Morgan Stanley falls hard on concerns about Europe

Morgan Stanley falls hard on concerns about Europe

Stock Market Predictions

NEW YORK (Global Markets) - Morgan Stanley (MS.N) shares fell 10.5 percent on Friday, far more than comparable financial stocks, on concerns about its exposure to European banks.

The shares of the second-largest U.S. investment bank closed at $13.50, a penny above its intraday low.

Other large bank and brokerage stocks also fell, but not nearly as much. Chief rival Goldman Sachs Group Inc (GS.N) dropped 5.3 percent to $94.55, with larger U.S. banks down 3.5 percent to 4.8 percent. The NYSE Arca Securities Broker/Dealer Index, which includes Morgan Stanley, fell 4.7 percent.

"Investors are still worried about Morgan Stanley's exposure to Europe and that's going to weigh on the stock," said Derek Pilecki, founder of Tampa, Florida-based Gator Capital Management, which operates long-short equity strategies in financial stocks. "I think this will pass, but it may take some time."

Morgan Stanley shares hit their lowest since December 2008 last week after finance blog Zero Hedge reported the bank was at risk because of its exposure to French banks.

Morgan Stanley has zero net exposure to France, including French sovereign debt and French banks, a source familiar with the matter said on Friday.

Nonetheless, investors appeared to be reacting to fears in the credit markets related to Morgan Stanley.

The cost of insuring $10 million worth of the bank's five-year bonds against default spiked to $470,000 on Friday, almost three times what it was on June 30.

Morgan Stanley credit default swaps were more expensive than Italian banks Monte dei Peschi and Unicredit SpA CRDIN.UL, as well as French banks Credit Agricole CAGRCO.UL and BNP Paribas SA (BNPP.PA), said Otis Casey, director of credit research at Markit. Its swaps were also pricier than Bank of America Corp (BAC.N), the largest U.S. bank, which has been plagued by investor concerns about its legal liabilities.

"Morgan Stanley CDS are among the widest of its U.S. peers in CDS trading and significantly wider than French banks," said Casey. "In part, it's hurt by perception because the markets are jittery."

A higher swap price indicates the market perceives a higher risk.

Credit default swaps are very thinly traded compared to equities, but many stock investors still view the product as an important measure of risk because they portended problems leading up to the financial crisis.

Walter Todd, a portfolio manager at Greenwood Capital whose fund holds 106,000 shares of Morgan Stanley, expressed frustration at the impact that credit default swaps appeared to have on Morgan Stanley shares.

There was no specific information to cause the stock to fall so sharply on Friday, he said, noting investors who do not own Morgan Stanley bonds can make speculative bets by buying credit default swaps, while also shorting its equity.

"It's like seeing an overweight person walking down the street, buying a life insurance policy on him, then buying a gun and shooting him," said Todd.

Morgan Stanley's stock was down on Friday on heavy volume, with 51.3 million shares changing hands, 76 percent more than its 50-day average of 29.2 million shares. It was the fifth most actively traded stock on the New York Stock Exchange.

Morgan Stanley is likely to offer detailed information about its European exposure when it reports third-quarter results next month, analysts said, but other factors have also been weighing on large bank stocks.

Wall Street has cut its earnings expectations for large U.S. banks sharply through 2012 due to declining asset values, low interest rates and a weak business environment.

Analysts now expect Morgan Stanley to report third-quarter earnings per share of 36 cents, on average, according to Thomson Global Markets I/B/E/S, down from 47 cents a month ago. They also cut estimates for the fourth quarter and for 2012 by 16 percent and 10 percent, respectively. Goldman has received even sharper estimate cuts.

(Reporting by Lauren Tara LaCapra; editing by Robert MacMillan and Andre Grenon)

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Few banks to follow UniCredit share sale example

Few banks to follow UniCredit share sale example

Stock Market Predictions

LONDON (Global Markets) - Markets will breathe a sigh of relief as beleaguered Italian bank UniCredit (CRDI.MI) completes its 7.5 billion euro ($9.7 billion) rights issue on Friday, but few expect it to prompt a flurry of share sale activity from other lenders.

Some 31 European banks have been told to fill a 115 billion euro collective hole in their balance sheets by the end of June as part of moves to tackle the continent's sovereign debt crisis.

But most are finding ways to boost their capital buffers without issuing new shares.

"The fact UniCredit gets done is obviously a positive ... but I'm not sure it necessarily swings the needle in terms of other banks thinking of coming to market," said one equity capital markets (ECM) banker. "It is still a last resort."

UniCredit's offering, keenly watched as a litmus test of investor appetite to support European banks, got off to a rocky start, with its shares dropping as much as 47 percent in the four days after the 2-for-1 issue was announced.

Retail demand was stronger than expected, a source close to the deal said, with good interest coming from U.S. investors.

The sale also received a boost from a plan by Abu Dhabi's investment vehicle Aabar INPTVA.UL to raise its stake in the bank to 6.5 percent.

The bank's stock is now at around 3.82 euros, well above the 1.943 euro offer price and sources close to the deal expect take-up, due to be announced by Monday, to be above 95 percent.

Although the cash call will put its core Tier 1 capital adequacy ratio above the 9 percent of risk-adjusted assets required by the European Banking Authority, UniCredit remains vulnerable to the country's sovereign debt woes, analysts say.

A source close to Italy's largest bank by assets said it had readied a 25 billion euro Italian covered bond program which it planned to use to boost collateral available for refinancing operations, while on Wednesday it announced plans to buy back up to 3 billion euros of hybrid debt, adding to efforts aimed at strengthening its capital base.

UNDERWHELMING

"UniCredit failing would have meant the door was shut (for other banks). But the door is still open, the question is who, how much and how," said a second ECM banker.

Germany's Commerzbank (CBKG.DE), which had been among those seen as most likely to issue new shares, has instead set out a range of other steps to boost its core capital.

Bankers highlight Deutsche Bank (DBKGn.DE) along with France's BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA) as those which may be both willing and able to get a share sale done.

Analysts at Mediobanca, one of the top advisers on UniCredit's rights issue, said the French banks should consider a rights issue as a less costly alternative to deleveraging.

"(The) UniCredit rights issue shows that the lack of private investors' appetite is no longer a good reason for French banks to ignore such an option," they said in a note.

But investor appetite remains limited.

"How do I rate the recapitalization efforts of European banking sector so far? A bit underwhelming I would suggest," said Stephen Adams, head of UK equities at Kames Capital, confirming his team's relative underweight to financials.

"I expect a lot of rights issues over the short to medium term ... Would I expect investors to support them? I think here and now probably not," he added.

EARLY BIRDS

Investors are weary of pumping yet more money into European banks and face heavy dilution. UniCredit's offering will dilute 2012 earnings per share by around 65 percent, according to analyst estimates.

While Adams predicts more rights issues by banks, he says investors will be very selective about the banks they back unless there is a significant rotation in asset allocation, out of cash and into equities.

"We have the classic situation whereby the early birds would be supported and then you would have that drag because of the sheer weight of requirement that has to come out," he said.

Smaller lenders are more likely to struggle to come to market, bankers said, as new investors are steering clear of the periphery and banks will be less keen to underwrite an offering.

But they do not rule out pursuing alternative structures.

"We have seen before major shareholders underwriting larger than their weight in the company," said the second ECM banker.

Shareholders in Austria's Raiffeisen RZB.UL have backed the option to issue new shares as part of its capital strengthening plans, while Spain's Banco Sabadell aims to raise up to 1 billion euros from a rights issue following its acquisition of rescued regional savings bank CAM.

UniCredit's smaller Italian peers Banca Monte dei Paschi (BMPS.MI), Banco Popolare (BAPO.MI) and UBI Banca (UBI.MI) are still striving to avoid cash calls.

"People will still look at their stock price and say 'I need to be very sure that I need to do it and want to do it and need to make sure that my shareholders, especially the large ones, are in the right place before I go ahead'," said the banker.

($1 = 0.7708 euros)

(Additional reporting by Sinead Cruise in London and Silvia Aloisi in Milan; Editing by David Cowell)

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