Connect with us

Global Banking and Finance Review is an online platform offering news, analysis, and opinion on the latest trends, developments, and innovations in the banking and finance industry worldwide. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website. .

Banking

Analysis-Outlook for European banks left clouded as storm abates

Published : , on

By Joice Alves and Naomi Rovnick

LONDON (Reuters) – European banking stocks were meant to shine in 2023.

But after a two-week storm which had analysts and investors rushing to rework their spreadsheets, the outlook is clouded.

Before the fall of Silicon Valley Bank (SVB) on March 10, stronger than expected euro zone economic data and 50% fourth quarter earnings growth had prompted positive predictions.

That optimism lifted banking stocks in the region to a five-year high in February and fed hopes that the battered sector would finally see a rebound after years of underperformance compared to their U.S. competitors.

European shares are trading at around 0.65 times their price-to-book value, according to Refinitiv Datastream.

This is their lowest so far since early January. But the hit from the recent tumult was harder on U.S. banks, which are trading at around 0.87 times their price-to-book ratio, the lowest level since November 2020.

And the ructions have left the gap between the ratios of European and U.S. banks at its narrowest since September 2017.

The weeks of turmoil and the emergency takeover of Credit Suisse by UBS have dashed expectations for European banks as 2008-style volatility whip-sawed bank shares, with investors rapidly reviewing their holdings.

“We’ve been sharpening our pencils,” said Paras Anand, chief investment officer at 24 billion pound ($30 billion) fund Artemis. After closely examining his fund’s bank holdings, Anand decided to “selectively” add to positions.

Reflecting concerns over the stability of the sector, bank shares are set for an almost 15% monthly drop in March, after five consecutive months of gains.

And in a sign of wider uncertainty, Citigroup on Friday cut the global financials sector to neutral from overweight.

Refinitiv data shows analysts cut their forward 12-month earnings growth forecast for STOXX 600 banks, which includes euro zone and British banks but not the big Swiss lenders banks, to 9.4% in mid-March from 15% in February.

They have since revised up their expectations, to 11.2%. The February forecast had been the fastest for the sector since September 2021.

‘UNLIKELY TO BUY’

Other investors see pressure on European bank earnings as they anticipate the euro zone economy will slow down.

Investors are now forecasting that banks themselves will tighten lending standards and pay more to secure deposits as the rumblings which began in the U.S. banking system pressure institutions in Europe to demonstrate that they are well capitalised.

Europe’s largest asset manager Amundi said a weaker economic backdrop means growth in net interest margins, a key measure of bank profitability, will be slower than expected and volumes will be lower given tighter credit conditions.

Peter Doherty, head of investment research at private bank Arbuthnot Latham in London, said he was “unlikely to buy” European bank stocks in the medium term, with the latest German investor morale survey signalling a bleak economic outlook.

“Traders will wait to see a bit more stability before they add more money to these (bank) stocks. A lot of people just want to make sure that the contagion fears abate before jumping back in,” said Patrick Spencer, vice chair of equities at RW Baird.

Volatility last week in Deutsche Bank shares, after the cost of insuring its debt against the risk of default jumped to a more than four-year high, intensified worries about the health of Europe’s financial sector.

Politicians, regulators and central banks have stressed that the storm triggered by the collapse of SVB and Signature Bank in the U.S. was not a pre-cursor to a repeat of the 2008 global financial crisis and conditions now are very different.

But while European Central Bank (ECB) President Christine Lagarde told European lawmakers on March 20 the exposure of euro zone banks to Credit Suisse was in the millions rather than billions of euros, she nevertheless warned that they should prepare for higher funding costs and lower lending volumes.

‘ROBUST’ LIQUIDITY

ECB chief Lagarde also said concerns over a credit crunch in Europe were excessive as banks have high liquidity levels.

This view was echoed by Amundi, which said that the liquidity profile of European banks “still appears very robust with less competition from money market funds than in the U.S.”.

Credit Suisse itself, which reduced European banks to ‘marginal overweight’, said they are in better shape than U.S. lenders as their liquidity coverage ratios (LCR), a measure of how much cash-like assets banks hold, are much higher.

In Europe, LCRs stand at 146% for major banks and 200% for smaller banks – well above the minimum requirement of 100%, while the U.S. majors have LCRs of 119%, Credit Suisse said, with real estate looking far less vulnerable in Europe.

But Barclays, which upgraded European banks to overweight in late January, has cut the sector back to neutral, citing expectations for increased regulatory scrutiny, especially on liquidity requirements.

Also in the calculation mix is the ECB’s campaign to raise interest rates to tackle rising inflation, which had previously been a boon for euro zone lenders.

However, some investors now worry that if the central bank continues to raise the cost of borrowing it could actually be against the interest of the banking sector as a whole.

The U.S. Federal Reserve’s rate increases have been partly blamed for sparking banking system turmoil, as clients pulled deposits from their banks to meet liquidity needs.

($1 = 0.8123 pounds)

(Reporting by Joice Alves, Naomi Rovnick; Writing by Joice Alves; Editing by Amanda Cooper and Alexander Smith)

Wanda Rich has been the Editor-in-Chief of Global Banking & Finance Review since 2011, playing a pivotal role in shaping the publication's content and direction. Under her leadership, the magazine has expanded its global reach and established itself as a trusted source of information and analysis across various financial sectors. She is known for conducting exclusive interviews with industry leaders and oversees the Global Banking & Finance Awards, which recognize innovation and leadership in finance. In addition to Global Banking & Finance Review, Wanda also serves as editor for numerous other platforms, including Asset Digest, Biz Dispatch, Blockchain Tribune, Business Express, Brands Journal, Companies Digest, Economy Standard, Entrepreneur Tribune, Finance Digest, Fintech Herald, Global Islamic Finance Magazine, International Releases, Online World News, Luxury Adviser, Palmbay Herald, Startup Observer, Technology Dispatch, Trading Herald, and Wealth Tribune.

Global Banking & Finance Review

 

Why waste money on news and opinions when you can access them for free?

Take advantage of our newsletter subscription and stay informed on the go!


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Recent Post