The main concern with Commerzbank shares, in our view, is the sense that the bank is not being

run for its equity holders at this point in time, but is focused primarily on working through its legacy portfolios of troubled assets, whilst servicing its debt obligations and avoiding placing any further burdens on the state. The investor-day guidance of continued heavy loan losses through 2016 suggests a backlog of loss recognition that is being spread over future years against earnings, protecting the capital and funding structure, but leaving little or no accretion to the equity base. We stay Underweight. There are a number of negative indications in the latest numbers and management comments that reinforce these fears and indicate continuing poor operating trends. Firstly around balance sheet and capital issues Commerz is paying coupons on its silent participations (the government rescue pref shares) but not on its ordinary shares, and even says that ordinary dividends are unlikely for 2013 too. This contrasts with other European banks that took government pref shares, which have tended to either pay dividends to both pref and ordinary shares, or to neither, but treating them equally at least. Here the prefs get paid but not the ordinary equity. The CFO emphasises the phased-in view of Basel-3 ratios, the main commitment being to stay above 9% at all times on this official-rules basis, while the fully-applied view (that equity investors care more about) is treated as secondary and somewhat academic, and he implies that it may not get any better at all during 2013. Linked to this, management imply that they will keep the SoFFin SPs for the foreseeable future, emphasising that it is grandfathered as official-basis CET1 capital until 2017, and implying that they will need this support to the capital structure for some time to come. On the 19bn shipping book, RWAs jumped by 7bn, implying a 37ppt increase in the average riskweighting on that book. The increase is half from higher PDs and half from higher LGDs, so pretty savage rating migration from their once per year model update. Meanwhile, NPLs in shipping increased form 4.1bn to 4.5 in the quarter.

KBC Group Q4 results ~20% ahead of consensus & bullish Irish LLP guidance KBC reported underlying net income of E309m for Q4, c.20% ahead of consensus. The beat was of high quality, in our view, driven by Belgium, CEE and Ireland. The announcement of a proposed cash DPS of E1 was a positive surprise for the market. KBC has provided guidance for the first time on Irish LLPs in 2013 that we estimate should lead to high-single-digit consensus upgrades. Overall, this was a strong set of results and with a good outlook on Ireland. We increase our adj net income forecasts by 5% and 8% for 2013-14 and raise our target price to E37 (from E35). Buy. Q4 results 20% ahead of consensus; cash DPS to be paid; solvency strong KBCs Q4 operating performance was good with underlying net income 20% ahead of consensus. This was mainly driven by higher revenues than expected, but also a lower tax rate. Belgium, CEE and Merchant Banking (the core divisions) all outperformed consensus expectations, with only the Group Centre underperforming, due to higher provisions. KBC surprisingly announced the proposed payment of a E1ps cash dividend for FY12, but also mentioned that no DPS will be paid in FY13. Solvency remains strong with a Basel 3 CT1 of 10.8% at end-2012 and the 11.0% target for 2013 maintained. Two important elements for the market: Irish LLPs decrease & NII stabilizes

NII had been collapsing for the last five quarters, but in Q4 NII stabilized QoQ. KBC is reacting to the lower reinvestment yields (with sale of GIIPS sovereign bonds) with better commercial margins and lower funding cost, a strategy that is starting to pay off. We believe that NII has now troughed. In Ireland, LLPs of E87m were below DBe of E110m and a 33% drop QoQ a positive surprise. KBC is guiding for total Irish LLPs of E300-400m in FY13, a 36% drop yoy if we take the mid-range. We estimate that consensus incorporating the companys guidance should lead to a 6% upgrade in 2013 EPS estimates. We now forecast Irish LLPs of E350m in 2013 and E240m in 2014. Valuation/Risk target price raised to E37 (from E35), Buy We increase our adjusted net income forecasts by 5% and 8% for 2013-14, on the back of lower provisions (esp. in Ireland). We derive from our SOTP valuation a target price of E37 (vs. E35 previously) and reiterate our Buy rating given the upside potential. Valuation does not look demanding with KBC trading at 6.2x adj. EPS 2014E and 0.95x TBV 2014E for RoTE close to 16%, which we consider an unjustified discount. Main risks: macro (esp. in Belgium, CEE and Ireland), high mortgage exposure to Ireland, large CDO book.

Commerzbank - FY2013 starts challenging, with revenues guided down, costs up

Transition years ahead; limited internal capital generation Commerzbank issued a cautious outlook statement for 2013, with revenues seen down, loan losses up, costs up due to investments and restructuring charges. Overall, no major surprises but a downbeat message nonetheless. Our Hold rating on Commerzbank acknowledges the group's strong position in core German banking products and turnaround potential, given its current excessive exposure to public sector finance, commercial real estate, and ship finance, but also anticipates ongoing costs to right-size the platform and reflects the shortterm weakness in profitability. No surprises in detailed prelim results; B3 CT1R of 7.6% a moderate positive Commerzbank disclosed detailed preliminary results, which did not result major surprises. Operating/net profit numbers were unchanged to an earlier announcement; B3 CT1 ratio (fully loaded) of 7.6% was a moderate positive (the E0.6bn DTA charge did not impact the ratio as much as expected); strong headline net interest income was explained by one-offs. Credit quality improvement in the core bank was offset by deterioration in the NCA book. EPS estimates reduced: down 27% for 2013, down 18% for 2014 We have lowered our EPS estimates for 2013 to E0.08 (from E0.11) and for 2014 to E0.14 (from E0.17), driven by lower expected trading profit, higher loan loss provisions, and lower fee income. We believe that Commerzbanks strong CT1 ratio improvement momentum of 2012 will materially slow down in 2013, and still be low in 2014; we forecast 8.1% B3 CT1 (fully loaded) for 2014. Steep discount to book value reflects earnings and asset valuation risk We value Commerzbank based on a sum-of-the-parts approach, using our estimates for FY2014. Estimating individual business segments' profits and equity consumption, and applying business-specific assumptions on long-term growth potential as well as cost of equity, we calculate target P/B multiples. Downside risks include its exposure to peripheral European countries, and an adverse development of credit quality, particularly in commercial real estate and shipping finance, resulting in higher credit risk costs. Spread tightening of Euro area sovereigns and investor interest in non-core asset investments are upside risks

Japanese reflation efforts. Japan seems determined to overcome years of deflation and weak economic growth. We remain short JPY as a weaker yen is a key tool to achieving policy targets. Our bias is that equities will rally further but need to see more news on the policy front before being more constructive. We caution against shorting fixed income when more QE is likely and would wait to see what sector the BoJ will operate in before embarking on reflation trades (page 5).

US breakevens. Global real yields in aggregate are relatively unchanged this past month.

However, breakevens have risen in most markets in line with the ongoing rally in risky assets. In the US, the rally in breakevens was due to a reduction in liquidity premia, adjustments for carry, and the move in gasoline futures. Thus, we see further upside, as this implies inflation expectations have not shifted higher (page 7).

Netherlands in focus. Given the weak economy and the nationalization of SNS Reaal, we

believe the government will announce further fiscal measures to bring the public deficit below 3% of GDP this year. Despite this weak outlook, we remain confident in our cautiously constructive view, arguing that the Dutch economy is unlikely to fall into a negative spiral. Our base case is that the Netherlands should maintain its AAA status, although risks are skewed to the downside (page 8).

BNP Paribas Disappointing Q4 performance but convincing cost cutting plan announced BNPP reported an adjusted pre-tax profit of E2.0bn, in line with consensus but 17% below our expectations. We find Q4 operating performance was disappointing with high costs and provisions, and a miss in all divisions except Investment Solutions. Yet, BNPP is reacting quickly to the dull environment with the announcement of a cost cutting plan and an expansion plan in Asia, which we estimate should improve RoE by 150bps in 2015E. We adjust our forecasts and raise our target price to E52 (from E46), and maintain Hold due to the limited upside potential. Disappointing performance in Q4, but positive surprise on the dividend We calculate an adjusted PBT of E2.0bn, broadly in line with consensus of E1.9bn but much below our E2.4bn forecast. The miss vs. our numbers is coming from higher costs and higher provisions. By division, only Investment Solutions outperformed (partly due to one-offs), while Retail Banking, CIB and the Corporate Center all underperformed DBe. The proposed payment of a E1.5 DPS, corresponding to a 30% payout ratio, entirely in cash was a positive surprise. Considering BNPPs strong solvency and managements wish to grow organically, we expect BNPP to progressively increase its payout ratio. Quick reaction with strategic plan announced, to improve 2015 ROE by 150bps BNPP reacted quickly to the dull environment (low revenues, rising LLPs) with the announcement of a E2bn cost cutting plan for 2015E (E1.5bn CtA) as well as an expansion plan in Asia (12% CAGR in revenues in 2012-16). The cost cutting plan is spread 1/2 Retail Banking, 1/3 CIB and 1/6 Investment Solutions. We give BNPP full credit for the plan (BNPP has historically delivered on promises) but also incorporate higher employee costs (hiring of 1,300 FTEs in Asia). Overall, the plan improves our ROE forecast by 20bps, 70bps and 150bps for 2013, 2014 and 2015 respectively, leading to a 10% ROE in 2015E. Valuation/Risk target price raised to E52 (from E46), Hold maintained We have reduced our forecasts to reflect the disappointing operating performance in Q4, but this is slightly offset by the announced cost cutting plan. Overall, we reduced our adjusted net profit forecasts by 8% for 2013E and 2% for 2014E. Our 2015E forecasts are c.20% ahead of consensus, which we expect to move up to reflect targeted cost savings. We now value BNPP on 2015E (to reflect the impact of the plan) and derive from our SOTP a target price of

E52. Hold maintained. Main risks: macro/sovereign risks, regulation, execution risk on the plan and share overhang from Belgian State.
MUNICH RE Update At first glance preliminary FY12 results were good and the market liked a better-than-expected dividend. However, we disagree. With no capital returns and a low payout ratio, Munich Re does not currently satisfy the main criterion we are looking for in the reinsurance sector. In addition, a number of underlying trends are deteriorating further in various segments, diluting reinsurance P&C results that were finally making some progress. All told, renewals showed only a modest +0.5% price increase highlighting a further softening of the reinsurance cycle. Details: Reinsurance did very well in Q4 with an underlying Combined Ratio at 91.3%. This swing however comes late: FY12 came at 97.8% on our basis (see page 10), showing only a modest +0.5% improvement on 2011 and not making up for lower investment yields, let alone for 2011 large Nat Cat losses. Profitability therefore remains under pressure there. ERGO P&C deteriorated further in Q4, with an exceptionally high CoR at 104% (cons: 97%, SGe: 98.4%), resulting in a FY12 CoR of 98.7%, significantly above consensus at 97%. Munich Re Health, which we look at in more details, posted a loss, highlighting that these low returns can also carry high risk. SG view While we explained our scepticism on ERGO P&C in Munich Re - Shifting Sands, we were still surprised by the extent of operating losses in Q4. The restructuring could deliver results in 2014 (our Expense Ratio declines from 34% in 2010-11 to 32.5%), but we believe consensus to be complacent in expecting Munich Re to meet its CoR 95% target. We reduce our earnings both in ERGO P&C and Munich Re Health, cutting overall earnings estimates by 2% to 4% in 2013-15, and remain around 3% below consensus. Within the reinsurance sector, our preferred stock remains Swiss Re (Buy). How we value the stock We leave our SOTP TP unchanged at 133. Weaker earnings reduce our valuation by around 4 per share, but are compensated by a lower CoC in line with the latest SG Map inputs, and market movements. Risks to TP: lower interest rates further hurting solvency; meeting Combined Ratio targets; catastrophic Nat Cat events. Events, catalysts & risks FY12 results on Tue 12 March, Investor Day on Wed 13 March.

Gas Natural Company News 4Q12 results expected to remain strong, but we have a more cautious outlook for 2013 Gas Natural will publish its 4Q12 results on 19 February before the market opens, followed by a conference call at 10:00 CET. We expect double-digit operating growth vs. 4Q11, and EPS growth of c.50%. The strong performance of the liberalised gas activities should continue to be the main engine for operating growth and should be enough for the group to deliver on its main strategic targets for 2012. However, in our view, 2012 results are unlikely to have a relevant impact on the share price, as market attention is likely to remain focused on: i) the sustainability of 2012 results in the liberalised gas activities and the electricity business following the announcement of the energy reforms; and ii) an update of 2010-14 Strategic Plan which might have to wait until 2Q13. We reiterate our Market Perform recommendation. Inditex_Company_Note_20130218 Fairly valued After a brilliant market performance in 2012 (+55% in 12M), Inditex is trading at a c.40% premium to peers (vs. 15% in 10Y). We have tried to find a more suitable valuation methodology for a high growth company such as Inditex which better reflects the improving return on its investments and value creation for shareholders of the company (Adj EV/EBIT vs. Adj. RoCE). Thus, if we apply the historical Adj. EV/EBIT multiple (13-14x) to our estimated Adj. RoCE of 34% in 2013e (incremental returns over 2011-12) we reach an average valuation for the group of EUR110/share, which is just 6% above current market levels.

 The quality of Inditexs business clearly merits a premium, but we think this is almost fully reflected in these current prices. We forecast that Inditex will maintain a very robust 11% EBITDA/net profit growth from 2012e to 2015e. However, this represents a slowdown vs. previous years (+14% and +16% CAGRs 08-11 for EBITDA and net profit, respectively). We maintain our Market Perform rating on Inditex on valuation grounds (no upside potential to our new EUR107.0 DCF target price).
The recent rise in the euro exchange rate is likely to hit Germany and Finland hardest given their strong trade links with non-euro-zone countries. But with exports from the south and periphery set to suffer more from weak demand within the region and continued increases in export prices, there is little sign of the rebalancing that is sorely needed both within and between euro-zone economies. Data last week revealed that the value of euro-zone exports fell by 1.8% in December, marking the fourth fall in six months and leaving the annual growth rate at just 0.3%. The downturn has so far been remarkably broad-based, with export growth in every euro-zone country falling from rates of around 20% in mid-2010 to near zero recently. (Chart 1 shows this for the largest five economies.) But there are reasons to think that export performance might be more divergent in the coming months. Most obviously, the euros strength will affect some countries more than others. Finnish, Greek, Irish and German exports look set to suffer most given their relatively strong trade links with countries outside the single currency area. (See Chart 2.) But this might not be the key factor determining relative export performance. While we have expressed concern about the euros rise, we have argued that developments in global demand are more important for export prospects. In that respect, Germany and Irelands strong trade links with the US and Asia (which we think will increase their lead over other economies this year) leave them well-placed. Our view that market fears for the euro-zones periphery will rebuild and recessions there will deepen suggests that the economies with the strongest trade links to that area are most at risk of sharp falls in exports this year. Worryingly, the southern euro-zone economies are highly exposed to each other. And France is in a more precarious position than Germany it sends 20% of its exports to the euro-zones south and periphery, while this area accounts for about 13% of German exports. Admittedly, if sharp falls in costs and prices in the peripheral economies cause their competitiveness to improve, they might be able to increase their exports to Asia and the US at the expense of countries like Germany. However, while some measures of peripheral firms costs have fallen, export prices have not, implying that these economies remain uncompetitive. (See our European Economics Focus Have the peripheral economies regained competitiveness? sent to clients earlier today.) Survey measures of export orders support the picture that the peripheral economies export prospects are worse than those of Germany and other core countries like the Netherlands. While export growth

looks set to turn negative throughout the region, falls will probably be sharpest in Spain, Portugal and Italy. These surveys also suggest that France will far underperform Germany. Of course, the economic impact of sharp falls in exports from the periphery will be reduced by a further drop in imports related to the weakness of domestic demand. But this is clearly scant consolation and the bleak outlook for exports from these economies compared with the better outlook for Germany is a serious blow to hopes of rebalancing.