Finance Friday 12.02.2016

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By Nikola Kedhi.

It is becoming a weekly occurrence for markets to experience huge declines in the face of some new adversity. This time it was the European banking sector that upset the equity markets. With the crisis of 2007 being fresh in the minds of everyone, many are wondering if the predicaments of the banks are the precursor of more troubling news.

On Monday, there were drops in almost every major stock market. Dow Jones Industrial Average lost 1.09%, NASDAQ 1.82%, whereas the S&P500 decreased 1.4%. The situation was worse in Europe, with the FTSE MIB and the Athens Stock Exchange Index declining the most, 4.69% and 10% respectively. The Stoxx Europe 600 fell 1.6% at the close of the market. The main element of the selloff was the decrease in banks’ shares. Commerzbank AG’s price fell to its lowest levels since July 2013. Swedbank AB dropped 5.7%, while Credit Suisse 8.4%. As Bloomberg reports, the stock of Deutsche Bank AG reached its lowest point since 1992.

It is clear that these banks are overwhelmed by a wide array of problems. First of all, according to Bank of America’s analysts, they are in the danger of experiencing huge losses of approximately $27 billion from loans given to energy companies. However, it is not only the energy companies that have potentially bad loans. Most European banks have a considerable amount of bad debt on their books, with Italian ones especially affected: 17% of their loans are NPLs. Falling oil prices and Chinese market slowdown have also played a role in the current situation of the banks. Furthermore, Greek banks continue to suffer as a result of the slow implementation of reforms by the Tsipras Government.

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Deutsche Bank remains one of the worst performing among European banks. In the last quarter of 2015, it made a loss of €600 million, while its ROE is around -11%. The Financial Times reports that Deutsche Bank is considering buying back several billion euros of its own debt, focusing on senior bonds of which it has about €50 billion in issue. Another concern for investors is the possibility of more litigation charges for Deutsche. Last year, the bank paid $2.5 billion to US and UK stemming from LIBOR manipulation scandal.

On Wednesday, the Deutsche Bank’s shares increased by 14% after the announcement of the buyback program. The German Finance Minister Wolfgang Schauble has said that there is no concern for the bank in the government. A similar statement has been made by the bank’s officials as well. The reasoning is that the bank has been restructuring and the benefits will be visible in the middle and long term.

The only bank in Europe that is proving quite resilient is the Komercni Banka AS, the Czech Republic subsidiary of Societe Generale SA. In the financial report released this Thursday for the year 2015, it is stated that thanks to the economic performance of the Czech Republic, the profitability of businesses and low unemployment, the bank managed to have a solid performance. Although profit decreased 1.5%, deposits increased 3.3% and loans expanded by 6.8%, as the number of new clients increased by more than 21000. Moreover, the bank’s Core Tier 1 capital adequacy ratio remained at the strong level of 16.3%.

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As always, analysts are divided on whether this will eventually effect European and American economies. American jobs reports last Friday exceeded expectations. The unemployment rate decreased to 4.9%, showing that the economy remains strong. In the EU, the situation is more complex and the economy is moving at a slower pace but the ECB is more concerned with the stubbornly low inflation. Goldman Sachs recently stated that a repeat of the financial crisis is unlikely since European banks have a lot of liquidity. Nevertheless, the pressure on the banking industry remains very high.

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