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DEXIA: target price downgraded to 2 €

DEXIA: target price downgraded to 2 €

5.10.2011 9:48

The Board of Directors of Dexia (1,04 EUR, 2,98%) held a meeting on 3 October to decide about the fate of Dexia. The Board asked the CEO, in consultation with all relevant governments and supervisory authorities, to prepare the necessary measures to resolve the structural problems penalising the Group’s operational activities.

Yesterday, the Belgian and French authorities reached an agreement about the creation of a bad bank that would benefit from state guarantee(We estimate € 50bn additional + € 32bn existing).

The first scenario entails the creation of a “bad bank” with all the run-off commitments to be financed and covered by the proceeds of a full break-up and divestment of the Dexia Group whereas the Belgian and French government would guarantee the funding of the “bad bank”.

The second scenario entails the creation of a “bad bank” while maintaining the rest of the Group intact. This is a scenario that resembles the most the approach that Dexia is currentlyusing. The Legacy Portfolio Management division would be transferred to the “bad bank”, to which could be added Dexia Crediop and Dexia Sabadell (if needed). The guarantees already in place for part of the LPM division could be expanded to the entire “badbank” which would also have to be capitalized.

The third scenario is a mix between the two previous scenarios.

Our Sum-Of-The-Parts valuation does not yet integrate any Basel III deduction (E.g. Dexia loan to Holding Communal, minority stakes) that would reduce the core capital but not necessarily valuation.

Our View:
Our SOTP valuation which integrates an estimated € 1.7bn net cost associated with the creation of a “bad bank” and a € 0.5bn hair-cut for Dexia Crediop and Dexia Sabadell, would leave a valuation of € 2.0 per share, which we set as a new target price. Valuation and target price can however still change materially pending further developments and disclosure of the proposed measures. We therefore change our recommendationfrom Accumulate to Hold, given lack of visibility.

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