Analysts: European bank sell-off turns ‘ominous’

Analysts: European bank sell-off turns ‘ominous’
European Central Bank HQ. (Image: ECB)

The region’s banking gauge, the Stoxx Europe 600 Banks Index FX7, -5.59% has logged six straight weeks of declines, its longest weekly losing stretch since 2008, when banks booked 10 weeks of losses, beginning in May, according to FactSet data.

“The current environment for European banks is very, very bad. Over a full business cycle, I think it’s very questionable whether banks on average are able to cover their cost of equity. And as a result that makes it an unattractive investment for long-term investors,” warned Peter Garnry, head of equity strategy at Saxo Bank. …

Garnry said the slump in bank shares is “a little bit odd” given the recent growth in the European economy and aggressive easing from the European Central Bank. Normally, banks benefit from measures such as quantitative easing, but it’s just not doing the trick in Europe. …

[T]here is more to the sector slump than just the individual bank problems, according to Garnry. The negative interest rates set by the ECB means that banks effectively have to pay to have cash on their balance sheets, while at the same time getting squeezed on their net interest margins. Debt levels are already really high on the continent, which means further loan growth is expected to be low, he said.

And then there is the impact from a slowdown in growth.

“You have regulatory rules coming into play that is curbing and cutting back on the profits you can make in your capital markets division. You have general lower economic activity, which is also leading to lower activity in your advisory and M&A business. So it’s not very fun to be a European bank at the moment at all,” he said.

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