Plunging Yields Expose Sorry State of US And European Banks (#GotBitcoin?)
After a broad selloff last week, European bank stocks have given up their gains for the year, with valuations of some major lenders at multiyear lows. Plunging Yields Expose Sorry State of US And European Banks (#GotBitcoin?)
The global downdraft in bond yields and rising trade tensions are falling squarely on the shoulders of European banks.
After a broad selloff last week, European bank stocks fell again on Monday, with the valuations of some at multiyear lows. The Euro Stoxx Banks index is down 1.7% in the year to date, compared with an 8% rise in the S&P 500 banks index of U.S. lenders. Shares in Deutsche Bank AG touched an all-time low Monday of €5.85.
It is a sharp reversal from a little over a month ago, when the European bank index had been up as much as 19% for the year.
Driving shares lower: European banks have been buffeted by the recent plunge in Europe’s already low interest rates. German 10-year government bond yields hit a record low of negative 0.21% on Friday. Low rates crimp banks’ net-interest margins, the difference between what banks pay for funding and what they make from loans. The low yields are being driven by worries about the strength of the global economy, making safe assets more attractive.
Investors said they expect the pain for banks to continue until interest rates eventually rise. But many economists don’t expect the European Central Bank to move benchmark rates for years.
“I can’t see a reason to invest in European banks at the moment. They are being hit from all sides,” said Chris Garsten, a European equities fund manager at U.K.-based Waverton Investment Management.
Among the worst performers is French bank Société Générale SA, whose shares are down nearly 20% so far this year and trade for less than a third of their book value, the lowest since 2012 during the throes of Europe’s sovereign-debt crisis.
The ECB last week in its financial stability report slashed forecasts for banks’ return on equity, a key profit measure, indicating more trouble may lay ahead for lenders.
“Profitability continues to fall short of the returns required by investors for the majority of euro area banks,” it said.
President Trump’s announcement on Thursday of possible tariffs on Mexico hit the shares of Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA, two of the region’s largest banks. Both rely on their Mexican operations to offset their slower-growing European businesses.
U.S. bank shares also fell in May because of concerns about the effect of dropping Treasury yields on their lending margins. But American banks have been supported by a relatively healthy economy and cleaner balance sheets.
In a sign of the differing fortunes between European and U.S. banks, the eurozone’s eight largest banks, including France’s BNP Paribas SA and Dutch bank ING Groep NV, have a smaller combined market value than JPMorgan Chase & Co., despite the Europeans having triple the assets.
Filippo Alloatti, a senior credit analyst at Hermes Investment Management, said European banks have little choice but to cut costs, but that “it’s a politically sensitive topic. Unions and politicians don’t want to see banks closing branches and reducing their footprint.”
In an April press conference, ECB President Mario Draghi lashed out at banks for having too many branches and employees, leaving little money to improve their digital businesses.
Deutsche Bank and Commerzbank AG ended merger talks in April, dimming hopes of a wave of consolidation among the region’s lenders. ING and Italy’s UniCredit SpA had also expressed interest in Commerzbank, but swooning market valuations are likely to make it harder for banks to raise capital for acquisitions.
Not all are deterred. Analysts at Keefe, Bruyette & Woods in a note said institutional investors’ interest in banks “is at new lows,” but rock-bottom valuations could mark a buying opportunity. Plunging Yields Expose Sorry, Plunging Yields Expose Sorry,Plunging Yields Expose Sorry