public administrations significant opportunities amid short-term challenges”, is available on Moody’s subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“Digitalization will be a major driver of reform in Europe’s public administrations in the coming years,” said Olivier Chemla, a Moody’s Vice President – Senior Analyst and author of the report. “The trend offers opportunities and challenges to European sovereigns, with the large economies of Germany and Italy poised to gain the most, given their relatively low levels of digitalization.”

Although digitalization is a policy priority in Europe, progress varies across the continent: Estonia, northern European countries and Spain score highly on the European Commission’s Digital Economy and Society Index. By contrast, south-eastern European countries, as well as Germany and Italy, have particularly low scores. The UK is also below the EU average.

Moving public services onto digital platforms has the potential to improve countries’ institutional strength, one of the four factors in Moody’s assessment of sovereign creditworthiness. Improvements could be seen in transparency, accountability, service provision and governance.

Digitalization also has the potential to enhance the tax authorities’ operating capacity, including monitoring of real-time revenue collection, cross-checking of information, audits and big data analysis. Preliminary results indicate increased tax collection and enhanced effectiveness across countries and levels of development. Beyond “traditional” activities, digitalization increases the international dimension of taxation, with the challenge to define precisely the tax base related to the digital economy.

Digitalization can help to cut the administrative burden and reduce public spending in the long-term, although there it is hard to assess precisely the magnitude of potential savings and costs.

Against the backdrop of high public debt and the need to rebuild fiscal buffers after the financial crisis, digitalization offers governments a unique tool to implement tighter cost controls and achieve sizeable budget savings.

However, shifting from a traditional model to a digital one requires significant investment and recurring maintenance resources. Governments will carry costs related to the shift.

Moreover, its impact on the labour market and government welfare spending could be substantial, particularly as it displaces the traditional job-for-life model in the public sector.

The composition of the civil service will likely evolve towards higher value-added jobs, in line with the tasks public administrations will have to perform in the future.

Subscribers can access this report via this link:

Cyprus, Israel, Greece, Italy close to East Med pipe line deal

Nov. 25, 2018 (Xinhua) — Four Mediterranean countries, Cyprus, Greece, Italy and Israel are close to an agreement to construct the world’s longest undersea pipeline to transfer natural gas from the eastern Mediterranean energy fields to Europe, a Cypriot government source was quoted as saying on Sunday.

“An agreement is expected to be reached soon among the countries involved in the project. After the deal is concluded, it will take about five weeks for its provisions to be examined by the European Union”, the government source told Cyprus state broadcaster.

The source was commenting on a report by an Israeli newspaper which said that the deal has already been struck.

The Cypriot government source said that Cyprus is also looking into all possible alternatives.

“A lot will depend on the results of the drilling of ExxonMobil that is currently underway”, the source added.

The European Union has funded a 100 million euro (113 million U.S. dollars) feasibility study and has voiced its backing to the project.

The drilling is carried out by ExxonMobil in association with Qatar petroleum in Cyprus’ offshore block 10, within the island’s exclusive economic zone,some 95 nautical miles off its south shores.

The consortium has planned two more drillings after the current one, also within Cypriot block 10.

One of the alternatives Cyprus is examining is building a two-train liquefaction plant, a much more expensive project of 10 billion euros, compared to a cost of up to 6.2 billion euros for the building of the pipeline.

A possible discovery of a sizeable gas field will boost Cyprus’ plans for a liquefaction plant along with its participation in the East Med project.

Cyprus has discovered two gas fields of a total capacity of 10 to 12 trillion cubic feet of natural gas. Israel has tapped four gas fields, with a total capacity of over 40 trillion cubic feet.

The planned undersea pipe to take the gas to Europe will be 2,200 kilometers long. It will start from a point 170 kilometers off the Cypriot south shores and will extent to Cypriot territory, then to Greece, with its terminal planned close to Otranto in southeast Italy.

It will be the longest but also the deepest pipeline, according to gas industry sources.

It will have a capacity of up to 20 billion cubic meters of gas annually and can cover about one fifth of Europe’s need in gas, which is estimated to rise to 100 billion cubic meters by 2030.

Reports in Israeli media have said that the project is expected to begin within a few months. (1 euro = 1.13 U.S. dollars)



Italian Bonds Rally as Salvini Seen Open to Compromise on Budget

Italian Bonds Rally as Salvini Seen Open to Compromise on Budget

By John Ainger

(Bloomberg) — 

Italian bonds climbed after a report that Deputy Prime Minister Matteo Salvini may be open to revisions on a budget criticized by the European Union.

Ten-year bond yields headed for the biggest drop this month and the euro rose after La Stampa newspaper reported Salvini may be willing to lower spending. The European Commission is due to publish its assessment of the budget at 11 a.m. London time, with a rejection potentially leading to fines for the country.

Italy’s 10-year bond yields fell 12 basis points to 3.50 percent, having touched 3.72 percent Tuesday, the highest level since Oct. 19. The spread over those on their German peers narrowed to 313 basis points.

“If the comments from Salvini are true and some sort of compromise is found, sanctions may even be avoided, which would make it likely indeed that the BTP-bund spread retightens back to the 250-275 area,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV.

The euro extended an advance to gain 0.3 percent to $1.1400, as its correlation with Italian bond moves increased. Italy’s FTSE MIB Index rose 1 percent, snapping five days of losses.

If the EU follows through with sanctions, it could levy fines of 0.2 percent of Italy’s gross domestic product, which could increase to 0.5 percent if the government in Rome doesn’t amend its budget.



Nouy Says ECB Stress Test Didn’t Show Banks Need Recapitalizing

Nouy Says ECB Stress Test Didn’t Show Banks Need Recapitalizing

By Nicholas Comfort

(Bloomberg) — 

The ECB’s test of how banks would fare under economic distress didn’t reveal a need to recapitalize any of the lenders, says Daniele Nouy, head of the central bank’s banking supervision arm.

  • As in previous years, the ECB will make “more severe” demands on some banks for how much capital they should hold, while others face “slightly better guidance”

  • “The result of the stress tests are reasonably favorable. We do not have cases like we did in 2016 where there was a need for recapitalization”

  • Stress tests can be improved in order to offer supervisors greater insight into the health of banks

  • On Italian banks, she said: “We monitor the situation of all banks in all countries carefully and obviously the Italian spreads are unwelcome in this perspective, but it is not the last time that we will have to face questions like that”

  • NOTE: The ECB didn’t publish the results of ~60 banks that it examined in parallel to the European Banking Authority’s test disclosed this month


European Banks Split Between the Haves and Have-Nots Is Clearer

European Banks Split Between the Haves and Have-Nots Is Clearer

(Bloomberg Intelligence) — The malaise surrounding EU banks, with limited catalysts and growing macro fears, received little cheer at 3Q. HSBC, Barclays, ING, SEB and StanChart were among our preferred 3Q reports, as BNP, Nordea, UBI and Metro continue to struggle. Revenue expectations remain flat in aggregate, with further provision cuts likely. The capital and payout outlook is also largely unchanged. (11/14/18)

1. Barclays, ING Emerge Relative 3Q Victors as Deutsche, RBS StallReturn to Top

1-Day Winners, Losers After 3Q Results Release

The average share price move of the 40-plus European banks on the trading day after they released 3Q results was 0.1%, which masks a very wide spread in performance. Metro Bank fell the most (12%), followed by Jyske (11%), Deutsche (5%) and RBS (4%). The biggest gainers were ING (6%) and HSBC (5%), which posted strong results. Commerzbank, Sabadell and Danske also bounced 5%, though we are less sanguine about the quality of their results. Barclays, Standard Chartered and Intesa all delivered positive surprises and outlooks, we feel, while Nordea, UBI and BNP’s results and commentary — albeit pre-empted by weak share price performance — also disappointed. (11/14/18)

2. DNB, Erste Lead Revenue Growth as Barclays Joins the Top PackReturn to Top

2019 – 2020 Revenue Growth

Expectations for average net interest income and total revenue growth in 2019 and 2020 have been marginally trimmed since mid-year, but are up 0.3% since 3Q earnings. UBS, Barclays, BCP and HSBC have received the largest post-3Q upgrades on net interest income. Average top-line growth is now expected to accelerate from 2% in 2019 to 3% in 2020. Fee growth and interest income growth are expected to be roughly even. HSBC’s return to growth is now baked into 6% expectations that have held steady. DNB and Erste lead expectations, even as consensus continues to moderate for both.

Consecutive good quarterly reports have led to Barclays revenue upgrades, putting it among the top-6 large cap banks on growth. ABN Amro, Natixis, Banco BPM, Nordea and RBS are the main banks expected to report small (1-3%) revenue contractions in 2019. (11/14/18)

3. 2019 Consensus Provisions Have Room to FallReturn to Top

Contributing Analysts Philip Richards (Banks)

The median provision charge for EU banks (including Nordics) is expected to rise from 20 bps (as a percentage of RWAs) in 2018 to 32 bps in 2019, and 40 bps in 2020. We estimate that 2019 consensus charges may tick lower in early 2019, though acknowledge that IFRS 9 may bring some negative surprises, likely back-ended to late-2019. The majority of 2019 expectations have been revised lower since 3Q results, with RBS, Allied Irish Banks, HSBC, Standard Chartered and the French banks taking the largest cuts. (11/14/18)

2019 Provision Expectations Have Room to Fall

4. Consensus CET1 Development Is Marginally NegativeReturn to Top

Change in 2019 CET1 Consensus

Average CET1 expectations for 2019 have fallen 6 bps since the start of 3Q earnings, with Nordea (95 bps), Allied Irish Banks (58 bps), Swedbank (44 bps), UniCredit (41 bps) and Banco BPM (24 bps) leading the fall. Conversely, Intesa (24 bps), Deutsche Bank (19 bps), SocGen and Standard Chartered (both 15 bps) and Danske (13 bps) surprised positively, leading to consensus upgrades. Swedish banks will see further cuts to consensus CET1 as 25% risk-weighting is applied to their domestic mortgage books. Average expected payout ratios remain flat for 2019 and 2020, at 50% and 55%, respectively.

Natixis (107% and a special dividend of 1.5 billion euros likely in early 2019), Nordea (93%), Intesa (80%), SEB and Handelsbanken (75% each) lead the payout ranking for 2019. ABN’s 3Q update on Basel IV impacts cut payout expectations. (11/14/18)

5. European Banks’ Promise of 10% EPS Growth Could Well Be BrokenReturn to Top

Contributing Analysts Tomasz Noetzel (Banks)

Research Note: EU Banks Set To Miss Targets
EPS Growth Trends Require Benign Provisions

Consensus estimates for the European banks suggest that average EPS growth in 2020 could rise to more than 10%, with recovery stories including Deutsche Bank, Commerzbank, Banco BPM, and RBS leading the charge. We believe that revenue pressures will lead to top-line disappointments, leaving overdelivery on cost control as the major determinant of share prices into 2019. Further, we would expect another round of bloodletting within the IB space as MiFID II bites and margin slippage continues. Lower provisions will offset some of the revenue weakness, as will new cost cutting plans. (11/14/18)

6. Cost-Income Targets Let Down Top-LineReturn to Top

The multi-billion dollar investment programs most banks are currently pursuing, as well as weak revenue, suggest to us that the majority of European banks will miss their respective cost-income targets. Consensus shows that DNB, Santander (where a new plan is due) and UniCredit are three of the very limited number of lenders expected to deliver on cost-income ratio targets, which we believe is true. Lloyds’ top-line momentum, with a material pickup in non-interest income needed, suggests that despite being one of the most efficient banks in Europe, it will also miss its efficiency goal. (09/27/18)

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