Falling bank stocks
The year 2016 has brought a new basket of troubles for the world banking stocks which are down everywhere. Financial stocks have declined by 19% in America. The overall European banking index has declined by 24pc. On the other hand, Japanese banks' shares have plunged by 36% in the last one month, Italian banks' by 31% and Greek banks' by a whopping 60pc. The Financial Select Sector SPDR Trust, an exchange-traded fund that tracks the performance of the financial stocks in the Standard & Poor's 500, is down 19pc over the past yea. The average financial stock in the S&P 500 is now down 17pc. The US KBW Bank index, covering the biggest commercial lenders, is down 18.5pc for this year alone. The FTSE-Eurofirst 300 Banks index has fallen even more precipitately. It is down 38.17pc from last year's peak. While the KBW index trades at slightly less than 90pc of book value, European banks trade at only 64.5pc. They were trading at book value less than a year ago.
The turmoil in Europe affects big banks as well as smaller ones. It has hurt such banking giants as Société Générale and Deutsche Bank both of which saw their shares fall by 10pc as well as giants outside it such as Barclays (based in Britain) and Credit Suisse (Switzerland). The French bank's fourth quarter profits were about 400 million euros short of analysts' expectations due to which Its shares plunged 11pc. Bank profits could suffer more this year because of problems like market volatility, new regulations, low oil prices and persistently low interest rates. Interest rates in most of the developed world are still at record lows, which means much smaller margins for the banks.
In the US, the Fed raised rates for the first time in a decade in December. But markets do not believe that the Federal Reserve will follow through with the four rate rises that its governors have forecast for this year. The downfall of European banking stocks is a matter of concern given the efforts made in recent years to make them more robust, both through capital-raising and tougher regulation. It may be recalled here that euro-zone banks issued over €250 billion of new equity between 2007, when the global financial crisis began, and 2014, when the ECB took charge of supervising them. Before taking on the job, it minutely examined the books of 130 of the euro zone's most important banks and found only modest shortfalls in capital.
The growing weakness of European banking shares has much to do with the wider worries about the world economy. A slowdown in global growth is one of many risks. Another is that the negative interest rates which are adversely affecting banks' profits. The loss in Japanese bank shares took an ugly turn following such a decision in late January. Investors in European banks are worried not only about the disappointing growth but also a possible move deeper into negative territory by the ECB in March. On February 11 Sweden's central bank cut its benchmark rate from -0.35% to -0.5%, which sent Swedish bank shares into a tailspin.
The woes of European banks have other causes as well. According to experts, the basic problem is that there are too many banks in Europe and that many are not profitable enough because they have clung to flawed business models. European investment banks also lack depth in domestic capital markets. Moreover, most banks in America and Europe are weighed down with bad and non-performing loans. Unless these fundamental weaknesses are removed, the banking industry will remain mired in trouble.