According to Moody’s, throughout this year, European banks, and Deutsche Bank in particular, have helped trigger global financial market sell-offs.
The troubled plight of these institutions was encapsulated by the admission of Credit Suisse CEO Tidjane Thiam that European banks are “not really investable as a sector.” The declining prospects of traditional business lines, high capital requirements, nonperforming loans, and regulatory offenses have battered share values. Bank equity prices in the Eurozone Stoxx index now trail last year’s high by 48%.
Yet euro-denominated bonds from the banking sector carrying the modest yield of 1.15% in the Bloomberg Barclays index seem to point to sturdy balance sheets. However, easy ECB monetary policy and the protections offered to senior bank debt may obscure the risks facing this sector.
Warning signs can been seen in equity prices that value banks as less than the book value of their assets, and in European contingent convertible hybrids that are junior to other bank bonds holding a substantial risk premium with the composite yield of 7.04%. As this sector persists in contributing to global financial market uncertainty, the potential remains for negative spillovers to risk assets worldwide.
