A bad year for European banks just got a whole lot worse. The Euro Stoxx 600 Index of leading bank shares has lost nearly a fifth of its value in the past 30 days after a spectacular sell-off on Monday. Few have been spared.
The share price of Barclays, BNP Paribas and Unicredit all slid around 5 per cent, those of Deutsche Bank fell 10 per cent, and the value of Greece's three largest banks all slumped nearly 30 per cent – from not very much to even less.
After the markets closed on Monday, Deutsche Bank took the unusual step of saying it had enough money to pay the coupons on some of its debt that are due in April. The German lender was essentially trying to convince the market that it isn't facing a liquidity squeeze.
Yesterday, John Cryan, Deutsche's chief executive, said his firm was "rock-solid", while Wolfgang Schäuble – the German finance minister – told an audience in Paris that he has "no concerns about Deutsche".
But if you're explaining, you're losing.
Their comments have not stopped the cost of insuring European bank bonds from spiking. Lenders are also charging far more on the loans that they make to each other. And while these horribly familiar indicators of stress have not yet hit 2008 levels, the spirit of Lehman Brothers is looming over the market turmoil like Banquo's ghost. Are investors right to be worried?
When examining the plight of European banks it helps to separate out their short, medium and longer-term problems. This helps illustrate that their ailments are chronic rather than acute (for now at least).
Into the short-term category we can dump the litany of woes outlined by Tidjane Thiam, Credit Suisse's new chief executive, when he recently unveiled the Swiss bank's first annual loss since 2008. He listed "volatile market conditions", "pressures on market liquidity", "widening credit spreads", and "large fund redemptions by market participants".
These are all trading woes, hence why banks – such as Deutsche and Credit Suisse, which have large investment banking operations – are getting whacked.
Tidjane Thiam, the chief executive of Credit Suisse. Photo: Bloomberg
All the market volatility is, of course, linked to worries about a possible slowdown in the global economy, especially in China, and the precipitous fall in the price of oil. This has, in turn, raised concerns that banks have made loans to emerging market companies and commodity producers that will never be repaid.
In the meantime, many banks are still having to set aside huge amounts to pay fines for past misdemeanors.
New regulations have essentially rendered some business lines, especially those in their investment banking divisions, obsolete. Banks need to shut these down and restructure themselves. Much of that work is only now starting – and it's expensive.
Part of the reason that European banks were able to sit on their hands for so long was the existence of implicit state aid and the actions of central banks, keeping interest rates at record lows and flooding the financial system with liquidity.
But this has become a double-edged sword. It has created the biggest and longest standing problems – wafer-thin net interest margins.
'It's not the despair.. it's the hope!"
Banks borrow money for short periods of time and lend it out over longer periods. The bigger the spread between short and long-term rates, the more money they make. For seven years, the yield curve (as plotted against the different rates over different time periods) has been as flat as a pancake.
Throughout that time, bank investors comforted themselves with the belief that the situation was only temporary. At some point, they reasoned, interest rates would rise and banks would start earning thicker interest rate margins.
And for a brief, glorious period at the end of last year, it looked like that patience had at last been rewarded. The US Federal Reserve finally achieved lift-off in December when it hiked rates by a whopping quarter of a percentage point. Further rises, it was indicated, would follow, as, in time, would the Bank of England and, maybe, the European Central Bank - the yield curve started to steepen.
But now central banks around the world are competing to see who can bow and coo the loudest. Investors are left dealing with the prospect of record low interest rates for even longer. As the John Cleese character says in the film Clockwise: "It's not the despair. I can take the despair. It's the hope I can't stand."
Investors are starting to seriously question when and how European banks will ever be able to make profits again. In the shorter-term, they have to raise capital cushions further to hit tougher targets in 2019. Many will once again have to go cap in hand to investors for fresh equity.
They might find those investors less than willing. In truth, it hasn't been a bad year for European banks, it's been a bad decade.
Since January 2008 the Stoxx Europe 600 Index has risen 43 per cent, while the Stoxx Europe 600 Banks Index has fallen 43 per cent. In aggregate, the industry hasn't achieved a return on equity above its cost of capital since 2008. What this means, in plain language, is that, for eight long years now, banks have been roaring through their shareholders' cash like drunken sailors on shore leave.
With the prospect of interest rates staying lower for longer, and expensive transformations only just beginning, that doesn't look like changing any time soon. Banks are discovering that the patience of their shareholders is not a limitless commodity.
The Telegraph London