Innovation: How your phone can tell if an earthquake’s coming
have less capital than others will have trouble in terms of their stock prices,” says Nikhil Srinivasan, chief investment officer of Italian insurer Assicurazioni Generali.
Deutsche Bank offered last month to buy back some bonds, and it found few takers. That shows an “investor preference to retain exposure” to it, the bank said in a Feb. 29 statement.
Some investors say the markets have overreacted this year. Banks have, after all, improved their capital levels since the crisis, says Martin Wilhelm, founder of money manager IfK, which holds Deutsche Bank bonds. “It’s a bad start, but banks can turn things around this year just like a soccer team can climb the league tables,” he says.
It certainly will be easier to build capital if business improves, just by hanging on to the earnings instead of paying dividends. But there are headwinds, starting with bad loans. Europe’s lenders lost about $600 billion in the U.S. subprime debacle, then piled up more bad debt when consumers and companies fell behind during long recessions in several countries.
The International Monetary Fund estimates there’s $1 trillion of bad debt on European banks’ balance sheets. For Italian banks, bad loans constitute almost 20 percent of total loans outstanding, meaning they’re not making any money on a big chunk of assets. And with interest rates at rock-bottom lows, it’s hard for banks across Europe to earn much on the good loans, either. Ireland and Spain are the only two euro zone members that forced their banks to clean up. The banks had to sell dud loans to asset management companies set up by the government at deep discounts. The cleanups cost the governments a lot of money, but now the banks can finance economic growth. Under new European Union rules, governments can’t finance such a cleanup unless they first force some bank creditors to take losses. That’s called a “bail in,” as opposed to the bailouts funded only by taxpayers.
Politicians in some countries “are resisting a cleanup because bailing in creditors will touch corporate deposits or wealthy savers,” says Harald Benink, a finance professor at Tilburg University in the Netherlands and chairman of the European Shadow Financial Regulatory Committee, a watchdog group.
Lousy financial markets have come along to make things worse. Investors are fretting over banks’ potential exposure to falling commodity prices and volatile emerging markets. Barclays said its investment bank division had its first quarterly loss in at least two years, as trading revenue slumped.
Growth isn’t easy to find in more conventional banking lines, either. Deutsche Bank bought a retail bank in 2010 to better compete against Germany’s 409 savings banks and 1,047 cooperative banks. After years of eking out profits, the acquired unit is on the chopping block. The cutthroat local market is further complicated by the existence of Landesbanks, partially owned by German states. Europe lacks the depth of U.S. capital markets. Companies are less likely to issue stocks or bonds, and so depend more on bank lending for financing. Weak banks can quickly become a drag on the economy. “The banks just don’t seem equipped to be able to cope with it,” says Stewart Richardson, chief investment officer of London-based RMG Wealth Management. “We need bank lending to the private sector to continue to grow, and the risk is actually that it begins to fall.”