Why a selloff in European banks is ominous

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Dark clouds are gathering around Europe’s banking sector.

 

Europe’s bank index has posted its longest weekly string of losses since 2008

European banks have been caught in a perfect storm of market turmoil, lately.

“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.

The doom-and-gloom outlook for banks comes as the stock market has had an ominous start to the year.

East or west, investors ran for the exit in a market marred by panic over tumbling oil prices and signs of sluggishness in China. But for Europe’s banking sector, the new year has started even worse, sending the bank index down 23% year-to-date, compared with 13% for the broader Stoxx Europe 600 index.

So what happened? At the end of last year, banks were singled out as one of the most popular sectors for 2016 because of expected benefits from higher bond yields, rising inflation expectations and improved economic growth. That outlook, however, was before the one-two punch of plunging oil and a slowdown in China sapped investor confidence world-wide.

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.

“And its worrisome, because banks are much more important for the credit mechanism in the economy here in Europe than it is in the U.S. There, you have a capital market where it’s easier to issue corporate bonds and get funding outside the commercial banking system. We don’t have that to the same extent in Europe, and therefore [the current weakness] is a little bit scary,” he said.

Full article: Why a selloff in European banks is ominous (MarketWatch)

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