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European Banks' Woes Aren't Fully Justified, Say Wealth Managers

Tom Burroughes

17 February 2016

Shares of European banking groups such as Deutsche Bank and Credit Suisse have taken a beating, stoking fears that the sector is dangerously vulnerable and reviving dark memories of the 2008 crash, but such worries are overblown, wealth managers say.

In recent weeks, Europe’s banks have seen shares slide, with investors concerned in some cases about the specific results issued at the time, or more broadly, perturbed by the deceleration in parts of the global economy. 

For example, shares in have slumped by around a half. The Deutsche Bank situation even prompted its co-chief executive, John Cryan, to state last week that the Frankfurt-listed bank was “absolutely rock solid”. Deutsche Bank logged a net loss in the fourth quarter of 2015.  

There is no specific issue that explains why European banks are more vulnerable than, say, their US peers, argued Yann Goffinet, senior financial analyst at Pictet Wealth Management. European banks have been suffering relative to other share prices in much the same way as has been the case with US banks, Goffinet said.

There are three causes of earnings downgrades on European and US banks, he said. These are energy losses and the credit cycle; lower/negative interest rates, and weaker trading revenues. 

“Banks therefore face a profitability issue, on several counts. However, there is no issue with liquidity or solvency - at least not yet - nor is this a systemic issue (unlike in 2007-08). European banks’ solvency ratios actually rose by 20 basis points in Q4, to 12.2 per cent, well above their levels before the 2007-08 financial crisis. Bank liquidity is abundant - although market liquidity has been an issue,” he said. 

George Luckraft, of AXA Framlington and fund manager of the St James’s Place Diversified Income fund, said: “Banks are struggling as a consequence of banking regulations but everyone is wrongly over-interpreting these developments as signals that something deeper is wrong.” 

Last week the FTSEurofirst index fell 4 per cent because of concerns about banks as well as other forces. Daily loan requirements spiked to €127 million on Tuesday last week. Paul Causer, of Invesco Perpetual and fund manager of the St James’s Place Corporate Bond fund, said: “Balance sheets are considerably stronger now . We do not believe we are back in a banking crisis. With equity valuations back at levels not seen since 2012 and tier one debt now offering double-digit yields, we are seeing more opportunity than we have for several years.”

Philippe Ithurbide, global head of research, strategy and analysis at Amundi, the European wealth manager, said: “We can never rule out the possibility of a crash, and a crash doesn’t require a prior bubble. That being said, without underestimating the banks' difficulties and the economic environment (slowdown, fears of recession), the financial environment (low rates), and the regulatory environment that is unfriendly to the sector, we are not counting on a collapse of the banking system like the one that struck in 2008.”

In his comments on banks, Pictet’s Goffinet said banks face profitability challenges but there is no issue yet with liquidity or solvency and these are not systemic forces, as was the case in the 2007-8 financial blow-up. 

“Bank stocks thus seem to be suffering more as a result of the turmoil on global equity markets and wider fears about the global economy than because of issues of a systemic nature specific to the banks,” Goffinet said. “Deflationary risks are a particular concern for banks, given that the real value of debt increases when inflation turns negative. In addition, the banking sector is usually high beta in times of turmoil, because banks are highly leveraged entities (equity/total assets is often below 5 per cent in Europe, slightly higher in the US) and have broad exposure across sectors and geographies - notably, in the current environment, to oil and gas, commodities and emerging markets,” he continued. 

“For bank stocks to recover significantly, concerns about these risks will have to abate - especially concerns about the global deflationary effects that could arise from a sharp weakening of the Chinese yuan. Until then, the sector may find it difficult to perform sustainably. Within the financial sector, current conditions are likely to favour non-banks with low balance sheet risk that are not too vulnerable to lower revenues. Among banks, domestic retail banks with little market exposure may well be better placed,” he added.