The recovery of asset markets tells us hardly anything about longer-term growth

HSBC MACRO - Gold prices are a dead giveaway
When can we be sure that economic recovery is in the bag? The world economy seems to be in a much better place today than it was at the beginning of the year. Policymakers haven't repeated the mistakes made during the Great Depression. The banking system seems to be in better shape, thanks in part to a large taxpayer bailout. Asset markets have recovered, suggesting that the earlier collapse in animal spirits may be over. And economists are revising upwards their forecasts for economic activity, concluding that the worst must now be behind us.

For all these reasons, investors are increasingly focused on so-called "exit strategies". How and when should economic life-support policies be removed? After all, interest rates in the developed world are at their lowest levels ever, the gentle hum of the monetary printing press can still just about be heard and budget deficits are huge. Are these policies still necessary, or is it time to expect the world economy to stand up on its own two feet?

It's easy to be seduced by what I might cheekily call "straight-line economics" – the idea that when the worst appears to be over, the best is just around the corner. Straight-line economics assumes that strong economic growth is a "normal" state of affairs, interrupted only occasionally by pesky recessions. If the rules of straight-line economics are applied today, it's obvious that policymakers should be raising interest rates and reducing budget deficits because, with animal spirits now rebounding, we're returning to straight-line predictability.

Sometimes, however, economies end up in a different place, based on the physics of bungee jumping. The economy falls off a cliff. Activity drops a long way. Then there's a rebound. For a while, the rebound looks very good and it's easy enough for economists to stick to their straight-line thinking. But the economy never returns to normal; instead it is left dangling by a thread. The straight line simply doesn't apply.

If we've learnt anything over the last two or three years, it's that straight-line thinking is pretty hopeless. For the economics profession, it's been a bruising experience. At the beginning of 2007, some economists recognised downside risks, but the consensus view was that, if there was to be an economic slowdown, it would be a so-called "soft landing".

For the forecasting community, it was one of the biggest errors ever made.

The economic models that were routinely used to churn out projections for growth and inflation were poorly designed to handle the housing and financial crises which bubbled over on either side of the Atlantic. Even worse, the models fostered the illusion of policymaking invincibility. Most of the models were "self-correcting", assuming that the straight-line approach was appropriate and that recessions were a thing of the past.

This, of course, was rubbish. But the weaknesses of the approach should give us pause for thought today. While it's true that the world economy is now in much better shape than it was last year, is this enough to guarantee that we're getting back to normality?
Central bankers are mostly proud of their efforts to "fix" the global economy. But if the fix is to continue working, the rise in animal spirits since the spring needs to be maintained. That's no easy task, partly because it's not clear what is causing it. The standard claim from policymakers, particularly in the UK, is that equity and corporate bond markets have risen in part because of the benefits of unconventional policies.

If the central bank buys lots of government bonds, the yield on those bond drops, thereby encouraging investors to buy other, riskier, assets. The increase in the value of equities and corporate bonds which follows makes life easier for companies looking to raise funds in the capital markets. It also makes households feel a lot more confident that the worst is over, thereby reducing the desire to hoard cash for a rainy day.

Imagine, however, that the increases in asset prices we've witnessed over past months fail to translate into a lasting recovery in economic activity.

Earlier in the year, investors were beginning to price in a "Great Depression Mark II" – a view which proved to be overly-pessimistic. In a world of bungee economics, it's just as likely that the current hopes of a "Great Recovery" will prove overly-optimistic. Rising asset prices may say something about the success of unconventional policies, but they could just as easily be part of the regular volatility of financial markets and, in fact, say hardly anything about longer-term growth prospects.

Throughout the 1990s, economists following Japan had to cope with similar problems. Every so often, the economic data would show modest signs of improvement. In their haste to declare recovery, investors would pile into Japanese equities, triggering a stock-market rally. The rally gave economists the confidence to revise up their forecasts for future economic growth. These upward revisions led to an even bigger rally. Then came the shocking discovery. The Japanese economy wasn't really recovering at all:

it was the ultimate bungee economy, with occasional signs of rebound followed, as night follows day, by yet another setback. The mistake was to assume that financial markets provided an accurate forecast of future economic developments. As it turned out, the best they could do was to offer an occasional bout of wishful thinking.

The danger for policymakers today is that, again, financial markets are offering not much more than wishful thinking. Indeed, disappointed with the absence of any effect on money-supply growth, the Bank of England is engaged in its own wishful thinking, arguing that the best way of gauging the impact of its quantitative easing programme is via the performance of financial assets – a claim which could easily go wrong given the fickle nature of investors.
The unfortunate reality is that unconventional policies are unconventional because no one really understands how they work. Whisper it quietly, but these policies may be no more than the ultimate economic placebo. Placebos can, of course, work wonders, but their best work is in the mind. Our central bankers are re-inventing themselves for a "new age" economy. They are no longer economic scientists but, instead, mystics who are hoping to persuade the rest of us of their miraculous powers.

If we return to a straight-line economy, central bankers' mystique will be justified. If, however, we're in a bungee world, their mystique will slowly be undermined. I suspect the costs will be seen mostly in increased currency volatility. Those central banks which have engaged in unconventional "funny money" policies need to see sustained results. If those results fail to materialise, we'll be left with weak economies and a broken printing press. The strength of the gold price in recent months suggests that investors still have their doubts about unconventional policies. They're buying insurance in case of failure. They're right to do so.

News from Danske Research

We present the November version of the Emerging Markets Briefer with updated FX forecasts Emerging Markets Briefer - 13 November 2009

News from Danske Research

The key events in EMEA next week will be the rate decisions in Turkey and South Africa. We expect the South African Reserve Bank (SARB) to keep its key policy rate unchanged at 7.0%. This is also the consensus expectation. At the same time we expect the Turkish Central Bank (TCMB) to cut its key policy rate by another 25bp to 6.50%. We think that this cut will mark the end of the Turkish monetary easing cycle and while we do not expect the TCMB to announce the end of the easing, it will most likely twist its communication in a less dovish direction, which might add moderate upside risk to Turkish market rates and yield next week.

New Europe Weekly, Week 47

News from Danske Research

This presentation provides our script for the ECB exit strategy
The ECB exit strategy  How and when

WSJ TOP NEWS

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China reportedly plans strategic coal reserve

China reportedly plans strategic coal reserve China plans to create a strategic coal reserve amid a spike in imports of the fuel, a report says

SG latest research

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ELECTRICITY - Towards Copenhagen...
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E.ON (3p)
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Centrica (3p)
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SG Carbon Specials - 2009-11-12 - Copenhagen and beyond

Natixis (Hold, TP=€4.20) - Rating downgrade - The party is over. Time to get down to business (3p)

Please find below our latest publication:

Natixis (Hold, TP=€4.20) - Rating downgrade - The party is over. Time to get down to business (3p)
Update
Natixis reported Q3 earnings at €268m below our estimate of €386m. Nevertheless, these results included several exceptional items (GAPC +€66m, CDS -€319m, capital gain +€463m, revaluation of the spread on own debt -€143m and +€309m taken from collective provisions). Restated for exceptionals, earnings broke even, in line with our estimates. We were disappointed by the 5% increase in costs, as we had been expecting a decline like during the past 1.5 years, particularly as the deterioration was mainly attributable to Corporate & Investment Banking (+20% after -16% in Q2 and -19% in Q1). Conversely, risk weighted assets are still well under control, down -3.5% quarter on quarter, notably thanks to Corporate & Investment Banking (-8%).
Impact
The company reported Q3 results based on its new strategic orientation (CIB, Services and Asset Management) which reduced visibility. The group was slightly impacted by GAPC in Q3, only because of provision write-backs on its monolines (€500m). Q3 performances were in line with our projections in most businesses except for Asset Management, which remains disappointing compared with peers (outflows of €1bn vs inflows of €10.9bn at CASA). The cost of risk restated for part of the Q2 sector provision allocation was up sharply (196bp for the group) mainly on LBOs and real estate financing. Thus, we see no reason to raise our earnings estimates at this stage.
Target price & rating
The orientation of the strategic plan is positive but lacks visibility and the numerous exceptionals may cloud the visibility of the accounts over the medium term. Following an excellent performance (68% over three months), the low valuation (1x 2010e tangible book value) reflects this poor visibility. In our opinion, the market today discounts factors that are much too uncertain, such as the use of €3.9bn in deferred tax over an unknown period of time. We downgrade our rating to Hold vs Buy. Our SOP-based target price is unchanged at €4.2.
Next events & catalysts
The group will not provide details on the progress of its plan until the full year results publication at end-February.

MARKET DATAPOINTS

1) S&P 500 -0.5% after the EU close - closing -1.0% at 1087. In spite of breaking through 1100 twice yesterday morning on the back of better than expected jobless data, a weak holiday outlook from Macy’s and bearish DOE stats weighed on shares, causing US equities to close at their lows of the day. Volumes remained particularly light with NYSE volumes trending 20% below 20-day average. Commodities seemed to be leading the equities market yesterday, with oil down -3.1% on the day at $76.82 after DOE stats showed a bigger than expected buildup in oil stockpiles. Treasuries were stronger, in line with the pullback in equities, despite a weaker than expected $16 billion 30-year auction. Tech (-0.4%), Consumer Staples (-0.5%) and Healthcare (-0.5%) underperforming. Energy (-2.0%) and Financials (-1.8%) underperforming.
2) Obama announcing jobs summit in December, and Senate likely to consider jobs bill in early 2010, suggest more explicit focus on jobs creation, and significant upside risk to our forecast of $75 bn additional fiscal stimulus in 2010. Alec Phillips: Momentum behind additional fiscal support for the economy appears to be building, with two recent developments implying a greater likelihood of further stimulus than even a few weeks ago: (1) comments from Senate Majority Leader Reid that the Senate was likely to consider a “jobs” bill in early 2010; and (2) the announcement today by President Obama that the White House would convene a “jobs summit” in December. A more explicit focus on job creation would: (1) increase the likelihood of new polices, rather than simple extension of existing ones; (2) raise the odds of additional fiscal assistance for states and infrastructure spending; (3) incrementally increase the probability of additional tax relief in 2010; (4) push health reform and energy legislation down the agenda for 2010 and probably increase the likelihood that Congress scales back the legislation it is contemplating in these areas; and (5) places even more pressure on the administration to demonstrate a path to medium-term fiscal consolidation. We continue to assume that Congress enacts $250 billion in additional fiscal measures to support growth over the next three years, including $75 billion more in 2010. However, recent developments – including the $45bn bill enacted last Friday – make this assumption look more conservative than ever.
3) DOE stats - inventories higher than expected across the board - distillate demand has yet to rebound. See first attachment.
4) Initial jobless claims continue to decline at a modest pace. Initial claims -12,000 to 502,000 in week ended November 7, vs. consensus 510,000, as the layoff pace has apparently eased up.
5) Industrial production, car sales, credit growth & construction output are pointing to sharper than expected acceleration in Euroland GDP in 3Q. Our Euroland GDP tracker, based on IP, car sales, credit growth and construction output, suggests GDP rebounded sharply to c. +0.8% qoq in Q3, imparting upside risks to our forecast of +0.5%qoq (see second attachment).
6) Euro-zone lending to households, and housing investment, leading GDP by 1-2 quarters - pointing to recovery in Euro-zone GDP in 2H09 & 2010 - Germany best placed - Spain worst. While lending to non-financial corporations tends to lag the Euro-zone business cycle by some 2–3 quarters, lending to households leads it by one quarter (see third attachment, p. 4, Chart 1). Moreover, housing investment turns 1–2 quarters before the rest of the economy (see third attachment, p. 4, Chart 2). In this sense, the pick-up in mortgage lending since May (see third attachment, p. 5, Chart 4), and the timid turnaround in housing investment growth in Q2 can be seen as a forerunner of further momentum in investment and of a broader recovery in the second half of this year and, if maintained, in 2010. A better performance of housing investment, however, is unlikely to be uniform across countries. Germany appears to be best-placed to benefit from the contribution of housing investment to overall growth: the supply of new homes in recent years has not been excessive while house prices look rather cheap; household net worth has improved relative to its recent history; labour market prospects are less gloomy than in other countries, and banks have tightened credit standards only moderately over the past year. Spain appears to be worst-placed.
7) Strong India industrial production in September points towards continued recovery. India industrial production Index rose 9.1% yoy in September compared to an upwardly revised 11% yoy growth in August. The IP reading was significantly higher than consensus forecast of 7% yoy. The quarterly momentum softened to 4.6% qoq in September, from 6.1% qoq in August. Leading indicators such as our Goldman Sachs India Financial Conditions Index and several business and consumer confidence indices suggest that data over the next few months will continue to tread gradually higher.
8) Corporate equity flows have been extremely bullish so far in November. TrimTabs: So far in November, announced corporate buying (new cash takeovers + new stock buybacks) of $47.0 billion has been almost five times higher than corporate selling (new offerings + net insider selling) of $10.0 billion. Having said that, the breadth of activity has been nowhere near as impressive as the volume. All but $12.6 billion of the announced corporate buying has come from the Burlington Northern Santa Fe buyout, the Cisco buyback, and the IMS Health buyout.
9) Warren Buffett - BBC's Evan Davis meets the world's greatest money maker in his office in Omaha. Part 1: http://www.youtube.com/watch?v=MuR7XcDJw0I. Part 2: http://www.youtube.com/watch?v=LH03WyBpgjU. Part 3: http://www.youtube.com/watch?v=nc1HAG4sMD0. Part 4: http://www.youtube.com/watch?v=XgCv5CqRws0. Part 5: http://www.youtube.com/watch?v=ljOH1j7emWw. Part 6: http://www.youtube.com/watch?v=jE-nbeqjqiI
10) Research focus today...
Lloyds...................................................Buy: Life without GAPS: Focus on pre-provision profits and credit quality
Bouygues..............................................Buy: Conviction Buy: Margin visibility increases post in-line 3Q revenues
Acciona.................................................Buy: Reiterating Conviction Buy after 9M results: at inflection point
Dividend Swap Monitor............................Assessing up- and downside risks to short-dated Nikkei 225 dividends (November 2009)
Capital Goods........................................UK: 3Q IMS wrap-up; Cookson remains Conviction Buy, IMI Buy Utilities..................................................Water: Reiterate CL Sell on UU ahead of final determination (November 26)
Aveva.....................................................Buy: Focus shifts from resiliency to structural growth potential; CL Buy
Gamesa.................................................Upgrading estimates and target price on solid margins, remains Buy
CEZ.......................................................Weaker EBITDA, better net income at 9M09; guidance confirmed RWE......................................................Sell: Reiterate Sell: Premium rating undermined by low earnings growth
Danieli....................................................First Take: Continued margin improvement, positioning for upturn
Have a good weekend!

China: Appreciation pressure intensifies

News from Danske Research
The political pressure on China from within Asia has increased with the finance ministers from both Indonesia and Singapore yesterday calling for yuan appreciation and APEC finance ministers today pledging to embrace flexible exchange rates. The Peoples Bank of China in its quarterly report yesterday prepared the ground for a change in China's exchange rate policy. With China's exports recovering, the Chinese leadership is sounding more confident about growth, and with political pressure intensifying, we believe the conditions are ripe for a change in China's exchange rate policy. We still expect the gradual appreciation of the yuan to be resumed by mid 2010. However, the risk it could start earlier has increased. A major one-off revaluation cannot be ruled out, while a complete float is highly unlikely.

Flash Comment - China: Appreciation pressure intensifies

OECD in Figures 2009

OECD's original, simple to use, pocket-sized data book. As ever, this year’s edition contains key data on the OECD-wide economy, society and the environment. There are comparable tables covering the entire spectrum of the organisation's work.

The e-Book - PDF format is Free.

Flash Comment - G20-meeting: Tobin tax steals headlines

News from Danske Research

With G20 countries on a time schedule for coordinating and reviewing individual countries' economic policies, the process already revealed some weakness as G20 was not able to agree on more specific policy goals. UK Prime Minister's proposal to tax financial transactions is dead on arrival. However, a special tax on financial institutions to finance future bailouts remains on the agenda. Exchange rates issues were avoided in the final communiqué. However, IMF believes CNY is significantly undervalued and it will be hard to avoid exchange rates issues in the review process starting early next year. In addition, IMF put forward seven basic principles for exit policies.

Flash Comment - G20-meeting: Tobin tax steals headlines

Flash Comment - Latvia: decline has bottomed out

News from Danske Research

Latvian GDP dropped 18.4% y/y in Q3 09, slightly up from minus 18.7% y/y in Q2 09.

Flash Comment - Latvia: decline has bottomed out

Flash Comment - Baltics: on a deflationary trend

News from Danske Research

Lithuanian inflation decelerated to 1.3% in October, from 2.7% y/y in September. Latvian inflation entered negative territory, with CPI dropping to -0.9% y/y in October, down significantly from 0.5% y/y in September.

Flash Comment - Baltics: on a deflationary trend

China: A more balanced recovery

News from Danske Research:

Today's economic data suggest that China's recovery is becoming more balanced with private domestic demand and exports substituting public investments as the main growth engines. However, the October data is not as strong as today's press headlines suggest. Growth in domestic demand and imports have slowed and Chinese imports of important commodities declined substantially in October. However, some of this weakness is probably explained by an extended holiday in October and should prove temporary. Underlying inflation has stabilised around 2%, suggesting no imminent need for substantial monetary tightening.
Flash Comment - China: A more balanced recovery

What the obscure Vopak says about the oil market

LONDON (MarketWatch) -- The financial world isn't preoccupied with oil at the moment, not with issues like Goldman Sachs bonuses or Federal Reserve exit strategies to consider.
But it wasn't that long ago that oil was the number-one topic in the market, and should black gold resume prominence, the update on Thursday from a relatively obscure Dutch firm called Vopak /quotes/comstock/24s!e:vpk (NL:VPK 54.19, +2.62, +5.12%) should be eyed.
Vopak is the world's largest independent tank terminal operator, so when it comes to storing oil, liquefied natural gas and the like, they know a few things.

And on Thursday, the group raised earnings guidance for the second time this year.
The reason? There are a few, but the main one is that demand for storing oil is strong.
A major reason to store, rather than sell, oil is if there aren't buyers for it. (Another would be a bet that prices in the future will grow significantly, but the futures complex at the moment is pricing in a 7% rise in 12 months and a 16% rise over five years -- hardly an irresistible siren song.)

Also take a look at what A.P. Moller-Maersk /quotes/comstock/23u!0lqm (UK:0LQM 0.00, 0.00, 0.00%) , the shipping giant, said in its nine-month report on Thursday: "There are no short-term prospects of higher demand for oil and gas transports." About the only good news they reported in the third quarter from that division came as vessels were increasingly used as offshore storage facilities.

And what those European firms are saying tracks with what the admittedly-not-always-truthful OPEC has been maintaining all along -- the market is very well supplied.
And similarly, while the International Energy Agency on Thursday hiked its 2009 and 2010 oil demand outlook, it pointed out that demand for gasoil used in railways and trucks is still pretty weak.

And, as the IEA also pointed out, the current price itself could derail recovery.
What it all suggests is that while demand for oil is certainly on the upswing, fundamentals aren't entirely behind the more than doubling in oil from February lows. Speculators getting ahead of themselves? Nah, it couldn't be.

In a market where oil reached as high as $147 a barrel, predicting prices is a fool's game. But know this -- there's plenty of oil sloshing around without a home.

News from Danske Research

Estonian GDP declined by 15.3% y/y in Q3 09, up from -16.1% y/y in Q2 09. Flash Comment - Estonia: decline in growth decelerates

E.ON (Buy, TP=€36.8) - Quarterly results - Better-than-expected results against a still difficult backdrop (3p)

Please find below our latest publication:

E.ON (Buy, TP=€36.8) - Quarterly results - Better-than-expected results against a still difficult backdrop (3p)

Update
The group reported Q3 adjusted EBIT of €1,959m, up 1% (vs €1,920m for the Inquiry Financial consensus and €1,848m for our estimate). We believe that this is an excellent performance against a deteriorated economic backdrop (and lower volumes), which notably reflects the company's ability to cut costs. Moreover, E.ON discussed at length certain aspects of its gas contracts and stated that it expects a pick up in gas volumes for 2011e.

Impact
For now, we maintain our estimates which, although prudent on Q3, discount a rebound in Q4, notably thanks to access to the Russian gas field Yussno Rhuskoye (management specified that this was effective from October 2009), which in our opinion will allow E.ON to reduce its gas supply costs. We note that E.ON is the second-largest “beneficiary” of take-or-pay contracts in Europe (behind ENI – see our preview). E.ON indicated it had sold its network for €0.9bn but that this disposal (as well as that of Tüega) would reduce debt only in 2010.

Target price & rating
We maintain our Buy rating on the share. The positive momentum from 2008 results (in March 2009) appears intact: debt reduction and restructuring are under way, and the company's repositioning on the gas value chain is partially complete (giving it more consistent upstream access). The company should soon present new 2012 guidance, potentially reducing capex and boosting its cost-cutting plan (March 2010? at the 2009 full year earnings publication). We maintain a target price of €36.8, as established in our note published on 17 September.

Next events & catalysts
The finalisation of the agreement between electricity producers and the government coalition should prompt a rally of about 5% (prices rose after the German general elections). Management may update guidance as of March 2010, which could take into account reduced capex and stronger cost-cutting. Further disposals (North American assets) are expected to complete the €10bn asset sale programme.

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Please find below our latest publication:

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Update
Scottish & Southern reported interim results (H1 09/10) close to our expectations: underlying pre-tax profit of £396m vs SGe £402m and adjusted operating profit of £579m vs SGe £523m. Note that all businesses contributed to growth with production/supply of electricity contributing £227m vs SGe £200m. The group reported net debt of £5.1bn and guided for full-year net debt of £5.5bn by year-end (March 2010).
Impact
We reiterate our full-year forecasts. The conference call on the results presentation did not provide any data to lead us to change our approach. We continue to believe that the group is overinvesting (with a five-year plan amounting to £6.7bn out to 2013) and £1.4bn projected for the current year. This policy could force the group to make a capital increase (an eventuality management has ruled out for the moment). Such a move would most definitely be required if the group opts to buy the network assets up for sale by EDF Energy (regulated asset value of £3.6bn)

Target price & rating
We reiterate our Sell rating on the share, as its main strengths are also likely to act as obstacles to any rerating: high net debt (3x 09/10e EBITDA), diversified contributions to operating profit (electricity, networks, telecoms, gas storage), large customer base (but likely increase in defaults on payment) and investment in electricity production (although, for some time, the group persisted in maintaining that it had an even spread between supply and production). We reiterate our 960p TP (see our 2 July 2009 report).

Next events & catalysts
SSE is continuing with its plans to build electricity generation facilities (wind and gas) which should come into service over the current year and subsequent years. EDF's regulated network assets are to be sold during H1 10. SSE should also start to consider construction of one or more nuclear power plants in the UK, as part of a consortium.

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)

Please find below our latest publication:

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)

Update
UCG reported weak core revenue (NII + net fees), 3% below market consensus and 5% below SGe. NII was weak (4% below consensus and 7% below SGe) on: 1) lower trading related income, 2) 3M Euribor drop (-45 bps qoq, and 3) a loan book reduction (-3.4% qoq). The overdraft fee impact on NII was negative by €131m, of which 50% was recovered in net fees. All divisions, but CEE and Poland, were sharply affected by the NII drop. Net fees were a touch below expectations, while trading income came in well above market consensus and SGe, thanks to the robust contribution of Rates & FX, Credit related business (former MIB division). LLP came in a touch better, at 150 bps (vs. 154 bps SGe - adjusted by the shrinking lending volumes). Without the one-off charge in Kazakhstan, LLP stood at 134 bps. LLP was better in all divisions, but CIB (148 bps vs. 144 SGe). The CEE LLP stood at 344 bps (vs. 388 SGe). Gross impaired loans grew by 8% q-o-q, with new inflows declining qoq. NPL coverage fell from 64.2% to 62.7%. Good news was the core tier 1 jumped by 70 bps qoq to 7.55% thanks to 1) earnings, 2) increasing AFS reserves, and 3) a sharp reduction in RWA (-6% qoq). The core tier 1 does not embed any dividend accruals. Net borrowing from banks was down 46% qoq.

Impact
De-leveraging actions and the reduction in the risk profile are the UCG short-term priorities, but this puts the P&L under pressure. Management is confident that the peak of LLP was touched in Q2 and that NII has bottomed, adding some ‘through the cycle' guidance: 1) €500m positive impact to NII – 1.7% of 2010e revenue- for a 100 bps parallel shift of the yield curve), 2) improving asset management mix, 3) 3,800 headcount cuts in 2010e, and 4) CEE GDP up 1% in 2010e.

Target price & rating
With €1.33bn earnings in 9M09, our €1.94bn net profit 2009e target could be demanding, but not impossible; 2010 will be another tough year if the cycle does not recover and rates don't rise: NII is the main issue. Our estimates and SOP €2.4 TP are unchanged. Hold.

Next events & catalysts
€4bn rights issue early 2010e. The lower visibility of the divisional reporting is a negative.