Illustration: Kevin February
Is there any way out of the gloom infecting Europe’s banking sector?
With the region’s economic prospects this year gradually killing hopes for an end to negative rates and a recovery in their interest margins, the European Central Bank’s rate cut this September only confirmed the challenges ahead. It will be even harder for European banks to earn their cost of equity.
In late 2019, the Stoxx600 index of European banks is stuck in almost the same trough it fell in to in the depths of the eurozone crisis. The ECB’s new policy of only charging for a relatively small tier of reserves did little to offset the impact of a widely expected rate cut in September.
The vast majority of European bank stocks are now trading firmly below book value; a clear signal from the market that the sector needs to shrink. Research by financial institution specialist Algebris Investments recently lamented that the cumulative market capitalization of the top 25 European banks has slumped to roughly the same as just one big US bank: JPMorgan.
