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Bill Fitzpatrick: Central Banks May Be Coming To Their Senses · Bloomberg Intelligence

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  Speaker 1: Matt Miller here with PIM Fox, and we're gonna bring
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  Speaker 1: in Bill Fitzpatrick right now global equity analysts and Manu
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  Speaker 1: Life Asset Management UH to talk about the Bank of
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  Speaker 1: Japan and international equities. And Bill, let me start with
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  Speaker 1: the b o J because it's I think such an
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  Speaker 1: exciting story. Um, but they kind of disappointed markets today.
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  Speaker 1: They didn't lower interest rates though into further negative territory.
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  Speaker 1: Does that mean that they get negative rates are bad
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  Speaker 1: for banks? Yes, I think they finally figured that out.
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  Speaker 1: And the good news is that other policy makers around
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  Speaker 1: the globe I think around the same page. Oh, absolutely,
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  Speaker 1: dragging has sent a very clear message that bank equity
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  Speaker 1: prices matter. I think you're unlikely to see them go
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  Speaker 1: further negative in Europe, and in fact, whatever policymaker moves
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  Speaker 1: you see, I think there's going to be a notion
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  Speaker 1: to protect the bank stocks. And I think that's that
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  Speaker 1: has to happen in Europe only because the whole economy
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  Speaker 1: is financed by the banks. They don't have a very
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  Speaker 1: deep capital markets. So I think that message is is uh,
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  Speaker 1: it's finally coming through. I think that's very encouraging. Bill.
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  Speaker 1: And what if you could describe for people in your
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  Speaker 1: in your in your mind, what are the problems in
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  Speaker 1: European Union banks? While there are there are several h
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  Speaker 1: The first problem is that you're just in a low
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  Speaker 1: growth economy. UH, so you're not seeing a lot of
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  Speaker 1: loan growth. It's very difficult for them to grow the
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  Speaker 1: loan book. Uh. The second component, which I think is
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  Speaker 1: probably most pressing today, is that we never really got
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  Speaker 1: the bad assets off the balance sheets. So if you
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  Speaker 1: think back to the tarp here in the US that
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  Speaker 1: was done all the way back in two thousand and eight,
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  Speaker 1: two thousand nine with cleans the balance sheets and we're
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  Speaker 1: able to get the banking environment operating smoothly right away.
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  Speaker 1: We never really did that here. Now a few countries did.
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  Speaker 1: They did in Spain, they've done in Ireland. Uh, not
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  Speaker 1: to say that they're growing dramatically, but they did a
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  Speaker 1: nice job there to clean up the balance sheets. But
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  Speaker 1: we still haven't done that in Italy. Uh. That's the
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  Speaker 1: biggest overhang today. And until we can address that problem,
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  Speaker 1: I think you're going to see the bank stocks are
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  Speaker 1: probably going to be stagnant. Does this mean that you'd
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  Speaker 1: be willing to take on more risks outside of bank stocks? Well,
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  Speaker 1: I think generally speaking, Uh, there's a lot of value.
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  Speaker 1: There's certainly a lot of value in the banking system
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  Speaker 1: in Europe and Japan. And I think once we get
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  Speaker 1: this uh this issue addressed in Italy, which will likely
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  Speaker 1: be in the next couple of days, only because we
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  Speaker 1: get the stress tests out today. But the only speaking,
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  Speaker 1: there's this plain better value in Europe and Japan than
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  Speaker 1: there is in the United States. Uh. There's a few
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  Speaker 1: of the more stable areas of healthcare and consumer stables
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  Speaker 1: where you're seeing relatively lofty valuations, but any of the
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  Speaker 1: more cyclical areas have sold off dramatically, and I think
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  Speaker 1: there are a lot of good opportunities there. I just
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  Speaker 1: wanted to bring our listeners the headline just crossing the
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  Speaker 1: Bloomberg terminal, the Italian Treasury is saying that no public
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  Speaker 1: backstop is needed for Montepachi, and we know that of course, uh,
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  Speaker 1: Montapachi is going to try and raise money here an
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  Speaker 1: additional five billion dollars and get rid of its bad loans,
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  Speaker 1: as we've been talking about for the past couple of hours.
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  Speaker 1: Past hour, I should say, um, I wonder who would
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  Speaker 1: want to buy stock in an Italian bank? I mean,
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  Speaker 1: isn't it just a losing investment. Well, it's certainly for
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  Speaker 1: the deeper value and deeper value oriented investor UH somewhere
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  Speaker 1: who just seems to navigate in the distressed areas in
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  Speaker 1: the marketplace. But I have to say, just see look
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  Speaker 1: at the headline. Now, this is very encouraging that there
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  Speaker 1: is private capital available. So you have to assume that
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  Speaker 1: this money is coming from folks who have who have
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  Speaker 1: really fowered the balance sheets of these different banks. Uh,
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  Speaker 1: they're getting very favorable terms. I'm sure I haven't seen
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  Speaker 1: exactly what kind of a discount of getting it's going
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  Speaker 1: to be massively dilutive to existing shareholders. So UH, this
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  Speaker 1: outside money is going to committed very favorable terms. But
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  Speaker 1: I think there's an effort to say, hey, you know,
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  Speaker 1: we think the balance she's collectively in Italy are going
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  Speaker 1: to be cleansed. And if if that's the case, now
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  Speaker 1: there's about a thirty or forty billion eurosword fall collectively
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  Speaker 1: in Italy. But if there are efforts to address those
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  Speaker 1: in unison, then there may be some value in this
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  Speaker 1: particular Italian bank. We are seeing UM in the news
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  Speaker 1: that JP, Morgan, Goldman, Sachs, UH, City Bank America they're
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  Speaker 1: all going to get together with a bunch of European
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  Speaker 1: banks as well to UH to underwrite this share sale.
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  Speaker 1: So it looks like those banks at least believe that
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  Speaker 1: they can do it. Bank, UH Bank, Amounted, Depasta d Sienna.
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  Speaker 1: I want to remind listeners was bailed out twice already
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  Speaker 1: since UM, since two thousand nine. But if we get
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  Speaker 1: past this issue, does that make the EU stronger and
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  Speaker 1: a better place to invest? Oh? I think so if
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  Speaker 1: this goes a long way, Like I said, there are
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  Speaker 1: other areas that have already removed some of the bad assets. Uh.
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  Speaker 1: That's not to say there aren't a few more of
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  Speaker 1: bad apples out there that will need to be addressed.
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  Speaker 1: But what we'd really like to see is move from
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  Speaker 1: a balance sheet concern to an income statement. And if
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  Speaker 1: we can get beyond the balance sheet saying, Okay, the
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  Speaker 1: income statement is still weak. We know that interest rates
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  Speaker 1: are so low, the margins are down, that's going to
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  Speaker 1: be a weight. But if there's a comfort in the
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  Speaker 1: balance sheets, then there's really no reason for these bank
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  Speaker 1: stocks to trade at half their book value. So I
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  Speaker 1: think there are real good opportunities for value investors there. Well,
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  Speaker 1: let me just challenge a little bit here, because I
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  Speaker 1: note that you're describing the European Banking Authority is due
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  Speaker 1: to give its a stress test results for sixteen that
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  Speaker 1: will take place at ten pm Central European time. That's
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  Speaker 1: just in about the six minutes from now. And there's
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  Speaker 1: another study that has done from the New York University
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  Speaker 1: that says that the European banks such as HSBC, Deutsche Bank,
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  Speaker 1: UNI Credit that they're gonna need to raise two hundred
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  Speaker 1: and eighty billion dollars in capital in order to meet
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  Speaker 1: the same standards that have been specified by the US
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  Speaker 1: Federal Reserve. Uh. Do you concur that they're gonna need
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  Speaker 1: that much money? Well, I don't know exactly the terms
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  Speaker 1: of the scenario that would require a capital raise of
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  Speaker 1: that magnitude, but I suspect that's an armageddon end of
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  Speaker 1: the world scenario that would trigger such a capital needs
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  Speaker 1: UH to that degree. Uh. So you again, I haven't
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  Speaker 1: seen the survey in great details, So Uh, technically that
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  Speaker 1: may be true, you know, but I think we'd have
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  Speaker 1: to see just a very massive recession. It's a trigger
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  Speaker 1: of conditions like that, and I just think that's that's
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  Speaker 1: unlikely today. So Europe's largest banks, they've gotten rid of
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  Speaker 1: about thirty of their market value that's declined since UH
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  Speaker 1: as of June, and UM their average ratio of market
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  Speaker 1: value to book value was like se that's got to
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  Speaker 1: be concerning for for the bank's managements. Well, that's certain.
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  Speaker 1: That's a message that the marketplace isn't very comfortable with
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  Speaker 1: with what resides on the balance sheet. And it's also
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  Speaker 1: a reflection of the returns. So the book you really
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  Speaker 1: can't talk about the book value without talking about the
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  Speaker 1: return on equity. UH. And for most of these banks,
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  Speaker 1: you're still seeing high single digit leaves, but from evaluation perspective,
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  Speaker 1: and get that up to ten, which is uh, certainly
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  Speaker 1: nothing spectacular. It's just a head of your cost of equity. Uh.
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  Speaker 1: And then I think you're probably look for valuations should
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  Speaker 1: push closer to book value. So if you go from
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  Speaker 1: seven tents of book value, as you say, uh, towards
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  Speaker 1: book value or maybe just a slight premium, you're talking
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  Speaker 1: about a gain that is available. So and we think
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  Speaker 1: if the balance you took good uh. And we are
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  Speaker 1: seeing from the earnings releases that have come out thus far,
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  Speaker 1: credit quality has improved. Uh. You know, then there's no
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  Speaker 1: reason why why we can't get closer to that temper
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  Speaker 1: cent r OE. And you also have nice downside protection
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  Speaker 1: if you think the balance sheets are good, so reasonable
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  Speaker 1: downside protection and very good upside. I think that's uh,
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  Speaker 1: that's an area where investors should look to find some games.
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  Speaker 1: Thank you very much, sure for joining us. A. Bill
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  Speaker 1: Fitzpatrick is a global equity analyst at Manual Life Asset Management,
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  Speaker 1: looking for some value and some bargains, perhaps in European
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  Speaker 1: banking shares. I'm pim Fox. My co host today Matt
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  Speaker 1: Miller filling in for Kathleen Hayes. We're gonna take you
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  Speaker 1: through to the close and also get you details about
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  Speaker 1: the European Banking Authority and its stress tests. They will
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  Speaker 1: be released at the market close, four pm Wall Street time.
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  Speaker 1: This is Bloomberg h