TARP repayment will drive hit to earnings for common
Merrill Lynch /BAM notes that when TARP pfds were issued in Oct, related warrants caused a portion of the investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and MS will force a reversal of remaining warrant value (through pfd dividend line).
Warrant repay will drive Equity hit, but likely 3Q event
They also expect each Co. will pay the government to extinguish attached warrants, but uncertainty remains as to valuation (e.g. what volatility will be used in valuing?). Whatever the value, they expect it to be a hit to common equity (without going through the P&L) sometime in 3Q. The numbers are significant (anywhere from $700mn to $1bn+, by our calculation), but given the strong capital cushion at these firms, T-1 common ratio hit should be no more than 50bps. Also, it is not clear that the full amount will be charged (logically, they’d expect the charge to be just the amount over the aforementioned 2Q hit).
GS: 2QE cut to $2.92 from $3.59 on TARP hit offset by
stronger FICC, but ‘10E up on repayment GS credited $490mn of its TARP payment to PIC upon accepting its $10bn of government capital; firm est. a cost of about $430mn from repayment (after 2.75 qtrs. of accretion). They are also adding a FDIC assessment of $70mn. This cuts 2QE to $2.69 from $3.59. However, it is increasingly clear that GS FICC business continue to operate solidly, offsetting cut with better Trading brings 2Q to $2.92. Adjusting forward ests for repayment of TARP as they did last week for JPM and MS (remove dividend, offset by lower Trading from $10bn lower allocated capital), which raises 2H09 forecast by $0.10 and ‘10E to $17.63 from $17.45.
JPM: 2QE cut to $0.01 from $0.30 on TARP mark
JPM credited $1.3bn of its TARP funds to Retained Earnings upon accepting its $25bn of capital, so we estimate a loss of about $1.1bn from repayment. This cuts Merrill 2QE forecast by $0.29 to $0.01. Notes that they have already accounted for a $750mn FDIC assessment fee.
MS: 2QE to -$0.23 from $0.70: TARP hit, more DVA
MS credited $1bn+ of TARP funds to PIC upon accepting $10bn of capital; Merrill estimates a loss of about $900mn from repayment. Also adding FDIC assessment of $30mn. This cuts 2QE to $0.10 from $0.70. MS spreads have continued to tighten; they now believe MS could post DVA loss of at least 1Q’s $1.5bn, which cuts 2Q to a loss of -$0.14. An est. $70mn charge from the Mitsubishi pfd. to Common exchange cuts another $0.04. Finally, the move to Basic From Diluted shares (because of loss) cuts 2QE another -$0.05 to -$0.23.
Notablecalls: While kind of cosmetic, I think the cuts don't spell well for overall i-bank sentiment. Especially in case of Goldman Sachs (NYSE:GS) where most other firms are scrambling to raise their estimates.
It now feels somewhat silly to pay that kind of multiple for GS. I know I was kind of positive on the name a week ago (got a pop) but I guess I have changed my mind.
I would not be surprised to see GS trade down in the n-t.
Merrill Lynch /BAM notes that when TARP pfds were issued in Oct, related warrants caused a portion of the investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and MS will force a reversal of remaining warrant value (through pfd dividend line).
Warrant repay will drive Equity hit, but likely 3Q event
They also expect each Co. will pay the government to extinguish attached warrants, but uncertainty remains as to valuation (e.g. what volatility will be used in valuing?). Whatever the value, they expect it to be a hit to common equity (without going through the P&L) sometime in 3Q. The numbers are significant (anywhere from $700mn to $1bn+, by our calculation), but given the strong capital cushion at these firms, T-1 common ratio hit should be no more than 50bps. Also, it is not clear that the full amount will be charged (logically, they’d expect the charge to be just the amount over the aforementioned 2Q hit).
GS: 2QE cut to $2.92 from $3.59 on TARP hit offset by
stronger FICC, but ‘10E up on repayment GS credited $490mn of its TARP payment to PIC upon accepting its $10bn of government capital; firm est. a cost of about $430mn from repayment (after 2.75 qtrs. of accretion). They are also adding a FDIC assessment of $70mn. This cuts 2QE to $2.69 from $3.59. However, it is increasingly clear that GS FICC business continue to operate solidly, offsetting cut with better Trading brings 2Q to $2.92. Adjusting forward ests for repayment of TARP as they did last week for JPM and MS (remove dividend, offset by lower Trading from $10bn lower allocated capital), which raises 2H09 forecast by $0.10 and ‘10E to $17.63 from $17.45.
JPM: 2QE cut to $0.01 from $0.30 on TARP mark
JPM credited $1.3bn of its TARP funds to Retained Earnings upon accepting its $25bn of capital, so we estimate a loss of about $1.1bn from repayment. This cuts Merrill 2QE forecast by $0.29 to $0.01. Notes that they have already accounted for a $750mn FDIC assessment fee.
MS: 2QE to -$0.23 from $0.70: TARP hit, more DVA
MS credited $1bn+ of TARP funds to PIC upon accepting $10bn of capital; Merrill estimates a loss of about $900mn from repayment. Also adding FDIC assessment of $30mn. This cuts 2QE to $0.10 from $0.70. MS spreads have continued to tighten; they now believe MS could post DVA loss of at least 1Q’s $1.5bn, which cuts 2Q to a loss of -$0.14. An est. $70mn charge from the Mitsubishi pfd. to Common exchange cuts another $0.04. Finally, the move to Basic From Diluted shares (because of loss) cuts 2QE another -$0.05 to -$0.23.
Notablecalls: While kind of cosmetic, I think the cuts don't spell well for overall i-bank sentiment. Especially in case of Goldman Sachs (NYSE:GS) where most other firms are scrambling to raise their estimates.
It now feels somewhat silly to pay that kind of multiple for GS. I know I was kind of positive on the name a week ago (got a pop) but I guess I have changed my mind.
I would not be surprised to see GS trade down in the n-t.
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