Barclays AS6911 US Tuesday Call JM 9 Jul 13

7/27/2019 Barclays AS6911 US Tuesday Call JM 9 Jul 13

1/19

Barclays Tuesday Credit CallNo Independence from Rates

Please see analyst certifications and important disclosures starting after slide 15.

Jeffrey Meli

Jigar Patel

Alex Gennis

July 9, 2013


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Agenda

Conference Call Information

Tuesday, 7:45am (EDT)

Conference ID: 77122048

Dial-in: +1-866-394-9718+1-706-634-9973

Replay: Live.barcap.com

Credit Conference Calls

Credit Strategy

Jeffrey Melis Piece

Other Speakers

Corporate Bonds/CDS Trading

Finbar Cooke European Bank CDS

Ryan Johnstin Financials Cash

Yoni Gorelov Yankee Credit

Yana Bouchkanets Barclays Live


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___________________________Source: Bloomberg, Barclays Research

CDX IG OTR (bp)

CDX HY OTR ($) US HY Index OAS and YTW

US Corporate Index OAS and YTW

2.5

2.7

2.9

3.1

3.3

3.5

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Ju l-13

125

130

135

140

145

150

155

US IG Corp YTW (rhs, %) US IG Corp OAS (lhs, bp)

4.9

5.4

5.9

6.4

6.9

7.4


400

420

440

460

480

500

520

US HY Corp YTW (rhs, %) US HY Corp OAS (lhs, bp)

OAS YTW

Last 2wks: -1bp +13bp

YTD: +7bp +79bp

OAS YTW

Last 2wks: -10bp +5bp

YTD: -35bp +54bp

After hitting new YTD wides/lows on June 24, IG and HY CDX have ralliedsharply over the past two weeks. Cash spreads are also modestly tighter overthe same period

69

74

79

84

89

94

99


Chg from 6/21 7/5: -8bpYesterday (7/8): -4bp

100

101

102

103104

105

106

107

108

Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul -13

Chg from 6/21 7/5: Price +$1.30; Spread -31bpYesterday (7/8): Price +$1.00; Spread -22bp


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0k

50k

100k

150k

200k

250k

300k

350k

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13

Latest Survey 6 Month Rolling Average

The main news on the macro front was Fridays better-than-expected payrollsreport. Treasury yields spiked, and CDX spreads widened in reaction.However, CDX managed to retrace all of the widening by yesterdays close

___________________________Source: BLS, Bloomberg, Barclays Research

Change in Nonfarm Payrolls (m/m, sa)

CDX IG and HY Intraday (Jul 5 8, bp) S&P 500 Futures Intraday (Jul 5 8)

10y Treasury Yield Intraday (Jul 5 8, %)Job creation exceededestimates for the third

consecutive month

2.55

2.60

2.65

2.70

2.75

Jul-0507:00

Jul-0510:00

Jul-0513:00

Jul-0516:00

Jul-0809:30

Jul-0812:30

Jul-0815:30

Payroll announcement

410

415

420

425

430

435

82

83

8485

86

87

88

89

Jul-0507:00

Jul-0510:00

Jul-0513:00

Jul-0809:15

Jul-0812:15

Jul-0815:15

CDX IG (rhs) CDX HY

10y yields rose 23bp on Friday,but declined 10bp yesterday

CDX indices managed toretrace Fridays move wider

1,610

1,615

1,620

1,625

1,630

1,635

1,640

Jul-0507:00

Jul-0510:00

Jul-0513:00

Jul-0516:00

Jul-0809:45

Jul-0812:45

Jul-0815:45


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So far, despite a significant selloff in fixed-income markets, there has beenlittle evidence of a great rotation away from credit and into equities, as theselloff and fund outflows have occurred across most risky assets

Equity Markets May-June Peak to Trough (%)Mutual Fund Flows ($bn)*

___________________________*Note: Monthly and weekly reporters including ETFs.Source: Lipper/Thomson Reuters, Bloomberg, Barclays Research

(15)

(10)

(5)

0

5

10

15

20

1-May 22-May 12-Jun 3-Jul

Equit ies IG Bonds HY Bonds

but, more recently,outflows occurred

across risky assets

Credit May-June Peak to Trough Spd Moves (bp)

-25%

-20%

-15%

-10%

-5%

0%

S&P 500 Nasdaq Eurostoxx EEM Nikkei

02040

6080

100120

140160180

CDX.IG US

Corp

OAS

CDX.HY US HY

OAS

iTraxx

Main

Euro

Corp

OAS

iTraxx

Xover

PE HY

OAS

Initially, equity fundssaw inflows despiteoutflows from fixed

income funds


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HY Corp

BondsCash & Other

Munis

IG Corp

Bonds

Mortgage

Treasuries

R2 = 50%

-3

-2

-1

0

1

2

-5 -4 -3 -2 -1 0 1 2 3

Fund Flows ($bn)

The recent volatility in credit markets has drawn additional scrutiny to fundflows. While HY flows appear to have value as a contemporaneous indicatorof returns, the utility of IG fund flow data is limited

___________________________1. Regressions based on weekly flows and returns (Wednesday to Wednesday periods) for the past 52 weeks. Flows are for weekly-only reporters including ETFs.2. Weekly-only reporters including ETFsSource: Lipper / Thomson Reuters, Barclays Research

US HY Flows vs US HY Index Total Returns1 Assets of Lipper Corp IG Fund Category2

Limited Information Contained in IG Fund FlowsUS IG Flows vs US Corp Index Excess Returns1

Most IG assets withinmutual funds are in

total return/agg funds

rather than dedicatedIG corporate bondfunds

Total Returns (%)

R

2

= 6%

-1

0

1

2

-3 -2 -1 0 1 2 3 4

Fund Flows ($bn)

Excess Returns (%) While HY fund flows are important to understanding prices moves in

HY credit, in our view, IG fund flows are less useful for understanding

spread moves in the IG market

There is a fairly strong contemporaneous relationship between HY

fund flows and HY returns, but almost no relationship between IG

flows and IG returns

Fund flows are less meaningful for the IG market because retail

investors are a smaller part of the buyer base in IG than in HY and

because most IG mutual fund assets are in total return/agg funds rather

than dedicated IG corporate bond funds. In fact, only 35% of the main

IG corporate bond fund Lipper category is IG corporate bonds

(35%)


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We expect spreads to tighten in the near term once interest rates stabilizeand fund outflows abate. However, in the longer term, we are mindful of therisk of QE withdrawal without accompanying improvements in economic data

___________________________Source: Barclays Research

Volatility Spiked When Fed Was Not in the Market

Near-Term View

Medium- to Longer-Term View

In the medium to longer term, however, we will continue to closely

monitor commentary from the Fed and changes in underlying

economic data

While we expect the pace of removal of Fed stimulus to be linked to

the pace of the economic recovery, we are mindful of the risk that

QE is withdrawn without significant improvement in economic

data

A scenario in which the Fed withdraws stimulus but economic data

remain weak exposes the market to an external risk flare-up that could

lead to a spike in volatility similar to selloffs in the spring/summer 2010

and summer 2011, when the Fed withdrew stimulus

We continue to believe that credit spreads are likely to retrace the

recent widening once rates stabilize, as the asset class becomes

more attractive at higher yield levels and fund outflows abate

In fact, high yield flows have turned positive recently and spreads

have already moved away from their recent wides

As a result, certain parts of the market that have lagged present buying

opportunities, in our view

In HY, short-duration bonds have underperformed andnow appear attractive. In IG, we maintain our constructive

view on financials, which have also lagged

0

10

20

30

40

50

60

70

80

90

0

100

200

300

400

500

600

700

800

900

1000

Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13

Fed Not in the Market Credit Index OAS (bp, lhs)

VIX Index (rhs)


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125

130

135

140

145

150

155

160

165

2-Jan 31-Jan 1-Mar 29-Mar 26-Apr 24-May 24-Jun

-5

0

5

10

15

20

Diff (rhs) Fins Non-Fins

Not surprisingly, banks, which have been higher beta over the past severalyears, underperformed in the recent selloff. We remain positive on the sectorand would use the recent selloff as an opportunity to increase exposure

___________________________Source: Barclays Research

US Corporate Index: Fins vs Non-Fins (OAS, bp) 5y Bank CDS minus 5y CDX.IG Spread (bp)

The financial-industrial basis haswidened during the recent selloff,

after compressing to zero earlierin the year

-40

-20

0

20

40

60

80

100

2-Jan 30-Jan 27-Feb 27-Mar 24-Apr 22-May 19-Jun

BAC C GS JPM MS WFC

CDS spreads of U.S. banks haveunderperformed the CDX index

recently, with MS and GSlagging the most


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The sector continues to be in the spotlight as the TBTF1 debate intensifies.While estimates of the TBTF subsidy vary wildly, we believe the higherestimates apply too large a spread subsidy to too broad a borrowing base

Most of a Large Banks Liabilities Would NotReflect TBTF Perceptions

Some Liabilities Clearly Do Not Benefit

Subsidy Estimates Vary Wildly: $0-83bn News outlets and academics have estimated that the SIFIs

benefit from an aggregate subsidy as great as $83bn per year2

We believe these estimates apply too large a spread

subsidy to too broad a borrowing base

Others have argued that the big banks borrow no cheaper than

they would on a standalone basis and, consequently, that there

is no subsidy

We believe these estimates do not appropriately account

for business model and risk differences between regional

and money center banks

___________________________1. Too-big-to-fa il 2. Why Should Taxpayers Give Big Banks $83 Billion a Year? Bloomberg View. February 20, 2013.Note: For details, please see TBTF: The $83bn Question, July 1, 2013.Source: Company reports, SNL, Barclays Research

Repo funding (~10%) repo rates approach govt funding rates and are

primarily based on the quality of the collateral, rather than the borrower

Trading liabilities (~5%) similar to repo, have costs more related to the

underlying securities than the credit quality of the bank

Other category - primarily consists of timing differences and customerpayables, which do not bear credit-sensitive interest

Only a subset of wholesale debt would fall within the scope of TBTF -

senior unsecured debt, commercial paper, sub debt, and trust preferred

securities, which togetherrepresent $1.2trn in debt, or ~ 13% of these

six banks total assets

50% 50%

8%

50%

10%

70%

11% 12%

18%

10%

20%

3%

6% 6%

16%

5%

16%

2%15% 15%

25%

17%

23%

10%

11% 10%

8%

9%

9%

11%

6% 7%

26%

8%

22%

4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BAC C GS JPM MS WFC

Deposits Repo Trading Liab Whsale Debt Equity Other


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9

Deposits: Unlikely to be Cheaper Due to TBTF

Resolutions to Protect Uninsured Deposits (05-)

Cum. Chg in Acct Bal >250k since 4Q11 (%)1

-5%

0%

5%

10%

15%

20%

25%

4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Moneycenters All Others

Uninsured depositors haveappeared largely indifferent

to a banks size

94% 87% 88% 86%100%

0%

20%

40%

60%

80%

100%

>$0.5bn $0.5-1bn $1-10bn $10-100bn >$100bn

Uninsured Deposits Protected Uninsured Deposits Not Protected

While the impact of TBTF status on deposits is less clear, we believe they areunlikely to be any cheaper because of TBTF

*OnlyWash.Mutual

At $4.4trn, deposits represent the largest single liability on

the money center banks aggregate balance sheet

Deposit balance naturally divides into two distinct categories:

Insured Deposits: with insured deposits, depositors

have little incentive to consider the credit quality of their

banks

Uninsured Deposits: these deposits could display

some credit sensitivity; however, in practice, they have

shown little sensitivity to a banks systemic importance

When the FDICs expanded Transaction Account Guarantee

(TAG) expired at the end of 2012, money-center banks

experienced a 1% decline in previously guaranteed account

balances the opposite of what we would expect if TBTF were a

major depositor consideration

Even if an uninsured depositor were to leave funds at a failing

bank, developments in bank resolution practices minimize thechance of experiencing a loss

Collectively, this very low likelihood of bearing a loss

explains uninsured depositors minimal credit sensitivity

___________________________1. The All Others category excludes the three major trust banks (BK, STT, and NTRS), as these banks have experienced much more volatile deposit flows over the past two years than either the

money centers or the other regional banks.Note: For details, please see TBTF: The $83bn Question, July 1, 2013.Source: FDIC, Barclays Research


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10

On the low end, those estimating no TBTF subsidy have focused on bondmarket funding costs, where a comparison of credit spreads shows no benefitto size. However, we believe this type of analysis oversimplifies the issue

10y IG Bank Holdco OAS vs Total Assets1 10y IG Bank HoldCo OAS vs Composite Rating2

R = 0.0084

0

50

100

150

200

250

300

$0 $500 $1,000 $1,500 $2,000 $2,500

OAS

Asset Size ($bn)

Small Regional Money Center

0

50

100

150

200

250

300

3 4 5 6 7 8 9 10

OAS

Composite Standalone Ratings

Money Center Regional Small

AA- A+ A A- BBB+ BBB BBB- BB+

*Bubble size denotes total assets

___________________________1. Asset size as of 1Q13.2. Composite rating reflects median of Moodys, S&P, and Fitch senior holding company issuer ratings.Note: For details, please see TBTF: The $83bn Question, July 1, 2013.Source: Barclays Research


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11

A simple spread comparison is incorrect because the largest banks differ intheir business mix from regional banks and from each other

Money Center vs Regional Banks

Retail Banking CommercialBanking

Credit Cards Trade Finance Debt & EquityCapital Markets

SecuritiesTrading

AssetManagement

Money Center Banks Yes Yes Yes Yes Yes Yes Yes

Regional Banks Yes Yes Sometimes Sometimes Minimal Minimal Sometimes

80% 76%

22%

70%

32%

84%

20% 24%

78%

30%

68%

6%

0%

20%

40%

60%

80%

100%

Bank of America(BAC)

Citigroup Inc. ( C ) Goldman Sachs (GS) JPMorgan Chase(JPM)

Morgan Stanley (MS) Wells Fargo &Company (WFC)

Retail & Commercial Banking Investment Banking

Money Center Banks Risk-Weighted Asset Mix1

___________________________1. Risk-weighted assets as of 1Q13.Note: For details, please see TBTF: The $83bn Question, July 1, 2013.Source: Company reports, SNL, Barclays Research


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12

+ 24bp+ 13bp

- 7bp

- 6bp

+ 11bp

-15bp

100

150

200

250

BAC C GS JPM MS WFC

OAS

Actual 10y Spread Predicted 10y Spread

Instead, comparing each banks credit spread to a weighted-average spreadcorresponding to its asset mix better addresses the money center risk profile.Utilizing such a framework, we estimate an annual subsidy of $2-6bn

BAC CGS

JPM

MS

WFC100

150

200

250

300

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

OAS

Est. Investment Banking RWAs % Total RWAs

Bank Credit Spreads vs Risk-Weighted Asset Mix1

A simple analysis suggests a subsidy of9-32bp for four of the six largest banks

A more refined analysis suggests asubsidy of 5-15bp for only three banks

Average Spread for Pure Investment Banks

Average Spread for Pure Retail & Commercial Banks

$2-6 Billion Annual SubsidyRefined RWA Analysis

___________________________1. Retail & commercial bank average includes COF, PNC, USB, and FITB. Investment bank average includes JEF, LAZ, and RJF.Note: RWA breakdown as of 1Q13. For details, please see TBTF: The $83bn Question, July 1, 2013.Source: Barclays Research

15-50bp x $1.2 trillion of credit-sensitive debt of six

banks = $2-6 billion

Even this estimate may be too high

Money center bank debt is far more liquid

Money center banks average Tier 1 Common Ratio is

9.14% compared with 8.26% for a sample of large

regionals1

Low-risk businesses, such as asset management and

trust/custodial, are not considered


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Our recent institutional investor survey confirmed that the perception of TBTFis widespread and that regulators have much work to do in improving thecredibility of their new resolution powers

Investor Survey: TBTF Subsidy Estimate

Subsidy Size is Not ConstantInvestor Survey: Likelihood of Bailout

Investor Survey: Likelihood of Bail-Out

0%

10%

20%

30%

40%

No SpreadSubsidy

1-25 bp 26-50 bp 51-100 bp Over 100 bp

Because the 6 largest U.S. banks might be bailed out in afuture crisis, the market-demanded spread for senior U.S.

SIFI credit is __ bp lower than it would be otherwise.

0%10%20%30%40%50%60%

Multiple US SIFIs willface a connected

succession of stand-alone failures

A single US SIFI willface an idiosyncratic

stand-alone failure

A US SIFI failure isunlikely in the next 20

years

Over the next 20 years it is likely ( > 50% chance ) that:

0%

20%

40%

60%

80%

No, some form of bail-out would instead take

place

Yes, but only if oneSIFI were to fail on an

idiosyncratic basis

Yes, even if multipleSIFIs failed inrelatively quick

succession

Assuming a SIFI fails in the next 10 years, do you believeOrderly Liquidation Authority (OLA) would be used to

resolve the entity?

While the TBTF subsidy is real, its small size suggests

only modest power to alter risk-taking behavior

Subsidy is likely to change with perceived broad

market risk

Subsidy could be large during times of

uncertainty unless regulators address

outstanding concerns

___________________________Note: For details, please see TBTF: The $83bn Question, July 1, 2013.Source: Barclays Research


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In Summary

Credit spreads rallied over the past two weeks, with CDX outperforming. So far,despite the sharp selloff in fixed income since the May tights, there has been little

evidence of a great rotation away from credit and into equities

In the near term, we remain positive on credit and expect spreads to tighten once

rates stabilize. However, in the medium-to-longer term, we will continue to closely

monitor commentary from the Fed and changes in underlying data, being mindful of

the risk that QE is withdrawn without significant improvement in economic data

The banking sector remains in focus as the TBTF debate has intensified. Estimates

of the TBTF subsidy vary wildly, ranging from $0 to $83bn. The high-end estimates

apply a subsidy to too broad a borrowing base, while the low-end estimates ignore

differences in business mix

Our RWA-based approach estimates an annual subsidy of $2-6bn. But perhaps more

importantly, our recent investor survey confirmed that the perception of TBTF is

widespread and that regulators have much work to do to dispel the notion of TBTF


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Tip of the Week: Access your TSP folder in CHART

With the launch of the cross-asset charting and curve analysis toolChart, Time Series Plotter will be retired in the near future. We are

mindful that the Time Series Plotter is still widely used, and we want to

ensure a smooth transition to Chart. Please review these simple stepsthat will allow you to move all saved TSP plots to Chart.

1. Make sure your "Settings" are set up properly:

When you open CHART, click "Settings" on the top grey menu bar.From the menu, you will see Show open TSP menu with a box. Please

make sure this box is checked and click Save

2. Go to "File," then "Open TSP"Once your settings are changed, your "File" menu will show "Open

TSP". Select "Open TSP" to access to your saved TSP folder. You should

see your saved TSP plots in the folder.

3. Save your TSP Plots in CHART

Once you have opened the TSP plot in CHART, you must "Save As" in

CHART to access the plot after TSP retirement and to add the plot to

your CHART Batch reports.

Barclays Live Sales: Americas

Yana Bouchkanets

+1 212 526 5537

[email protected]

Julia Brezing

+1 212 412 2539

[email protected]

Jim Martin

+1 212 412 7619

[email protected]


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Analysts Certifications and Important Disclosures

Analyst Certification(s)We, Jeffrey Meli, Jigar Patel and Alex Gennis, hereby certify (1) that the views expressed in this research report accurately reflect ourpersonal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensationwas, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Important Disclosures:Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and eachindividually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send awritten request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer tohttp://publicresearch.barclays.com or call 212-526-1072.

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result,investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. Barclays Capital Inc.

and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in thedebt securities that are the subject of this research report (and related derivatives thereof). Barclays trading desks may have either a longand / or short position in such securities, other financial instruments and / or derivatives, which may pose a conflict with the interests ofinvesting customers. Where permitted and subject to appropriate information barrier restrictions, Barclays fixed income research analystsregularly interact with its trading desk personnel regarding current market conditions and prices. Barclays fixed income research analystsreceive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm(including the profitability of the investment banking department), the profitability and revenues of the Fixed Income, Currencies andCommodities Division and the potential interest of the firms investing clients in research with respect to the asset class covered by theanalyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representationthat it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads,some or all of which may have changed since the publication of this document. Barclays produces various types of research including, butnot limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one typeof research may differ from recommendations contained in other types of research, whether as a result of differing time horizons,methodologies, or otherwise. Unless otherwise indicated, Barclays trade ideas are provided as of the date of this report and are subject tochange without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies andProcedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html.


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Disclaimer

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Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporatedoutside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (LicenceNo.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi).Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLC-QFCBranch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. Related financial products or services are only available to Business Customers asdefined by the Qatar Financial Centre Regulatory Authority.This material is distributed in the UAE (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC.This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the publication to be used or deemed as recommendation, option oradvice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al FaisaliahTower, Level 18, Riyadh 11311, Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024.This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License#177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21.This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in

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Barclays AS6911 US Tuesday Call JM 9 Jul 13

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