European banks slide on Turkish lira fears

Shares in Europe’s major banks lost further ground on Monday, as concerns about Turkey’s currency crisis spread to other emerging markets.

The eurozone banking equity index was down 1.6%, hovering near its lowest level in 2018 and falling for the fourth session in a row.

Turkey’s lira pulled back from a record low against the dollar on Monday morning after the central bank pledged to provide liquidity and cut reserve requirements for Turkish banks, but the currency’s meltdown continued to shake global markets. The lira has lost most than 40% of its value so far in 2018.

The Russian rouble hit its lowest level since early 2016, under pressure from the lira and investors’ concerns about new US sanctions against Russia.

Shares in European banks were hit across the board for the second trading session in a row, with those exposed to Turkey and other emerging markets suffering the steepest losses.

“There is a panic move on all emerging market currencies, the stress spreads on the South African rand, the Indian rupee or the Mexican peso,” said analyst Alexandre Baradez from brokerage IG Group.

Shares in Spain’s BBVA, Dutch bank ING and Italy’s UniCredit, which all have units in Turkey, shed more than 3%, extending Friday’s losses. BNP Paribas fell 1%.

Analysts at JPMorgan Cazenove and Deutsche Bank calculated the impact on the four banks of a potential exit from Turkey, including the writedown of their assets there and the loss of intergroup funding. The JPMorgan report said the hit on the core capital would be “a significant but manageable” 87 basis points for ING and 53 basis points for BBVA.

UniCredit’s core capital ratio would benefit from not having to set aside money for forex losses linked to the lira depreciation. BNP would have a limited capital impact of three basis points.

Deutsche Bank saw worstcase scenario equity losses for the banks at 12% of group equity for BBVA, 4% for UniCredit and ING, and under 2% for BNP Paribas. “This is not our base case, but even if it were to occur, the impact should be manageable for European banks,” it said.

A BNP Paribas spokesperson declined to comment on the analysts’ figures.

UniCredit and ING did not immediately comment. BBVA did not comment on the analysts’ data but a spokesperson for the bank noted that BBVA CEO Carlos Torres Vila recently said that every 10% depreciation of the lira in Turkey leads to an impact of about two basis points on the bank’s capital ratio.

European banks with large businesses in emerging markets, such as Societe Generale in Russia and Santander in Mexico, also saw their shares losing ground on Monday. Santander fell 2.5% and Societe Generale dipped 1.3%.

SOCIETE GENERALE IN RUSSIA AND SANTANDER IN MEXICO ALSO SAW THEIR SHARES LOSING GROUND