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Banks across Europe witness stock drops, banking crisis looming over their heads

Claire Peterson on March 30, 2023

Banks – On Friday, the European financial crisis took an unexpected twist, with bank stocks tumbling.

Investors had a role, acting on their lingering anxieties about previous bank crises spreading into the broader industry.

Stocks

The European Stoxx Europe 600 Banks index tracks the top 42 European and British banks.

It finished 3.8% lower.

Despite this, the index has dropped roughly 18% from its peak in late February.

Similarly, the London FTSE 100 index sank 1.3%.

Deutsche Bank (DB) shares fell 14.5% before rebounding to close down 8.5%.

UBS and Credit Suisse’s shares declined 3.6% and 5.2%, respectively.

Deutsche Bank

Deutsche Bank’s costs for protecting itself against a potential debt default have grown in recent days.

According to S&P Market Intelligence data, the bank’s five-year CDS hit 203 basis points on Thursday, the highest level since early 2019.

On Friday, German Chancellor Olaf Scholz declared that there was no need to be concerned about Deutsche Bank.

“It’s a very profitable bank,” said Scholz.

EU leaders issued a joint statement in Brussels applauding the European banking sector for its stability and proper capital and liquidity levels.

Michael Hewson, chief market analyst at CMC Markets, backed up the news, saying:

“The rising price of insuring CDS senior debt is weighing on Deutsche Bank, as well as other European banks, on concerns over the impact of rising rates on the wider economy and banks’ balance sheets.”

Interest rate hike

The European Central Bank kept its commitment to hike interest rates by half a percentage point this week.

Their decision was based on their conviction that inflation posed a greater economic threat than the present global financial crisis.

After data showing an unexpected increase in inflation in February, the Bank of England raised its main interest rate by a quarter percentage point on Thursday.

Market jitters, according to Susannah Streeter, Hargreaves Lansdown’s head of money and markets, have also contributed.

“Worries about contagion are again rearing up even though more deposits appear to have been flowing into the German lender since the banking scare erupted,” she said.

“It is thought to have capital reserves well in excess of regulatory requirements.”

Analysts believe Deutsche Bank’s announcement on Friday that it will repay one of its bonds five years ahead of schedule jolted markets.

Such a move is typically interpreted by investors as proof that the company is financially strong and capable of repaying creditors on schedule.

US crisis effect

While investors were initially optimistic, the bankruptcies of Silicon Valley Bank and Signature Bank in the United States, as well as Credit Suisse’s emergency takeover, harmed their confidence.

Investors may have construed the comments as Deutsche Bank’s anxiety about the banking industry’s future.

Some investors, according to Capital Economics deputy chief markets economist Jonas Goltermann, are concerned that banks are overcompensating.

Furthermore, he argued that the bank’s actions looked to have backfired.

According to a person close to the situation, Deutsche Bank’s decision to repay the bond ahead of time was planned rather than a reaction to recent market events.

Under the rules enacted in the aftermath of the 2008 financial crisis, the bond would have lost its eligibility as a sort of regulatory capital later on.

The bank, according to the source, replaced the bond in February by releasing a matching type of bond.

Similarly, Commerzbank (CRZBF) in Germany and Société Générale in France incurred considerable losses, with losses of 5.5% and 5.9%, respectively, at the end of the quarter.

Swiss banks remain wary

UBS, Switzerland’s largest bank, paid 3 billion Swiss francs ($3.25 billion) for its Swiss rival in an emergency takeover arranged by the Swiss government this week.

The move helped to calm markets following the collapses of Silicon Valley Bank and Signature Bank earlier this month.

Yet, investors were concerned on Friday.

UBS and Credit Suisse failed following a Bloomberg report that the US Department of Justice was investigating their employees’ connections to help Russian oligarchs dodge Western sanctions.

The DOJ sent subpoenas to the individuals prior to UBS’s acquisition of Credit Suisse, according to the story.

Meanwhile, employees of major US banks are being examined.

According to CMC Markets’ Hewson, the DOJ probe into UBS contributed to widespread price weakening across European banks.

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Bank stocks become priority after fears of recession

Jason Robinson on March 13, 2023

Bank – Analysts predict that major economies would either stagnate or enter a recession.

As a result, in 2023, investors will defy conventions by flocking to huge bank equities.

Banks

The Stoxx Europe 600 Banks index, which includes 42 major European banks, increased by 21% between January and late February.

It exceeded the Euro Stoxx 600, its larger benchmark index, to hit a five-year high.

Yet, the KBW Bank, which tracks 24 of the largest American banks, increased by 4% in 2023, well surpassing the S&P 500.

The two bank-specific indices have risen since their lows in October.

The economy

So far, the economic situation is less favorable.

The biggest economies in the United States and the European Union are expected to increase somewhat more than last year.

In the United Kingdom, however, output is anticipated to fall.

Former Treasury Secretary Lawrence Summers believes that a rapid recession poses a risk to the United States at some time.

But, central banks were obliged to hike interest rates as a result of widespread economic weakness and unsustainable inflation.

In any case, it has aided banks by allowing them to earn higher profits on consumer and commercial loans as more money is deposited into savings accounts.

Although interest rate increases have kept big bank stocks stable, fund managers and analysts believe investor and analyst confidence in their capacity to weather economic storms because the 2008 financial crisis has also contributed to the situation.

“Banks are, generally speaking, much stronger, more resilient, more capable to [withstand] a recession than in the past,” said Roberto Frazzitta, the global head of banking at Bain & Company.

Interest rate increases

As major countries’ interest rates rose last year, governments took efforts to contain rising inflation.

The huge increases came after a period of cheap borrowing prices, which began in 2008.

The financial crisis devastated the economy, causing central banks to cut interest rates to historic lows in an attempt to stimulate consumption and investment.

Central banks have done nothing for more than a decade.

Investors seldom gamble on banks in an environment where lower interest rates imply reduced lender profitability.

Thomas Matthews, senior markets economist at Capital Economics:

“[The] post-crisis period of very low interest rates was seen as very bad for bank profitability, it squeezed their margins.”

But, the rate-hike cycle beginning in 2022, as well as a few indicators of weakness, have changed investors’ views.

Fed Chair Jerome Powell cautioned on Tuesday that interest rates may grow faster than expected.

Returning investors

The increased prospect of shareholder gains has converted investors.

According to Ciaran Callaghan, Amundi’s director of European market research, the average dividend yield for European bank shares is now 7%.

The S&P 500 dividend yield is 2.1%, while the Euro Stoxx 600 yield is 3.3%, according to Refinitiv data.

Also, European bank stocks have risen in the last six months.

According to Thomas Matthews, Capital Economics beat its American rivals because interest rates in nations that use euros are closer to zero than in the US, implying that investors have more to gain from rising rates.

He also said it may be attributed to Europe’s unexpected turn of events.

Wholesale natural gas prices in the region reached a new high in August of last year, but have since fallen down to pre-Ukraine conflict levels.

“Only a few months ago, people were talking about a very deep recession in Europe compared to the US,” said Matthrew.

“As those worries have unwound, European banks have done particularly well.”

Structural changes

At the present, the European economy is still struggling.

As the economy slows, bank stocks take a blow since bank profits are linked to borrowers’ capacity to repay loans and satisfy consumers’ and companies’ need for further credit.

Banks, on the other hand, are better positioned to sustain loan defaults than they were in 2008.

Authorities proactively enacted legislation mandating institutions to have a significant capital buffer in the event of a loss during the global financial crisis.

Lenders must also have sufficient cash (or fast convertible assets) to repay depositors and other creditors.

According to Luc Plouvier, senior portfolio manager at Dutch asset management firm Van Lanschot Kempen, banks have undergone structural changes in the last decade.

“A lot of the regulation that’s been put in place [has] forced these banks to be more liquid, to have much more [of a] capital buffer, to take less risk,” he noted.

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