US bank­ing shares plum­met on eco­nomic slow­down fears

The Pak Banker - - FRONT PAGE -

Shares of large banks and other fi­nan­cial stocks were pum­melled on Wall Street Mon­day as fears of a US eco­nomic slow­down height­ened wor­ries over de­te­ri­o­rat­ing credit qual­ity. US banks were broadly lower, but the hard­est-hit in­cluded Bank of Amer­ica, Cit­i­group, Gold­man Sachs and Mor­gan Stan­ley, all down 6.0 per­cent or more in af­ter­noon trade.

But the sec­tor sell­off ex­tended to Europe as well, with Ger­man gi­ant Deutsche Bank plung­ing 9.5 per­cent and France's So­ci­ete Gen­erale drop­ping 6.1 per­cent, re­spec­tively. A slow­ing econ­omy trans­lates into higher loan de­faults, weaker credit qual­ity and lower in­ter­est rates, all of which are bad for bank prof­its, said Jim Sine­gal, an an­a­lyst of banks and pay­ment com­pa­nies at Morn­ingstar.

A bad econ­omy also de­presses cap­i­tal mar­kets ac­tiv­ity, which is es­pe­cially im­por­tant to the earn­ings of Gold­man Sachs and Mor­gan Stan­ley, he said. "A broad down-day that's sort of re­flec­tive of over­all eco­nomic fears is go­ing to be am­pli­fied in bank shares," he said.

The losses came on a grim day for Euro­pean and US stocks over­all, with ma­jor indices in both re­gions off about 2.5 per­cent or more as US oil prices closed un­der $30 a bar­rel.

In­vestors also shed shares of pay­ment com­pa­nies. Credit card oper­a­tors Visa and Mastercard fell 6.8 per­cent and 3.3 per­cent. PayPal Hold­ings lost 6.1 per­cent, while e-com­merce pay­ment com­pany First Data sank 12.7 per­cent.

The oil slump is "driv­ing eco­nomic fears in gen­eral," Sine­gal said. "Peo­ple are look­ing at the slide in en­ergy prices as a symp­tom that the global econ­omy is de­te­ri­o­rat­ing."

Adding to the woes are the stream of poor earn­ings from Euro­pean banks in re­cent days.

Amid the bleak Euro­pean eco­nomic out­look and per­sis­tently low in­ter­est rates, the banks are fac­ing "death by thou­sand cuts" from tougher reg­u­la­tions and cap­i­tal rules, said Uni­Credit chief econ­o­mist Erik Nielsen

Low equity prices could com­pel "the fa­mous down­ward spiral" of banks be­ing forced to raise more equity, ne­ces­si­tat­ing more as­set sales, Nielsen said in a client note Sun­day.

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