European bank stocks have worst year since eurozone crisis
Collective 25% fall has cost shareholders $380bn and left all big banks trading below book value
European banks’ shares have had their worst year since the height of the eurozone crisis, with the sector falling 25 per cent, as investors lost faith in the region’s lenders amid enduring low profitability, outdated business models, negative rates and Brexit.
The slide has cost shareholders about $380bn and has left all major banks in the UK and across the continent trading below book value. On average they are now valued at about 0.6 times their net assets, compared with ratios of 1.1 for the top six US banks and 1 for lenders on the MSCI Emerging Asia Banks Index.
“The European bank sector is making more money than in recent years but continues to suffer from poor profitability relative to American or Asian peers,” said Ronit Ghose, chief banks analyst at Citigroup. “Share prices are down this year about three times more than earnings forecast revisions.”
While profits and capital levels are up and regulatory fines down, any improvements in underlying performance have been eclipsed by new scandals, as well as geopolitical and macroeconomic shocks. Most notably, the election of a Eurosceptic, anti-establishment government in Italy over the summer heaped further doubt on the stability of the eurozone already shaken by Brexit.
Bankers, analysts and investors say sentiment has turned so sour there are few active buyers left, with the sell off almost indiscriminate across countries and business models.
Few economists now expect interest rates — perhaps the key determiner of bank earnings — will rise out of negative territory any time soon. There is still little clarity on the future relationship between the UK and the EU after Brexit, which has saddled banks with hundreds of millions in restructuring costs.
Relative to the US banking industry, expenses remain stubbornly high in Europe and are inhibiting the large scale investment needed to overhaul IT infrastructure. The average American bank makes a return on equity of 16 per cent whereas in Europe returns are about half that, according to Citi data.
“Investors are worried that higher profitability expectations are being pushed back due to concerns over the end of the US cycle, fears that ECB rate rises may be later or smaller and also ongoing shocks from technological change,” Mr Ghose said.
The most drastic fall has been at Deutsche Bank, which ends the year down 53 per cent after revenue continually disappointed expectations and it lost further market share in investment banking. The German lender fired its chief executive in the spring and last month was raided by police investigating money laundering.
Another scandal that dented sentiment was the emergence of large-scale money laundering at Danske Bank, whose shares fell 43 per cent after it was discovered €200bn of money from Russia and ex-Soviet states had been processed through its Estonian branch.