Fall­ing bank stocks

The Pak Banker - - EDITORIAL -

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.

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