Financial Crisis

A Dreary Sense of Déjà-Vu

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A murky picture of Europe's banks is scaring investors.
  • Why it matters

    Why it matters

    Substantial losses at some European banks have led to the entire sector being punished on the stock markets, with many investors avoiding all financial stocks.

  • Facts

    Facts

    • Swiss bank Credit Suisse is the latest to announce bad news, reporting a net loss of 3 billion Swiss francs (about $3 billion) for 2015.
    • The MSCI Europe Banks index has lost 21 percent since the beginning of the year.
    • The problems in Europe’s banking sector have been blamed on weak economic growth, tighter regulation and mistakes made in the past.
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    Audio

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However disastrous the figures might have been be, Tidjane Thiam kept his cool.

The chief executive of Credit Suisse reported Thursday that the Swiss bank recorded a net loss of 3 billion Swiss francs (around €2.7 billion; $3 billion) for 2015, following write-downs of billions on the investment bank and unexpectedly high litigation costs last year.

“We are not pleased with the losses, but they’re manageable,” Mr. Thiam said, attempting to boost morale. “Our performance won’t be measured by daily share prices, but by what we will have achieved in three years.”

However, investors are clearly not so patient. Shares plummeted to their worst levels since 1992, down more than 12 percent by Thursday afternoon.

Both Mr. Thiam’s comments, and the ensuing share price collapse were a familiar refrain: It may be some consolation to Mr. Thiam that things aren’t going much better for his competitors. Credit Suisse’s dismal figures are just the latest bad news to be announced by European banks in recent days.

Deutsche Bank, the German market leader, posted a record loss of €6.8 billion. Chief Executive John Cryan’s warnings that things will remain tough for the coming years sent the bank’s share price to a record low. High costs for the bank’s deep restructuring, and billions in legal fines are likely to weigh on profits until at least 2018.

Restructuring measures have also swallowed up billions at British bank Barclays. In Italy, billions in bad loans on banks’ books have fueled distrust across the entire financial sector since the start of the year, from large players like Unicredit to smaller crisis-riddled banks like Monte del Paschi.

Falling profits, high restructuring costs, costly penalties for past mistakes: The same reasons are causing malaise at many major European banks. The entire sector is being punished on the stock markets as a result. The MSCI Europe Banks index has slid 21 percent since the beginning of the year, with many investors giving all financial stocks a wide berth.

“The profit margins of European banks have come under extreme pressure due to low interest rates and sluggish economic growth.”

Lukas Daalder, Chief Investment Strategist, Robeco

Even Swiss bank UBS, which announced a profit of €5.6 billion for last year, has suffered under the weight of the market unease.

While U.S. banks are reporting excellent figures and almost look as if there had never been a financial crisis, it seems that the crisis was never over for many European banks.

Credit Suisse is an example of this: Mr. Thiam was brought in last summer to reduce the bank’s dependence on investment banking, which the old management had held on to for too long.

 

The Big Losers-01

 

The restructuring itself had already proved expensive, but Mr. Thiam is now also facing headwinds on the markets and is having to write down securities portfolios. The trading division alone lost 2 billion Swiss francs over the whole year as a result.

“All the problems started in the bond business,” Mr. Thiam said, adding that the bank now has to “solve the problems of the past.”

This statement would probably resonate with investors in Deutsche Bank. The bank’s co-chief executive Mr. Cryan, who was also appointed in the summer, was forced to report a loss of billions after his predecessor, Anshu Jain, had banked in vain on a revival in the bond business. As with Credit Suisse, many investors here are afraid that they may be asked for fresh capital to absorb the record loss and ongoing legal fees running into the billions.

Fund managers have cited various reasons as to why shares in European banks are performing so badly.

“The profit margins of European banks have come under extreme pressure due to low interest rates and sluggish economic growth,” said Lukas Daalder, chief investment strategist and fund manager at Dutch asset management firm Robeco.

“Banks’ business depends on economic growth, which is weak in the western world,” said Mark Phelps, chief strategist and fund manager at U.S. fund company Alliance Bernstein AB.

Moreover, regulators are tightening the rules. What is intended to make the financial system more stable is creating fresh problems for banks: “Banks are doing less business because capital requirements are increasing,” said Mr. Phelps.

As a result, the fund manager said he is steering clear of banking stocks. “Banks are unfavorable as regards their ability to generate reliable long-term profit growth,” Mr. Phelps.

Italy has been among the countries worst-hit by the financial worries. Unicredit has seen its share price plunge 38 percent since the start of the year as the country’s largest bank, like Deutsche Bank and Credit Suisse, is in the midst of a deep restructuring of its operations. Chief executive Federico Ghizzoni repeats at every opportunity that the bank won’t need fresh capital to deal with its challenges, but investors aren’t so sure.

Prime Minister Matteo Renzi and Finance Minister Pier Carlo Padoan have repeatedly insisted that the Italian banking system is solid – there are no systemic risks. But repeated news about tougher scrutiny from the European Central Bank, capital increases and near-bankruptcies have dented investor confidence.

Plans for a “bad bank,” backed by the government, to take bad loans off the books of struggling Italian banks remain uncertain. While a deal has been struck with the European Commission, the implementation has stalled. Mr. Renzi hopes to pass a wider banking reform law and bad bank in one package, but lawmakers are waiting for the final draft.

It’s just one of the many signs of worry across Europe that is leading a series of well-known asset managers to hold back from banking stocks.

Bert Flossbach, the head of Flossbach von Storch, already banished banking stocks from his funds shortly before the 2008 financial crisis, as he believed that they are difficult to calculate.

He probably wasn’t entirely wrong. The European banking industry index has just about returned to the level it was at shortly after the collapse of U.S. investment bank Lehman Brothers in November 2008.

 

Holger Alich is Handelsblatt’s correspondent in Switzerland. Michael Brächer and Anke Rezmer cover markets for Handelsblatt in Frankfurt. Regina Krieger is Handelsblatt’s Italy correspondent. To contact the authors: alich@handelsblatt.com, krieger@handelsblatt.com, braecher@handelsblatt.com and rezmer@handelsblatt.com  

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