European banks reeling amid global slowdown concerns



Volatility hits Irish banks, with questions raised on AIB flotation

Ciarán Hancock

It was almost like 2008 all over again for the global financial sector this week as shares were routed.

On Thursday, France’s Société Générale became the latest group to report earnings that missed estimates, dragging the sector down. Credit Suisse Group joined Germany’s Deutsche Bank and Italian and Greek counterparts trading at or near record lows. Nor have Irish banks been immune with Bank of Ireland and Permanent TSB recording double-digit declines in their share prices.

European banks are heading toward their lowest prices since early August 2012 – the point when they started rallying after European Central Bank president Mario Draghi pledged to save the euro by whatever means necessary.

While central banks around the world have been keeping interest rates low to help the recovery, signs of a slowdown in China and emerging markets and the oil rout are hitting the market, sparking a global sell-off that’s already erased $16.4 trillion from equities since last year’s high. European lenders have particularly suffered.

Worries that Deutsche would struggle to meet debt obligations snowballed with growing concerns about bad loans and the repercussions of tougher regulations.

Credit Suisse, which posted a loss last week, has declined 43 per cent this year while Deutsche Bank is down 41 per cent. Banks on the Stoxx Europe 600 Index have plunged by 28 per cent.

Credit risk

European banks and insurers’ subordinated credit risk rose to the highest level since March 2013. The cost of insuring junior debt rose for the 10th time in 11 days on Thursday, and a gauge tied to senior bonds also resumed an increase, according to data compiled by Bloomberg.

Bank debt has been caught up in a global selloff, as investors begin to lose confidence in the ability of policymakers to support financial markets.

The collapse in so-called additional Tier 1 notes means the worst-hit bonds issued by lenders, including Deutsche Bank, UniCredit and Banco Santander are now pricing in an average of three years of skipped coupons, according to JPMorgan Chase. Banks can be barred from making coupon payments if capital falls below a trigger level.

The picture for Irish bank shares is no brighter despite what appear to be strong fundamentals around the economy.

Figures published on Thursday by the Central Bank of Ireland show that Irish households are now in their eighth year of deleveraging after the boom of the mid-2000s. At €4.8 billion, mortgage lending last year was ahead of estimates.

Shares in Bank of Ireland, which is 14 per cent owned by the State, are down 24 per cent year to date. The bank will publish its full-year results on February 22nd amid worries over its pension fund deficit, which is affected by low bond yields, low interest rates and declining investment returns. Concerns over Brexit are also emerging for a bank that has 40 per cent of its balance sheet in the UK.

Legacy issues

Permanent TSB, which is 75 per cent owned by the State and returned to the main market in Dublin and London last year via a placing, has seen its stock decline by 40 per cent year to date.

PTSB is a minnow in global banking terms with significant legacy issues around non-performing loans still to work through and a high cost base.

Eamonn Hughes, a banking analyst with Goodbody Stockbrokers, said concerns with Italian banks over non-performing loans had created “fears in general” around banks in Europe.

“There are a number of factors at play and Irish banks are getting caught up in it,” he said, adding that the volatility was likely to continue for “the next few weeks”.

On Monday, AIB avoided the rout in banking stocks by closing up on the day, but this was an irrelevance given that it is 99.8 per cent owned by the State and is not traded by institutions.

Not that AIB is immune to the volatility in global markets. The mantra within the bank is “Be ready” for when the new government is formed in March and a decision on an IPO of a 25 per cent stake in AIB is taken one way or the other.

Dividend payments

Noel O’Halloran, chief investment officer with Kleinwort Benson Investors (KBI), would like clarity on the resumption of dividend payments before putting his clients into the stock. KBI manages €8 billion worth of assets from its Dublin base on behalf of global clients.

“We would like to see a path to a dividend because . . . in a slower growth world if you’re looking for returns of 6 to 10 per cent a year, if you can get 50 per cent of that through a dividend, that’s a nice start,” O’Halloran told The Irish Times Business Podcast.

“So that’s a headwind for an AIB [IPO]or indeed any bank. The company in its roadshow will have to give guidance on that.

“In the absence of that, it will be down to valuation and what return on equity can the bank achieve with the capital base they have. The reason a lot of banks are trading at a discount to their price-to-book at the moment is because they are not achieving a return higher than their cost of capital.”

Despite the current market volatility, O’Halloran believes that an IPO of AIB this year is a possibility.

“My sense is that it will happen. My outlook on the world is that the fundamentals are way better than the current sentiment would have you believe. Assuming that . . . the company earnings over the next three, six months come through as expected . . . that the US economy doesn’t go into recession . . . that the central banks are on the job, I think we’ll get calm through the year again.

“By the autumn the conditions in markets will be favourable again to investment. I think AIB, properly priced, would be viable in the autumn.” – (Additional reporting by Bloomberg)



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