Higher capital requirements after the financial crisis are pushing up the cost of capital for European banks. The key question is by how much, since the return on equity required in order to compensate investors for the risk they undertake can be difficult to determine because it is unobservable.
Aristóbulo de Juan | This is the huge cost of complacency. You frequently hear Spanish bankers and supervisors repeating a new mantra: “The European banks are worse than ours and their supervision is more lax.” Europe’s oldest bank reveals an NPL ratio of 39%, while Deutsche Bank announces losses of 6.9 billion euros…but can this sort of management be allowed?
UBS | What’s happening? Banks are trading at distressed PE and P/TNAV multiples. Emerging Market/China/ APAC slowdown and oil going to US$30 are potentially triggering a downturn in the credit cycle and concerns over credit/exposure quality in general.
Two fundamental factors have affected bank lending. On the one hand, market doubts over the banks’ ability to generate margins against a backdrop of low and even negative interest rates. And on the other, the indirect impact of current energy and raw material prices on the lenders’ balance sheets.
Ana María Llopis, independent director at Societe Generale explains that “the entity’s share price was at 40 euros before the crisis and now it is around 42-44 euros. So some banks have recovered. Then there are others still at low prices for particular reasons, or because they operate in China or Brazil.”
Fernando Barciela | Is the banking crisis over? I don’t think so. There is a lot of very bad news coming out from some of the biggest European banks these days. Deutsche Bank said on Thursday it would shed 35,000 jobs. The German lender reported a $6.6 billion quarterly net loss. So it will trim its investment banking operations and close operations in 10 countries.
BRUSSELS | May 7, 2015 | By Alexandre Mato | Plans to spin off Deutsche Bank’s retail business is the latest rumour to emerge from a changing European banking sector eagerly looking for ways to be more profitable under Basel III regulations. Too big to fail institutions are worried about a decline in their margins because of the low interest rates outlook. For these lenders, breaking up their investment and commercial business, as well as going on a shopping spree within the sector, seem to be solutions for growth.
MADRID | May 5, 2015 | By JP Marín Arrese | Banks have undergone a massive overhaul to meet demanding requirements under Basel III. They have substantially strengthened their core capital over the last couple of years to keep abreast of increasing requests tabled by regulatory bodies. The leverage ratio under implementation represents a new challenge which is likely to have a significant influence on their business strategy.
MADRID | The Corner | The escalation of the crisis in Ukraine has led to sharp asset prices and currency volatility with capital outflows from the region, particularly from Russia and of course Ukraine itself. UBS points out that the European banks within their coverage present “a meaningful exposure: the loans in Russia and Ukraine amount to over €60bn before taking into considerations any investment banking activity.”