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Slide 1: 09 June 2008 Global Equity Research Macro (Strategy) Global Equity Strategy Research Analysts Andrew Garthwaite 44 20 7883 6477 andrew.garthwaite@credit-suisse.com Jonathan Morton 1 212 538 9853 jonathan.morton@credit-suisse.com Luca Paolini 44 20 7883 6480 luca.paolini@credit-suisse.com Marina Pronina 44 20 7883 6476 marina.pronina@credit-suisse.com Mark Richards 44 20 7883 6484 mark.richards@credit-suisse.com Sebastian Raedler 44 20 7888 7554 sebastian.raedler@credit-suisse.com STRATEGY Peripheral Europe: where next? When exchange rates don’t adjust, domestic price levels have to, and this tends to create far more of an asset bubble (e.g. Hong Kong 1993, Middle East today) or deflation (Germany 1998–2003). Stay short of domestic Spain and Ireland. (1) It is probable that house prices will fall c20% from here. The house price/wage ratio is 50% and 60% above average in Spain and Ireland (compared to 3% and 35% in the US and UK), respectively. The OECD claims housing is overvalued by 16% and 33% in Spain and Ireland, respectively, compared to 10% in the US. (2) Housing is still very oversupplied: starts per capita are nearly 4 times the US in both countries and would have to fall 30% and 50%, respectively, to get to previous cycle lows. (3) Leverage looks extreme, with credit/GDP of 40% above trend. (4) GDP growth is abnormally geared to property, with finance and construction at peak accounting for 38% and 45% of jobs growth in Spain and Ireland, respectively. The PMIs are now consistent with close to zero growth. (5) There has been a big loss of competitiveness: the Spanish current account deficit is 10% of GDP and Ireland’s is 6%. Spain and Ireland have the lowest export exposure to emerging markets, and Spain has the worst productivity record in the OECD. What can be done? 80% of mortgage debt is linked to short rates, which are now expected to rise in Europe. Thus, the only choice is significant deflation (and yet the real effective exchange rate is 10% and 21% overvalued in Spain and Ireland, respectively) or massive fiscal easing (with government debt/GDP low in Spain and Ireland). In our view, both will be required, resulting in Irish/Spanish bond spreads rising to 70bps from 20bps currently, threatening all domestic stocks (utilities suffer from a higher discount rate). Is it in the price? Not in Spain. Its respective P/B and P/E relatives are still 37% and 15% above the average. Domestic Spain has outperformed 1% YTD. Domestic Spanish banks trade on a 10% premium on pre-tax, pre-provisioning profits to continental Europe banks. Irish banks are cheap, but still trade on a 27% premium to UK banks (on underlying profits). Stocks with high exposure to Spain or Ireland that are cheap to short and Underperform-rated are Inditex and Bank of Ireland. The following are expensive on Credit Suisse HOLT, trades on a premium to its peer group and has negative earnings momentum: Iberia, Bankinter, Mapfre, Ryanair, NH Hoteles, Zardoya-Otis and Vocento. What about elsewhere? Greece has a current account deficit of 14% and Italy is close to recession, but we would not short banks in these countries for the following reasons: (1) Customer leverage is low: credit/GDP is less than half the average of Ireland and Spain. (2) Bank leverage is low, with particularly high deposit ratios. (3) In Italy and Greece, 35% and 30% of bank lending is to property compared with 64% and 84% in Ireland and Spain, respectively. (4) Housing is less overvalued. (5) The cost/income ratios are higher, implying more self-help potential. (6) Italian banks trade on a 28% discount to Europe. In Italy, though, with debt/GDP of 96%, bond spreads could widen beyond 100bps (from 38bps now), and thus we would sell domestic plays with negative earnings momentum, such as Mediaset and Mediolanum. DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Slide 2: 09 June 2008 Spain and Ireland: more to go for on the downside Country factors should start to dominate again as the ECB starts to raise rates. In an environment where interest rates and the exchange rate can't adjust, there is even more onus on domestic prices and asset prices to decline in those countries which are the most overleveraged, the most reliant on short-term debt, have the most overvalued housing market and have the most overvalued currencies. A year ago, we published a long report (After the boom, dated 14 May 2007) suggesting that investors should be very short of domestic Spain and Ireland. Clearly this has become a consensus call in the same way as shorting domestic UK had become a consensus call by the end of last year, but this does not mean that the consensus is wrong. Indeed, sometimes the most money is to be made on these calls. Macro problems are getting worse: Spain and Ireland (1) Confidence indicators are deteriorating much faster than in other European countries. Figure 1: Business confidence is collapsing... Figure 2: ... followed by consumer confidence 70 65 60 55 50 45 Spain - composite PMI Ireland- composite PMI Euro-area - composite PMI 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Spain Ireland Euro-area 40 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: PMIpremium -2.5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED, number of standard deviations from long-run average According to our economics team, the regional PMIs are consistent with a GDP growth close to zero in Ireland and Spain (see Appendix 1). The rise in unemployment is even more alarming, especially if compared to the European average. The rise in unemployment reflects weakness in the finance/construction sector (which have accounted for 45% and 38% of total Irish and Spanish employment growth, respectively, in 2007), as shown below. Global Equity Strategy 2
Slide 3: 09 June 2008 Figure 3: Unemployment rates in Spain, Ireland and EU15 Figure 4: Employment growth in Finance/Construction 12% 11% 10% 9% 8% 7% 6% 5% 4% 2003 Spain Ireland EU 15 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 2003 Spain Ireland 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED (2) The slowdown in construction activity and house prices is accelerating significantly, as shown below. Figure 5: House prices in Spain and Ireland Figure 6: Construction activity in Spain and Ireland 20 18 16 14 12 10 8 6 4 2 Spain House prices y/y% (lhs) Ireland House prices y/y% (rhs) 35 30 25 20 15 10 5 0 -5 -10 -15 50 40 30 20 10 0 -10 -20 -30 -40 Spain building starts y/y% (lhs) Ireland houses completed y/y% (rhs) 30 20 10 0 -10 -20 -30 0 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 -50 -40 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED These are the results of the lagged response to higher ECB rates (more than 80% of mortgages are variable-rate) but also of the extreme overvaluation of the property markets. Critically, the Spanish and Irish property markets remain very expensive, as shown below. House prices relative to wages are still 50% above average in Ireland and 60% above average in Spain. This compares to the US and UK, where the house price/wage ratios are 3% and 35% above the average, respectively. Global Equity Strategy 3
Slide 4: 09 June 2008 Figure 7: House prices – deviation from “fair” value (IMF) Figure 8: House prices to wage ratio still very high 5.5 5.0 4.5 4.0 Spain - House prices/wages (lhs) Ireland- House prices/wages (rhs) 9.50 8.50 7.50 6.50 3.5 5.50 3.0 2.5 2.0 4.50 3.50 1.5 2.50 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: IMF. ”House prices gaps” based on affordability, disposable income, interest rates, credit growth, equity prices and working age population Source: OECD, © Datastream International Limited ALL RIGHTS RESERVED And residential rental yields are low relative to bond yields, as shown below. Figure 9: Residential yields minus bond yields in Spain and Ireland are the lowest in Europe 500 Residential y ields minus bond y ields 400 300 200 100 0 -100 -200 Austria Ireland Portugal Netherlands Italy Denmark Poland UK Finland France Russia Switzerland Spain Hungary Germany Norway Sweden Belgium Source: Global Property Guide And, looking at the level of housing starts, the correction is far from over. Our Spanish banks analyst, Santiago Lopez Diaz, believes that a decline of up to 40% from a 2006 peak of 750k is realistic. A good measure of oversupply is the level of housing starts/permits per capita. Again, Ireland and Spain score at the top, with a level which is about 4 times higher than in the US and UK, as shown below. We can also see that housing starts per capita in Spain and Ireland are only back to levels seen 3 years ago, whereas in the US housing starts per capita are back to levels last seen in 1991. If housing starts per capita fell to the average level seen in US, then there would be a 60% fall in housing permits. Global Equity Strategy 4
Slide 5: 09 June 2008 Figure 10: Housing starts/permits per capita very high in Spain and Ireland 18 Housing starts/permits per Capita (x1000) 16 14 12 10 8 6 4 2 0 Portugal Ireland France US UK Germany Spain Figure 11: Housing starts/permits per capita in Spain and Ireland 25.4 20.4 15.4 10.4 5.4 0.4 Q4 1992 Q4 1994 Q4 1996 Q4 1998 Q4 2000 Q4 2002 Q4 2004 Q4 2006 Spain - Housing permits per capita (lhs) Ireland- Housing permits per capita (rhs) 20.00 15.00 10.00 5.00 0.00 25.00 Source: © Datastream International Limited ALL RIGHTS RESERVED, Global Property Guide Source: OECD, © Datastream International Limited ALL RIGHTS RESERVED We would highlight that housing starts are collapsing in Spain and Ireland, but to return to previous cycle lows they would have to fall by an additional 30% and 50%, respectively, as shown below. Figure 12: Spanish housing starts, '000s annual rate 250 230 210 190 170 150 130 110 90 70 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse European economics team Figure 13: Irish housing starts, '000s annual rate 80 70 60 50 40 30 20 10 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse European economics team Of course, the Spanish and Irish economies are very sensitive to the property market. Construction investment accounts for a disproportionately large share of Spanish and Irish GDP, 11% and 8%, respectively (13% share of total employment). Global Equity Strategy 5
Slide 6: 09 June 2008 Figure 14: Construction as a share of GDP and total employment (4Q 2007) Construction as % GDP Ireland Spain Finland Austria Netherlands Euro area France Portugal Italy Germany United Kingdom US 8 10.9 5.9 7.1 5 5.9 6.1 5.5 5.6 3.5 6.2 4.8 Construction employment as a % of total employment 13.2 13 7.5 na 5.8 7.7 7 na 7.7 5.4 4.7 5.3 Source: Credit Suisse European economics team However, they have contributed 0.8% to annual GDP growth over the past 3 years in both Ireland and Spain. (The construction and financial sectors have accounted for 46% and 20% of total Irish and Spanish employment growth, respectively, since 2004.) (3) Excessive leverage for Spain/Ireland, as shown in the high level of private domestic debt relative to GDP per capita. Figure 15: Domestic credit to GDP and GDP per capita 200% Domestic credit to private sector /GDP(%) Netherlands 160% Spain Portugal Ireland 120% Greece 80% Austria Germany Italy France Belgium Finland 40% 15000 30000 45000 GDP Per capita (US$) 60000 75000 Source: © Datastream International Limited ALL RIGHTS RESERVED High leverage is also reflected in high interest rate payments, which therefore curb discretionary spending. Global Equity Strategy 6
Slide 7: 09 June 2008 Figure 16: Spanish housing interest rate payments as % GDP Figure 17: Irish housing interest rate payments as % GDP 7.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse European economics team 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse European economics team An additional problem is that in Spain and Ireland a high proportion of mortgage debt is floating, making these countries much more vulnerable to concerns that European inflation remains above target (and that the ECB will postpone rate cuts). Figure 18: High proportion of variable-rate mortgages in peripheral Europe 100 90 80 70 60 50 40 30 20 10 0 United Kingdom Luxembourg Netherlands Finland Ireland Italy Germany Portugal Denmark Average Belgium Sweden Greece France Spain Austria Source: OECD, European Mortgage Federation (4) Big loss of competitiveness, as shown by the large current account deficits and the overvalued real effective exchange rate (due to respective Spanish and Irish domestic inflation rising, cumulatively, 11% and 12% faster than Euro-area average since 1997). Global Equity Strategy 7
Slide 8: 09 June 2008 Figure 19: Spain and Ireland have big current account deficits... 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Spain - current account/GDP (lhs) Euro-area - current account/GDP (lhs) Ireland- current account/GDP(rhs) 8% 6% Figure 20: ...reflecting a significant loss of competitiveness (Real effective exchange rate) 150% Spain Germany Ireland France 140% 4% 2% 0% 120% 130% -2% -4% -6% 100% 110% -8% 90% Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: OECD This probably means that we need to see a 20% and 10% decline in the real effective exchange rate in Ireland and Spain, respectively, just to get back to a ‘neutral’ level. We suspect that given the problems in housing/construction, we have to see the real effective exchange rate undershoot. Since productivity growth is very weak (as we show below), this can only be achieved by a sharp decline in wage costs relative to the rest of Europe, maybe by as much as 10–15% relative to Europe in Spain and more so in Ireland. This has to be very bad for domestic consumer-based stocks in these countries. (5) Very low productivity growth. Spain, in particular, has experienced an almost unprecedented decline in labour productivity in the last decade, as shown below. (The good news is that productivity growth has been positive since 2006.) Figure 21: Productivity growth and level very low in Spain 55 50 GDP per Hour (USD PPP) France UK Germany Ireland Spain 45 40 35 30 25 20 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: The Conference Board Global Equity Strategy 8
Slide 9: 09 June 2008 (6) Low exposure to emerging markets, as shown below. Figure 22: Ireland and Spain have relative low exposure to emerging markets 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Ireland Exports to developing countries, % total UK Spain European Union France Germany Austria Italy Greece Source: IMF In addition, Spain is more exposed to competition from emerging markets than the European average (35% of total imports come from emerging economies, 31% in the EU). The positives: fiscal surplus and demographics We, of course, acknowledge that both Ireland and Spain have the fiscal flexibility to support their economies (both countries have budget surpluses and central government debt/GDP ratio of 21% and 30%, respectively). Figure 23: Fiscal debt to GDP (central government, 2007) 120 100 80 60 40 20 0 United States Australia Austria Ireland Portugal Denmark Netherlands United Kingdom Switzerland Italy Finland Canada Czech Republic Slovak Republic Germany Hungary Sweden Norway Belgium Mexico Turkey Greece Poland Spain France Gov ernment debt/GDP Source: OECD But investors always underestimate the degree to which fiscal positions deteriorate into a sharp economic downturn as tax revenues decelerate. In a normal downturn we would expect the cycle alone to add about 2-3 pp to the fiscal deficit; for instance, in 2000–03 the deficit rose from 0% to 3.1% of GDP in the Euro-area. (Government revenues rose 1.5% and spending 9% in real terms.) Global Equity Strategy 9
Slide 10: 09 June 2008 Spain has just announced a fiscal stimulus package worth €10bn over 2 years. This € amounts to 0.9% of GDP, including an income tax rebate of €400 for this year and next; a € programme to retrain unemployed construction workers; and a plan to promote more housing subsidized by the state. However, we feel that we are likely to get very aggressive fiscal spending. After all, even in the good times Italy and France were running budget deficits of more than 2% of GDP, and of course the Maastricht criteria allow countries to run budget deficits of 3% of GDP or more in a recession. Thus, we believe that there could be massive fiscal easing, as this is the only way to counter the deflationary threat to these economies. If the exchange rate can’t devalue and rates can’t fall, then all the hard work has to be done via domestic prices, wage levels and fiscal policy. In addition, population growth has been very strong in the last decade, especially in comparison with other European countries, and it remains so. This is, of course, an offset for declining productivity growth. Figure 24: Solid fiscal balance in Spain and Ireland... 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Source: © Datastream International Limited ALL RIGHTS RESERVED Figure 25: …and exceptional population growth (2007) 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 -14.0 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Brazil US UK JP 20102015 Spain - fiscal balance/GDP (lhs) Ireland- fiscal balance/GDP(rhs) Euro-area Ireland Source: © Datastream International Limited ALL RIGHTS RESERVED We worry that often demographic inflows are a function of opportunities as well as wage differentials. Both clearly have diminished. Below, we show that the boost to the supply side in Spain in terms of population growth has largely come from immigration. Figure 26: Population growth in Spain Figure 27: Immigration has been a key driver of the supply side stimulus in Spain 3,000 3.5 Spain C ontribution of Migration toPopulationC hange 2,500 3.0 2.5 2.0 (%) 1.5 1.0 0.5 0.0 -0.5 1980-1981 1987-1988 1994-1995 2001-2002 2008-2009 2015-2016 Spain World 2,000 1,500 1,000 500 0 -500 -1,000 19501955 19601965 19701975 19801985 19901995 20002005 20202025 Natural Population Change Change due to M igration Source: OECD Source: OECD Russia China Spain India Global Equity Strategy 10
Slide 11: 09 June 2008 Valuation not attractive We calculate that roughly 50% of the Spanish and Irish markets are related to domestic earnings. We show in aggregate that Spain is looking expensive on a P/E and P/B basis relative to history, while Ireland is not. Figure 28: Spain 12m fwd P/E relative to Europe ex-UK 120% Figure 29: Ireland 12m fwd P/E relative to Europe ex UK 110% 110% 100% 90% 100% 80% 90% 70% 80% 60% 70% Price to Forward earnings - Spain relative to Europe Ex UK 50% Average 60% Jul-90 40% Jul-90 Price to Forward earnings - Ireland relative to Europe Ex UK Average Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research On a price/book basis, Spain looks even more expensive and Ireland a bit cheaper. Figure 30: Spain price-to-book relative to Europe ex-UK 130% Figure 31: Ireland price-to-book relative to Europe ex-UK 130% 120% 120% 110% 110% 100% 100% 90% 90% 80% 80% 70% 60% Price to Book - Spain relative to Europe Ex UK Average 50% Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 60% Jul-90 70% Price to Book - Ireland relative to Europe Ex UK Average Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Source: MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Source: MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research It is clearly far more relevant to focus on domestic area, and here we find that domestic Spanish stocks have slightly outperformed, while domestic Irish stocks have underperformed the European market since January. Global Equity Strategy 11
Slide 12: 09 June 2008 Figure 32: Domestic Spain relative to Europe and Domestic Ireland relative to Europe 1.20 1.10 1.00 Domestic Spain rel Europe 0.90 Domestic Ireland rel Europe 0.80 0.70 0.60 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Source: MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Banks We are still short of the Spanish domestic banks: First, their performance has been surprisingly strong – though BBVA and Santander, which have a big earnings exposure to booming Latin America (respectively 45% and 34% of net income) have performed better than domestic banks, as shown below. Figure 33: Spanish banks have outperformed European banks Figure 34: Domestic Spain banks relative price performance 0.5 0.5 0.4 0.4 0.4 0.4 0.4 Spain banks vs. EMU banks (rhs) 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Jul-98 Mar-00 Nov-01 Spanish domestic banks rel Cont Europe banks Spanish domestic banks rel BBVA & SAN Jul-03 M ar-05 Nov-06 Jul-08 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Global Equity Strategy 12
Slide 13: 09 June 2008 Second, domestic Spanish banks are expensive relative to their European peers on both P/E and P/B (they still trade at a 25% premium on forward P/E). Figure 35: Spanish domestic banks price/book relative 3.20 Domestic Spain banks PB rel to Europe ex UK banks 2.70 Domestic Spain banks PB rel to Spain market Figure 36: Spanish domestic bank 12m fwd P/E relative 160% 150% 140% Spain domestic banks 12m fwd P/E rel to Europe x UK banks Spain domestic banks 12m fwd P/E rel to Spain mkt 2.20 130% 120% 1.70 110% 1.20 100% 90% 0.70 80% 70% Jul-95 0.20 Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Source: MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research And, above all, domestic Spanish banks trade on a 10% premium to the rest of Europe on price to pre-tax, pre-provisioning profits. Irish banks trade on a discount. Figure 37: Domestic Spanish banks trade on price to provisioning profits Company BANKINTER, S.A. BANCO PASTOR, S.A. BANCO POPULAR ESPANOL BANCO SABADELL BANCO BILBAO VIZCAYA ARGENTARIA SA BANCO SANTANDER SA Spain average (median) Spain average ex BBVA & BSCH (median) European average (median) Country ESP ESP ESP ESP ESP ESP Loan-todeposit 2.41 1.64 2.29 2.09 1.46 1.90 1.99 2.19 1.58 Leverage (tangible) 28.6 17.1 18.7 19.7 26.0 22.9 21.3 19.2 25.9 Price-tobook 2.8 1.9 2.3 2.0 2.3 1.7 2.1 2.1 1.6 12m fwd PE 12.8 9.9 9.3 10.4 8.1 8.6 9.6 10.2 8.6 Pre-prov pre- Credit Suisse tax PE Rating 6.6 UNDERPERFORM 5.8 UNDERPERFORM 5.5 UNDERPERFORM 6.5 UNDERPERFORM 5.1 OUTPERFORM 5.6 OUTPERFORM 5.7 6.2 5.6 Source: Credit Suisse HOLT Both Spanish and Irish banks have very high exposure to property and construction, as shown below. Figure 38: Exposure of banks to property and construction, % total lending Spain UK Portugal Ireland US France Japan Germany Italy Greece % of bank lending to property and construction 2000 Current 59% 84% 63% 73% 54% 64% 39% 64% 43% 55% 27% 44% 33% 41% 35% 37% 30% 35% 30% % point increase 25% 10% 10% 25% 12% 17% 8% 2% 5% - Source: Credit Suisse European banks team. Credit Suisse research Global Equity Strategy 13
Slide 14: 09 June 2008 It is only now that we are beginning to see the slowdown in loan growth and a rise in provisioning as unemployment starts to rise. Clearly, in both economies loan growth has to slow further and there is significant operationally leverage to this. Moreover, provisioning has to rise a lot further. Figure 40 shows that NPLs could easily rise to 3% from 1% currently if the unemployment rate rises by 2 pp. Figure 39: Loan growth in Spain and Ireland (y/y%) Figure 40: Provisioning rises as unemployment rises 40% 35% 30% 25% 20% 15% 10% 5% 0% 1996 9.0% Spain Ireland 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1998 2000 2002 2004 2006 2008 NPLs (lhs) Spain umployment rate (rhs) 21 19 17 15 13 11 9 7 2Q89 4Q91 2Q94 4Q96 2Q99 4Q01 2Q04 4Q06 Source: Credit Suisse research Source: © Datastream International Limited ALL RIGHTS RESERVED We do acknowledge that Spanish banks tended to have more conservative LTV ratios (a capital charge is applied if LTV is higher than 80%), far less use of SIVs (owing to the penalty imposed by the Bank of Spain) and stricter NPL standards. Also, into a default scenario, banks can take control of all the assets of an individual (not only his property). From this point of view, Spanish banks have potentially better recovery ratios than their European counterparts. Irish banks have performed worse, and look relatively cheaper against both their history and their peer group. Figure 41: Irish banks have underperformed in the last 12M... Figure 42: ...and they look much cheaper now 125% 9 8 7 6 5 4 3 2 Ireland banks vs. EMU banks (lhs) 115% 105% 95% 85% 75% 65% 55% Jul-95 Price to forward Earnings - Ireland Banks rel. to Europe xUK Banks 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Global Equity Strategy 14
Slide 15: 09 June 2008 But when we look at pre-provisioning profits, we find that valuations are again not particularly cheap: Irish banks trade on a 27% premium to UK banks on underlying profits and BoI has nearly 40% of its exposure to UK commercial and residential real estate. Figure 43: Irish banks trade on a discount to European peers on price to provisioning profits Company ANGLO IRISH BANK CORPORATION PLC ALLIED IRISH BANKS PLC BANK OF IRELAND Irish average (median) UK average (median) European average (median) Co untry IRL IRL IRL Loan-to deposit 1.48 1.90 n/a 1.69 1.53 1.58 Leverag e 24.2 19.3 31.8 24.2 36.6 25.9 Price-tobook 2.1 1.4 1.3 1.4 1.4 1.6 12m fwd PE 5.4 6.2 5.5 5.5 5.6 8.6 Pre-prov p re- Credit Suisse tax PE Ratin g 4.5 4.2 4.0 4.2 3.3 5.6 NEUTRAL UNDERPERFORM UNDERPERFORM Source: Credit Suisse HOLT Other domestic stocks We believe investors should be short of domestic Spain and Ireland not only because of the growth outlook but also because a likely widening in bond spreads, as fiscal positions deteriorate, would require a higher discount rate on all domestic stocks We screen for stocks with more than 40% of their revenue from Spain and Ireland. Below we show stocks with downside on HOLT and negative earnings momentum. We also include those companies rated Underperform by Credit Suisse analysts. The stocks that trade on a premium to their global peer group with negative earnings momentum and expensive on HOLT are: Mapfre, Bankinter, Vocento, NH Hoteles, Iberia, ZardoyaOtis and in Ireland, Ryanair and Irish Continental Group. Figure 44: Domestic Spanish stocks that have downside on HOLT and negative earnings momentum OR are rated Underperform by Credit Suisse analysts -----P/E (12m fwd) -----rel to mkt % above/below average 162% 34% 59% 47% 39% 53% 13% n/a 9% -24% 9% 30% n/a 31% 12% -27% ------ P/B ------rel to mkt % above/below average 85% 26% 100% -3% -24% 10% -12% n/a 5% -25% -24% -10% n/a 29% -20% 8% Yield (08e) HOLT Implied CFROI Price, % less 5-year change to average best 2.9 1.7 -17.9 0.6 1.8 4.9 1.9 6.7 2.9 -2.4 -4.2 1.3 -0.6 -2.7 n/a -1.0 -38.6 -15.3 -61.8 -9.4 -27.8 -40.7 -42.1 -33.5 -1.6 20.5 9.8 -13.2 10.6 15.4 n/a -32.7 ----------- Momentum -------------3m Sales 1m EPS 3m EPS CFROI Momentum score Valuation score Overall score Consensus (buy less holds & sells) -100.0 50.0 -33.3 -100.0 -39.1 75.0 -81.8 -42.9 66.7 24.1 -72.4 -100.0 -30.0 -9.1 -62.5 -42.9 Name Abs rel to Industry Abs FCY DY Credit Suisse rating Cia Esp Petroleos Abertis Infraestr Zardoya-Otis Aguas De Barcelona Iberia Lineas Aere Ebro Puleva Sa Nh Hoteles Vocento Viscofan Sa Inditex Banco Popular Espa Bankinter Sa Bco Esp De Credito Acerinox Sa Bco Pastor Mapfre 28.5 16.7 27.1 22.4 13.9 14.7 16.7 19.2 14.0 13.3 9.0 13.1 8.7 11.2 9.8 9.5 n/a 99% 201% n/a 127% 90% 113% 131% 86% 95% 97% 141% n/a 96% 106% 105% 3.6 2.7 31.4 1.8 0.9 1.6 1.3 2.3 2.5 5.3 2.0 2.1 1.7 1.9 1.7 1.9 3.8% 5.8% 3.5% 2.0% 12.1% -3.3% 4.9% 6.8% 8.1% 4.9% n/m n/m 5.7% 6.8% n/m n/m 1.7% 3.0% 3.4% 2.4% 2.7% 2.8% 2.4% 3.2% 3.0% 3.7% 5.2% 3.5% 5.5% 2.8% 3.1% 4.3% 0.0 2.0 1.0 2.0 2.0 1.0 3.0 3.0 6.0 6.0 1.0 7.0 5.0 2.0 4.0 -1.4 0.9 -0.7 -0.4 0.6 0.1 -1.5 1.7 1.4 -0.2 0.2 -0.2 -3.4 n/a 1.2 -6.9 -1.3 -0.2 0.4 -13.9 -3.9 -2.7 -13.5 -0.8 0.4 -1.0 -2.1 0.0 -0.4 4.0 4.0 -14.2 -0.4 -3.6 -1.9 -28.0 -8.1 -8.5 -27.3 -1.1 -0.5 -2.9 -5.2 -1.3 -6.5 6.4 9.2 2.9 0.8 -0.1 -3.7 -0.2 2.3 0.4 -3.6 -1.4 -1.0 -1.3 -4.7 -1.2 -4.0 4.5 3.1 0.5 1.0 0.0 0.5 0.0 1.0 1.0 0.0 0.5 1.0 0.0 0.5 0.0 0.0 2.0 2.0 1.5 3.0 3.0 2.5 3.0 3.0 3.0 4.0 3.5 7.0 7.0 2.5 8.0 6.0 5.0 7.0 NR NR NR NR NR NR NR NR NR Underperform Underperform Underperform Underperform Underperform Underperform Neutral 2.0 -10.3 Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, IBES, Credit Suisse HOLT Global Equity Strategy 15
Slide 16: 09 June 2008 Figure 45: Domestic Irish stocks that have downside on HOLT and negative earnings momentum OR are rated Underperform by Credit Suisse analysts -----P/E (12m fwd) -----rel to mkt % above/below average 1% -23% -33% 42% 42% ------ P/B ------rel to mkt % above/below average -57% -44% -51% -92% 54% Yield (08e) HOLT Implied CFROI less 5-year average -3.4 -8.6 -11.7 -0.5 2.6 Price, % change to best -4.8 62.6 89.2 -11.4 -13.1 ----------- Momentum -------------3m Sales 1m EPS 3m EPS CFROI Momentum score Valuation score Overall score Consensus (buy less holds & sells) -14.3 17.7 -33.3 100.0 n/a Name Abs rel to Industry Abs FCY DY Credit Suisse rating Ryanair Hldgs Allied Irish Banks Bank Of Ireland Iaws Group Irish Contl Group 14.6 6.0 5.2 13.9 11.6 133% 65% 56% 85% 116% 1.6 1.1 1.0 0.3 2.4 -5.0% n/m n/m 3.6% 2.3% 0.0% 6.7% 8.7% 1.1% 4.2% 2.0 7.0 7.0 3.0 1.0 -3.9 -2.0 -2.9 0.1 -0.1 -12.1 -0.4 -3.9 0.0 NM -35.0 -1.9 -6.7 1.1 NM 1.2 -0.5 2.9 14.6 NM 0.5 0.0 0.5 1.5 0.0 3.5 7.0 8.5 4.5 1.0 Neutral Underperform Underperform NR NR Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, IBES, Credit Suisse HOLT Shorting stocks One of the criticisms with our view of Spain and Ireland is that it is shared by many investors. But consensual positions can still be profitable. Below, we show how many shares are currently borrowed as a percentage of those available (the “utilization” column in the table). This gives an indication to the practicalities of going short. Allied Irish stands out as a stock that does not appear to have been aggressively sold short. Note how large the number is for some of the Spanish banks. For more information please speak to the Credit Suisse Stock Lending desk. Figure 46: Cost of shorting domestic Spanish and Irish stocks that are rated Underperform by Credit Suisse analysts Utiliz ation, % of available stocks borrowed 2% 5% 12% 29% 34% 51% 55% 56% 64% 65% 68% 72% 74% 75% 79% Indicative borrow fee* 0.35% fee 0.4% fee 0.35% fee 0.75% fee 0.4% fee 11% fee 2.5% fee 4.5% fee 8% fee 15% fee 10% fee 1% fee 5% fee 10% fee 7.5% fee Consensus (buy less holds & sells) 18 -14 -33 -43 24 -43 -9 -30 -33 -92 -100 -39 -82 -63 -72 Company Allied Irish Banks Ryanair Hldgs Bank Of Ireland Mapfre Inditex Vocento Ac erinox Sa Bc o Esp De Credito Zardoya-Otis Bc o De Sabadell Bankinter Iberia Lineas Aere Nh Hoteles Bc o Pastor Banco Popular Espa CS rating Underperform Neutral Underperform Neutral Underperform NR Underperform Underperform NR Underperform Underperform NR NR Underperform Underperform Short Interest 2,510,000 1,520,000 20,630,000 25,000,000 20,390,000 700,000 13,500,000 4,350,000 4,760,000 46,740,000 13,210,000 52,190,000 3,860,000 4,460,000 106,580,000 Source: Data Explorer, Credit Suisse, *Credit Suisse Stock Lending desk Italy and Greece – are they different? Superficially, Italy and Greece may look as vulnerable as Spain and Ireland. They have slowing growth and consumer confidence and slowing house price inflation, as well as high current account deficits and real effective exchange rates – which is, of course, hurting their competitiveness. Global Equity Strategy 16
Slide 17: 09 June 2008 Figure 47: OECD lead indicators (6M ann.) for Italy and Greece Figure 48: Consumer confidence in Italy and Greece 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Italy Greece Euro-area 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 Italy Greece Euro-area 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 Source: OECD 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 Source: © Datastream International Limited ALL RIGHTS RESERVED Figure 49: Italy and Greece have overvalued currencies… 120% Italy 115% Germany Greece France Figure 50: ...and high negative current accounts 6% 5% 4% 3% Italy - current account/GDP (lhs) Greece- current account/GDP(rhs) 0% -2% -4% -6% -8% -10% -12% -14% -16% 110% 2% 1% 105% 0% -1% -2% 100% 95% -3% -4% Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 90% Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Source: OECD Source: © Datastream International Limited ALL RIGHTS RESERVED We, of course, acknowledge that Italy and Greece have government debt/GDP ratios of 96% and 105%, respectively (which make aggressive fiscal stimulus packages unlikely), and Greece has a current account deficit of 14% - which must be financed by capital inflows. However, the two countries look better than Spain and Ireland for the following reasons: (1) Low consumer leverage (low household debt/GDP). Global Equity Strategy 17
Slide 18: 09 June 2008 Figure 51: Italy and Greece have relatively low leverage 120% Household debt/GDP 100% 80% 60% 40% 20% 0% United States Portugal Ireland United Kingdom Austria Netherlands Finland Spain Japan Europe France Greece Italy Belgium Poland Czech Republic Luxembourg Hungary Sweden Germany Slovenia Norway 90 Source: © Datastream International Limited ALL RIGHTS RESERVED (2) Low financial product penetration. Figure 52: Life premiums as a share of GDP and GDP per capita 14% South Africa 12% Taiwan United Kingdom Ireland 10% Hong Kong Life premiums, % of GD Japan South Korea France Finland Belgium 6% Portugal Singapore Italy 4% Malaysia Chile Hungary Israel Germ any Spain Sweden Netherlands US Australia Canada Austria Switzerland Denmark 8% 2% Thailand China Poland Philippines Brazil Czech Republic Argentina Mexico Colombia Indonesia Russia 0% 0 10 20 New Zealand Greece 30 40 50 60 70 80 GDP per capita, US$ '000s Source: OECD, Credit Suisse Insurance Team (3) Less of a housing bubble. During the last 10 years, house prices have risen 102% in Italy and 150% in Greece, against an increase of 240% in Ireland and 190% in Spain. As a consequence of that, rental yields relative to bond yields remain well below Spanish or Irish levels. According to our European bank team, there is no evidence to suggest that there has been a housing bubble in either Italy or Greece – so banks’ exposure to the sector is not a big concern. Global Equity Strategy 18
Slide 19: 09 June 2008 Figure 53: Greece and Italy have higher rental yields than Ireland and Spain 350 300 250 200 150 100 50 0 -50 -100 -150 -200 Ireland Spain Norway Residential y ields minus bond y ields Austria Denmark Portugal Italy France UK Finland Russia Poland Greece Switzerland Hungary Source: © Datastream International Limited ALL RIGHTS RESERVED, Global Property Guide (4) Higher exposure to emerging markets. Italy and Greece exports to emerging markets are 33% and 39% of their total exports, respectively, among the highest in Europe. As shown on page 9, the respective figures for Spain and Ireland are 24% and 12%. (5) Unemployment has not yet started to rise. Figure 54: Unemployment rates are not rising in Italy and Greece 12% IT 11% 10% 9% 8% 7% 6% 5% 2003 2004 2005 2006 2007 2008 Greece EU 15 Source: © Datastream International Limited ALL RIGHTS RESERVED Superficially, on the banks, there is also less downside risk as: (1) High cost-cutting potential in Italy. The cost/income ratio in Italy is still relatively high, indicating self-help is still a theme. Germany Sweden Belgium Global Equity Strategy 19
Slide 20: 09 June 2008 Figure 55: European banks: median cost-income ratio by country 90 80 70 60 50 40 30 20 10 0 DNK ITA USA ESP SWE FRA PRT AUT BEL DEU NOR GBR GRC IRL Cost-to-income ratio Source: Credit Suisse HOLT (2) Lower exposure to the construction/real estate sectors (see page 13). We do not get a detailed breakdown of the loan book for Italian or Greek banks, but our analysts believe that their exposure to the sector does not pose obvious risks. Additionally, the exposure to property developers is rather small – in Greece below 3%, according to our analyst, Petros Katsoulas. Total exposure to property and construction is 30% for Greece and 35% for Italy. Thus, Italian banks are much more of a play on the corporate which looks generally in a better state than the consumer sector. (3) Very stable, low-cost deposit base, as shown in the ratio of sight deposits to total private loans. And along with this, they have structurally much lower rates of leverage, thus their RoE are much more sustainable. Figure 56: Sight deposits/Total private loans 60% 53% 50% 41% 40% 30% 20% 10% 0% G R IT FI DE BE AT ES SI FR NL IE PT 38% 33% 33% 30% 27% 26% Figure 57: Leverage 45 40 35 30 25 Leverage: tangible assets / tangible equity 24% 22% 22% 22% 20 15 10 5 0 USA DNK ITA ESP SWE GBR NOR GRC DEU FRA AUT PRT BEL IRL Source: Credit Suisse European Banks team Source: Credit Suisse HOLT (4) More attractive valuations for Italian banks. P/B of Italian banks are at a 20-year low relative to continental European banks, while on relative PE Italian banks look close to fair value. Global Equity Strategy 20
Slide 21: 09 June 2008 Figure 58: Italian banks attractive on relative PB... 2.1 Italy banks PB rel. to EMU 1.9 1.7 1.5 1.3 1.1 0.9 0.7 0.5 1990 Figure 59: ...but relative P/E is close to long run average 150% 141% 133% 124% 115% 106% 98% 89% 80% Jul-95 Price to forward Earnings - Italy Banks rel. to Europe xUK Banks 1992 1994 1996 1998 2000 2002 2004 2006 2008 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Greek banks trade at “normal” PB levels but look slightly expensive on a relative forward P/E basis. Figure 60: Greek banks relative P/B 5 4.5 4 3.5 3 Greece banks PB rel. to EMU Figure 61: Greek banks relative P/E 160% 140% 120% 100% 2.5 2 1.5 1 0.5 1990 80% Greek banks 12m fwd P/E rel to Europe Xuk banks 60% Average 1992 1994 1996 1998 2000 2002 2004 2006 2008 40% Jul-95 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Source: © Datastream International Limited ALL RIGHTS RESERVED Source: I/B/E/S, MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research Global Equity Strategy 21
Slide 22: 09 June 2008 Figure 62: Italian and Greek bank valuations Company GREEK POSTAL SAVINGS BANK EMPORIKI BANK OF GREECE S.A. AGRICULTURAL BANK OF GREECE ALPHA BANK SA BANK OF PIRAEUS S.A. EFG EUROBANK ERGASIAS SA NATIONAL BANK OF GREECE, S.A. CREDITO EMILIANO SPA BANCA POPOLARE DI MILANO Country GRC GRC GRC GRC GRC GRC GRC ITA ITA Loan-todeposit 0.77 1.22 0.85 1.62 1.56 1.39 0.94 1.57 1.50 1.94 1.96 1.90 1.86 1.70 1.78 1.22 1.82 1.58 Leverage 17.9 31.5 17.0 16.9 16.4 19.2 24.7 17.6 15.2 12.6 21.3 18.7 28.8 30.3 21.2 17.9 19.9 25.9 Price-tobook 2.4 3.1 2.4 3.0 2.8 3.0 3.5 1.7 1.1 1.6 1.0 1.0 0.9 1.3 1.3 3.0 1.2 1.6 12m fwd PE 10.5 12.8 9.8 9.8 9.8 9.0 8.9 8.8 8.3 17.1 8.9 9.7 8.4 7.9 8.8 9.8 8.8 8.6 Pre-prov pre- Credit Suisse tax PE Rating 21.3 9.2 5.9 7.7 7.8 6.8 7.6 5.1 4.0 8.6 2.9 7.7 5.5 5.1 8.2 7.7 5.3 5.6 n/r n/r NEUTRAL OUT PERFORM n/r OUT PERFORM OUT PERFORM n/r n/r n/r RESTRICTED OUT PERFORM NEUTRAL OUT PERFORM NEUTRAL ITA BANCA CARIGE SPA - CASSA DI RISPARMIO DI G BANCA MONTE DEI PASCHI DI SIENA SPA ITA UBI BANCA BANCO POPOLARE UNICREDITO ITALIANO SPA INTESA SANPAOLO SPA Greece average (median) Italy average (median) European (median) ITA ITA ITA ITA Source: Credit Suisse HOLT Diverging growth = diverging bond spreads? We can see already that PMI differentials are increasing and bond spreads are widening. However, we find it very surprising that widening fundamentals – Germany still growing at a solid pace, peripheral Europe falling into recession - are still not reflected appropriately in bond spreads (country risk), as shown below. Figure 63: Country PMI dispersion is very high 4.7 4.3 3.9 3.5 3.1 2.7 2.3 1.9 1.5 Mar-00 PMI Index: Dispersion of 4mma (LHS) Bond spreads: Dispersion of 4mma 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 May-01 Jul-02 Sep-03 Nov-04 Jan-06 Mar-07 May-08 Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research. Dispersion calculated as the standard deviation over the last 4 months We think that bond spreads would have to rise significantly from here, reflecting also the higher risk of a break-up of the Euro. Clearly, widening economic performance makes a uniform monetary policy much less effective and vulnerable to political intervention. Higher bond spreads in peripheral Europe will of course raise the cost of capital for companies operating there, with a negative impact on earnings multiples. We would not be Global Equity Strategy 22
Slide 23: 09 June 2008 surprised by a recession scenario, with the ECB raising rates and the Spanish and Irish bond spreads rising 50bps or higher. In Italy though, with debt to GDP of 96%, bond spreads could widen beyond 100bps (from 38bps now), and thus we would sell domestic plays, and those with negative earnings momentum in particular. Figure 64: Domestic Italian stocks that have downside on HOLT and negative earnings momentum OR are rated Underperform by Credit Suisse analysts -----P/E (12m fwd) -----% domestic sales 77.1 100.0 42.4 60.6 91.8 94.0 74.7 76.3 70.7 73.2 rel to mkt % above/below average -3% n/a -13% -46% -13% -39% -22% -11% -18% -20% ------ P/B ------rel to mkt % above/below average 0% n/a -54% -43% -37% -57% -14% 20% -50% -28% Yield (08e) HOLT Implied CFROI less 5-year average 1.3 1.7 2.5 1.2 2.4 -10.8 3.4 0.2 -0.2 -6.2 Price, % change to best -16.7 -21.7 -69.9 -19.3 -5.9 -48.4 -28.0 32.9 8.2 77.8 ----------- Momentum -------------3m Sales 1m EPS 3m EPS CFROI Momentum score Valuation score Overall score Consensus (buy less holds & sells) 83.3 73.3 89.5 -7.7 22.2 -10.0 -23.1 9.7 -51.4 -61.5 Name Abs rel to Industry Abs FCY DY Credit Suisse rating Cir-Compagnie Inds A2A Spa Autogrill Spa Rcs Mediagroup Intesa Sanpaolo Mediolanum Mondadori Edit(Arn Enel Telecom Italia Spa Mediaset 13.0 15.6 13.6 10.9 8.8 12.0 10.4 11.4 10.6 11.7 99% 112% 91% 75% 95% 132% 71% 68% 90% 80% 1.1 2.4 4.2 1.1 1.0 2.9 2.3 2.3 1.0 2.5 -42.1% 7.7% 3.9% 8.1% n/m n/m 12.7% 2.4% 19.2% 24.7% 2.9% 3.7% 3.6% 5.5% 7.3% 5.7% 7.8% 6.9% 5.8% 8.2% 2.0 3.0 4.0 5.0 5.0 5.0 5.0 4.0 7.0 7.0 0.4 -0.4 0.3 -1.0 1.4 -8.9 0.5 0.6 0.1 -0.1 -6.7 -5.1 -2.9 -10.4 -2.7 -8.7 -2.0 -0.6 -3.8 -1.4 -26.9 -10.1 -8.4 -12.9 -6.0 -14.6 -5.1 3.0 -10.7 -4.6 NM -15.6 10.3 -2.9 1.5 -10.5 -1.5 7.4 -2.9 0.3 0.7 0.0 1.0 0.0 1.0 0.0 0.5 1.5 0.5 0.5 2.7 3.0 5.0 6.0 6.0 6.0 6.5 5.5 8.5 8.5 NR NR NR NR Neutral Underperform NR Underperform Underperform Underperform Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, I/B/E/S, Credit Suisse HOLT In terms of relative performance, Greece and Spain have done better than Ireland and Italy in the last 12 months, as shown below. We would highlight that this performance divergence is partially explained by developments in country risk, as shown in Figure 66. (Yield spread against Germany has widened by 17bps in Spain and by a much higher 31bps in Ireland.) Figure 65: MSCI indices performance... Figure 66: ...partially explained by perceived country risk 125 115 105 95 85 75 65 05/07 Source: MSCI Italy Ireland Greece Spain 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 05/07 07/07 Italy Ireland Greece Spain 09/07 11/07 01/08 03/08 05/08 07/07 09/07 11/07 01/08 03/08 05/08 Source: © Datastream International Limited ALL RIGHTS RESERVED Global Equity Strategy 23
Slide 24: 09 June 2008 Appendix 1 Figure 67: Spain PMI and GDP growth 70 65 Composite PMI, lhs Spain Figure 68: Ireland PMI and GDP growth 1.6 1.4 1.2 1.0 Ireland 58 Manufacturing PMI, lhs 12 10 8 6 4 60 55 54 0.8 50 45 GDP, q/q, rhs 50 0.6 0.4 46 GDP, y/y, 2q ma, rhs 2 0 42 0.2 40 98 99 00 01 02 03 04 05 06 07 08 98 99 00 01 02 03 04 05 06 07 08 Source: Credit Suisse European economics team Source: Credit Suisse European economics team Global Equity Strategy 24
Slide 25: 09 June 2008 Appendix 2 Figure 69: Spain and Ireland domestic (more than 40% domestic sales) non-banks expensive on our scorecard -----P/E (12m fwd) -----rel to mkt % above/below average n/a 162% 47% 7% 110% 13% 59% 53% 34% 1% 19% n/a 42% n/a 35% -34% n/a 14% 26% n/a 31% Abs ------ P/B ------rel to mk t % abov e/below average n/a 85% -3% -50% 37% -12% 100% 10% 26% -57% -1% n/a -92% n/a 119% -8% n/a 6% 13% n/a 29% FCY DY Yield (08e) H OLT Implied CFROI less 5-year aver age n/a 2.9 0.6 1.8 n/a 1.9 -17.9 4.9 1.7 -3.4 0.1 6.7 -0.5 n/a 1.3 n/a n/a -3.8 n/a 2.2 -2.7 Pric e, % c hange to best n/a -38.6 -9.4 -35.1 n/a -42.1 -61.8 -40.7 -15.3 -4.8 -35.6 -33.5 -11.4 n/a 0.3 n/a n/a 18.4 n/a -17.4 15.4 ----------- Momentum -------------3m Sales 1m EPS 3m EPS CFR OI Momentum scor e Valuation sc ore O verall score % domestic sales rel to Industry Consensus (buy less holds & sells ) 84.6 -100.0 -100.0 -100.0 -60.0 -81.8 -33.3 75.0 50.0 -14.3 63.6 -42.9 100.0 46.7 -21.7 23.8 50.0 -20.0 46.7 n/a -9.1 Name Abs Credit Suisse rating Laboratorios Almir Cia Es p Petroleos Aguas De Barc elona Metrovacesa Faes Farma Sa Nh Hoteles Zardoya-O tis Ebro Puleva Sa Abertis Inf raestr Ryanair Hldgs Acs Ac tividades Co Voc ent o Iaws G roup G rifols Sa Union Fenos a Sa Sol Melia Sa O brascon Huar Lain Kerry Group Prosegur Seguridad G lanbia Acerinox Sa 68.2 77.1 78.7 92.8 93.9 44.3 89.5 47.7 51.2 56.0 83.8 100.0 80.6 100.0 59.3 64.4 58.3 64.7 51.7 42.2 42.7 15.2 28.5 22.4 14.9 43.5 16.7 27.1 14.7 16.7 14.6 9.9 19.2 13.9 26.8 13.4 9.7 12.8 12.5 14.1 14.2 11.2 123% n/a n/a n/a 350% 113% 201% 90% 99% 133% 63% 131% 85% 140% 81% 65% 81% 77% 100% 87% 96% 4.1 3.6 1.8 1.8 8.2 1.3 31.4 1.6 2.7 1.6 2.8 2.3 0.3 10.4 2.5 1.6 3.7 2.8 4.8 6.2 1.9 n/a 3.8% 2.0% -49.8% n/a 4.9% 3.5% -3.3% 5.8% -5.0% -30.5% 6.8% 3.6% n/a 2.0% n/a n/a 6.9% n/a 5.8% 6.8% 2.3% 1.7% 2.4% 3.3% 1.1% 2.4% 3.4% 2.8% 3.0% 0.0% 4.6% 3.2% 1.1% 0.7% 3.8% 2.0% 1.8% 1.1% 3.0% n/a 2.8% 0. 0 0. 0 1. 0 1. 0 0. 0 1. 0 2. 0 2. 0 2. 0 2. 0 3. 0 3. 0 3. 0 4. 0 3. 0 5. 0 4. 0 4. 0 4. 0 4. 0 5. 0 n/ a -1.4 -0.7 -0.7 n/ a 0. 1 -10.3 0. 6 0. 9 -3.9 -0.3 -1.5 0. 1 n/ a 1. 2 n/ a n/ a -0.9 n/ a 1. 9 -3.4 3.3 -6.9 0.4 -2.6 NM -2.7 -0.2 -3.9 -1.3 -12.1 2.3 -13.5 0.0 0.2 -0.6 -5.0 1.9 0.0 3.1 NM -0.4 -2.1 -14.2 -1.9 6. 8 NM -8.5 -3.6 -8.1 -0.4 -35.0 5. 3 -27.3 1. 1 -0.5 4. 3 -10.7 3. 4 0. 4 4. 2 NM -6.5 -1.1 2. 9 -3.7 -15.0 1. 0 0. 4 -0.1 2. 3 0. 8 1. 2 -0.3 -3.6 14.6 -0.2 -0.9 -0.9 -1.7 1. 7 1. 6 NM -4.0 0.7 0.5 0.5 0.5 2.0 1.0 0.0 1.0 1.0 0.5 1.0 0.0 1.5 0.7 1.0 0.0 1.3 1.0 2.0 2.0 0.0 0.7 1.5 2.5 2.5 3.0 3.0 3.0 3.0 3.0 3.5 4.0 4.0 4.5 4.7 5.0 5.0 5.3 6.0 6.0 6.0 6.0 NR NR NR NR NR NR NR NR NR Neutral NR NR NR NR Underperf orm NR NR NR NR NR Underperf orm Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, I/B/E/S, Credit Suisse HOLT Companies Mentioned (Price as of 05 Jun 08) Acerinox (ACX.MC, Eu16.52, UNDERPERFORM, TP Eu16.00, OVERWEIGHT) Agricultural Bank of Greece (AGBr.AT, Eu2.54, NEUTRAL, TP Eu2.80, OVERWEIGHT) Allied Irish Banks (ALBK.I, Eu12.34, UNDERPERFORM, TP Eu15.00, OVERWEIGHT) Alpha Bank (ACBr.AT, Eu21.92, OUTPERFORM, TP Eu27.50, OVERWEIGHT) Anglo Irish Bank (ANGL.I, Eu7.86, NEUTRAL, TP Eu11.35, OVERWEIGHT) Banco Espanol de Credito (Banesto) SA (BTO.MC, Eu10.76, UNDERPERFORM, TP Eu12.50, OVERWEIGHT) Banco Pastor (PAS.MC, Eu9.29, UNDERPERFORM, TP Eu9.50, OVERWEIGHT) Banco Popolare (BAPO.MI, Eu12.56, NEUTRAL, TP Eu14.30, OVERWEIGHT) Banco Popular (POP.MC, Eu9.80, UNDERPERFORM, TP Eu11.00, OVERWEIGHT) Banco Sabadell (SABE.MC, Eu6.21, UNDERPERFORM, TP Eu6.50, OVERWEIGHT) Banco Santander Central Hispano SA (SAN) (SAN.MC, Eu12.81, OUTPERFORM, TP Eu17.00, OVERWEIGHT) Bank of Ireland (BKIR.I, Eu7.50, UNDERPERFORM, TP Eu9.00, OVERWEIGHT) Bankinter (BKT.MC, Eu9.27, UNDERPERFORM, TP Eu9.00, OVERWEIGHT) BBVA (BBVA.MC, Eu13.89, OUTPERFORM, TP Eu20.00, OVERWEIGHT) EFG Eurobank Ergasias (EFGr.AT, Eu18.56, OUTPERFORM, TP Eu26.00, OVERWEIGHT) Enel (ENEI.MI, Eu7.18, UNDERPERFORM, TP Eu7.00, UNDERWEIGHT) Inditex (ITX.MC, Eu32.41, UNDERPERFORM, TP Eu27.00, UNDERWEIGHT) Intesa Sanpaolo (ISP.MI, Eu4.05, NEUTRAL, TP Eu5.30, OVERWEIGHT) Mapfre SA (MAP.MC, Eu3.42, NEUTRAL, TP Eu3.47, MARKET WEIGHT) Mediaset (MS.MI, Eu5.11, UNDERPERFORM, TP Eu5.30, UNDERWEIGHT) Mediolanum (MED.MI, Eu3.51, UNDERPERFORM, TP Eu4.34, MARKET WEIGHT) Monte dei Paschi di Siena (BMPS.MI, Eu1.92, RESTRICTED) National Bank of Greece (NBGr.AT, Eu34.12, OUTPERFORM, TP Eu48.00, OVERWEIGHT) Ryanair (RYA.I, Eu3.23, NEUTRAL, TP Eu2.50, MARKET WEIGHT) Telecom Italia (TLIT.MI, Eu1.45, UNDERPERFORM, TP Eu1.40, MARKET WEIGHT) UBI Banca (UBI.MI, Eu16.15, OUTPERFORM, TP Eu21.50, OVERWEIGHT) Unicredito (CRDI.MI, Eu4.32, OUTPERFORM, TP Eu5.70, OVERWEIGHT) Union Fenosa (UNF.MC, Eu41.82, UNDERPERFORM, TP Eu41.50, UNDERWEIGHT) Companies not rated mentioned in the report A2A Spa, Autogrill Spa, Cir-Compagnie Inds, Abertis Infraestr, Acs Actividades Co, Aguas De Barcelona, Bca Carige Spa, Bca Pop Di Milano, Bk Of Piraeus, Cia Esp Petroleos, Credito Emiliano, Ebro Puleva Sa, Emporiki Bank, Faes Farma Sa, Glanbia, Greek Postal Savin, Grifols Sa, Iaws Group, Iberia Lineas Aere, Irish Contl Group, Kerry Group, Laboratorios Almir, Metrovacesa, Mondadori Edit, Rcs Mediagroup, NH Hoteles, Obrascon Huar Lain, Prosegur Seguridad, Sol Melia Sa, Viscofan Sa, Vocento, Zardoya-Otis Global Equity Strategy 25
Slide 26: 09 June 2008 Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows***: Outperform (O): The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months. Underperform (U)**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months. *The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock ratings are relative to the analyst’s industry coverage universe). **In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions. ***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return overlay applied. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 45% (57% banking clients) Neutral/Hold* 41% (55% banking clients) Underperform/Sell* 13% (50% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) 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Slide 27: 09 June 2008 The following disclosed European company/ies have estimates that comply with IFRS: ACX.MC, AGBr.AT, ALBK.I, ACBr.AT, ANGL.I, BTO.MC, BAPO.MI, POP.MC, SABE.MC, SAN.MC, BKIR.I, BKT.MC, BBVA.MC, EFGr.AT, ITX.MC, ISP.MI, MAP.MC, BMPS.MI, NBGr.AT, RYA.I, CRDI.MI, UNF.MC, ENEI.MI, MS.MI, MED.MI, TLIT.MI. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. 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