Might The Panic Have Been Slightly Overdone?

Might the panic in the banking world over the past few years been ever so slightly overdone? I have thought from the start that it is inconceivable that the vast amounts of potential bad debt being provided against bad debts would actually all go bad. I have maintained from the start that once banks stop making bad debt provisions, they become money-making machines. And once it is clear that debts are still being serviced, and/or repaid in full, a fair proportion of those provisions must come back into the profit and loss account and on to the balance sheet.

Citigroup’s most recent quarterly results, given a robustly rosier hue by the release of $2bn or so of unneeded bad debt provisions, would suggest that this next logical stage of the cycle is now under way. It will, of course, result in an overcapitalised banking sector, paving the way to the NEXT banking disaster, but let’s take it one stage at a time, shall we?

It is against this broader context that we should view the report by Moody’s Investors Service which shows that the performance prime residential mortgage-backed securities (RMBS) in Europe, the Middle East and Africa (EMEA) has followed a moderately stable trend in most countries.

Moody’s calculates that the two largest prime RMBS markets, the Netherlands and the UK, continued their relatively stable performance over the past year. Italian and Spanish prime RMBS markets showed improvement in some performance indicators over the past year. The performance of Irish and Greek prime RMBS markets followed a deteriorating trend (http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF255621).

Dutch Prime RMBS

The performance of the Dutch RMBS market followed its relatively stable trend over the past year, remaining one of the best in EMEA, although some indicators showed a slightly negative trend. Moody's 60+ day delinquencies (as a percentage of current balance) increased marginally to 0.8% in March 2011 from 0.7% in March 2010. However, 60-90 day delinquencies remained stable at 0.2% in March 2011. The cumulative defaults rate continued its upward trend, increasing to 0.7% in March 2011 from 0.4% in March 2010. Cumulative losses in the Dutch RMBS market (as a percentage of original balance) increased slightly to 0.1% in March 2011, still remaining at a low level compared with that of other markets.

The Moody's outlook for the Dutch RMBS market remains stable.

UK Prime RMBS

The performance of the UK prime RMBS market followed a stable trend over the past year. The 90+ days delinquencies index remained at its stable level of 1.9% in May 2011. The cumulative losses index increased to 0.2% in May 2011, from 0.1% in May 2010, at a still relatively low level when compared with other markets. The UK Prime RMBS market recorded a total redemption rate (TRR) of 14.6% in May 2011, which is one of highest in EMEA. In May 2011 the UK RMBS market didn't incur any performance-related reserve fund draws. Moody's outlook for UK prime RMBS remains stable.

Italian Prime RMBS

The performance of the Italian prime RMBS market remained stable over the past year. The 60+ day delinquencies index continued its decreasing trend to 2.1% in May 2011, from 2.4% in May 2010. The 60-90 day delinquencies remained at the relatively stable level of 0.5% in May 2011. The cumulative defaults index showed systematic growth to 2.2% in May, 2011 from 1.6% in May 2010, one of the highest levels in EMEA. Moody's outlook for Italian Prime RMBS remains negative.

Portuguese Prime RMBS

The Portuguese RMBS market remained stable over the past year. Moody's 60+ day delinquency trend decreased slightly to 1.4% in April 2011, from 1.5% in April 2010. Portuguese RMBS cumulative losses, defined as the difference between the cumulative written-off amounts and cumulative recoveries when the realised losses are not available, rose slightly to 0.8% of the original balance in April 2011. As of April 2011 there were six transactions that showed deviation of the reserve fund from the target value. Moody's outlook for Portuguese Prime RMBS remains negative.

Spanish Prime RMBS

The performance of the Spanish prime RMBS market continued its recovering trend over the past year. Moody's index of 60+days delinquencies recorded a decrease to 1.7% in March from 2.3% in March 2010. Although Spanish RMBS delinquencies peaked in 2009, recording the highest 60+ weighted-average delinquency levels in EMEA, the current level of 60+ days delinquencies is low in comparison with that of other markets. 60-90 day delinquencies recorded a noticeable decrease to 0.7% in March 2011, from 0.8% in March 2010.

The Spanish Prime RMBS market remained one of the weakest markets in terms of cumulative defaults as a percentage of original balance. The Spanish Prime RMBS market recorded an increase of cumulative defaults, reaching 1.9% in March 2011 from 1.5% in March 2010. In March 2011 there were nine deals which breached the interest deferral trigger and 15 which were recorded in the principal deficiency ledger. Moody's outlook for Spanish RMBS remains negative.

South Africa Prime RMBS

The performance of the South African RMBS market has been stable between October 2010 and March 2011, following a two-year period of rapid deterioration. The South African RMBS market was still one of the worst performing markets in terms of 90+ day delinquencies as a percentage of current balance. The 90+ day delinquency trend remained between 3.4% and 3.5% over a six-month period ending in March 2011, compared with 2.4% in March 2010. The weighted-average cumulative loss trend remained stable over the past year at 0.3% of the original balance. Moody's TRR remained stable, ranging from 20% to 23% over the period of one and a half years ending March 2011. Currently, South African RMBS record the highest prepayment rates in EMEA. In March 2011 there weren't any reserve fund draws made for performance reasons.

Irish Prime RMBS

The performance of the Irish prime RMBS market followed its deteriorating trend in April 2011. The 90+ day delinquency trend rose systematically over the past year to 7.6% in April 2011, from 4.1% in April 2010. The Irish prime RMBS market recorded very strong increase of 360+ days delinquency index to 2.4% in April 2011, from 1.0% in April 2010. Moody's annualised TRR trend declined to 3.6% in April 2011, from 4.7% in April 2010, which is one of the lowest prepayment rates in EMEA. Despite further rising delinquencies, Irish RMBS transactions continued to show only marginal levels of losses. This can be explained by the continuously weak housing market in Ireland and by the legal and regulatory disincentives to foreclose on properties. Moody's outlook for Irish RMBS remains negative.

Greek Prime RMBS

The overall performance of the Greek RMBS continued to deteriorate in April 2011. The Greek RMBS 90+ days delinquency index recorded a noticeable increase to 2.0% in April 2011 from 0.7% in April 2010. The weak performance also occurred in Moody's cumulative default index (as a percentage out of sum of original balance, cumulative additions and cumulative replenishments), which increased to 0.8% in April 2011 from 0.4% in April 2010. Moody's CPR of the Greek prime RMBS market remained at the lowest level among other EMEA RMBS prime markets. Moody's outlook for Greek RMBS remains negative.

http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF255621

The new report entitled "Moody's: EMEA RMBS continue their stable performance in most countries in H1 2011" is now available on www.moodys.com.