The scale of the derating among the western world's banks has been truly breathtaking. All US bank shares have tumbled in recent weeks with, for example, shares in
France's banks have been hammered, too, with
Spotting a clear catalyst for this bank sentiment crisis isn't easy, but one event stands out - the US debt rating downgrade. Certainly, the eurozone sovereign debt burden is a huge factor, but that has been festering for months. The unexpected emergence of a US debt crisis, however, may have been the final trigger that left bank shares as the hardest hit in the current market turmoil.
Given the importance of the US to the global economy, and banks' dependence on economic growth, the collapse in sentiment towards banks isn't entirely surprising. The US boasts the world's largest economy - demand there largely drives global growth, including in fast-growth Asian markets. When the US struggles, the world - and those that lend to it - struggle, too.
So news last month that first-quarter US economic growth had been revised down to just 0.4 per cent thoroughly spooked investors. Add in the spectacle of the White House and Congress sparring over setting a debt ceiling - risking default in the process - and the sense of crisis grew. Then came the seemingly unthinkable: rating agency
That decision could make US borrowing more expensive, worsening the debt problem and forcing tough austerity measures - further hampering the already feeble US recovery. And it's not clear that undertakings by Federal Reserve Bank chairman Ben Bernanke to keep interest rates "exceptionally low" until 2013, while possibly pursuing more quantitative easing, will be enough to avoid a recession.
US problems might not have been enough alone to trigger this meltdown. When added to Europe's own debt crisis, however, sentiment towards the banks has slipped uncontrollably. European bank exposure to the sovereign debt of more troubled eurozone economies is certainly large. According to figures from the Bank for International Settlements (BIS), the German and French banks are exposed to a combined 41 per cent of all bank claims against the 'PIGS' nations (Portugal, Ireland, Greece and Spain). That's hurting individual lenders -
And it's the absence of a solution that's the real worry. "US funds are very worried about knowing very little," remarked one UK-based banking analyst - leaving them unclear as to the counterparty risk their funds are exposed to. He adds that there's "very little faith in European politicians to sort it out".
Indeed, the sense that the situation is slipping uncontrollably appears partly responsible for the collapse in French bank shares after rumours circulated that France could also suffer a sovereign debt downgrade - even though all three main rating agencies denied this. "As long as EU peripheral debt issues remain in the headlines, despite the best efforts of the European Central Bank (ECB), banks are likely to remain a focal point for negative risk appetite," think analysts at Bank of America Merrill Lynch.
Ironically, individual banks look better placed to survive than they did during 2008's crisis. Capital ratios are more robust, for instance, and should strengthen further as bank regulators implement new Basel III capital rules. Credit quality, after 2009's recession, is firmly on the mend, too, with most banks reporting falling impairment charges.
But liquidity worries can't be ruled out. The cost of longer-term euro interbank funding is rising and rumours are circulating that some Asian banks are growing uncomfortable with their exposure to European lenders. Some Italian and French banks look particularly reliant on short-term funding and there's also evidence that European banks are increasingly turning to the European Central Bank (ECB) for funds.
Growing regulatory hurdles won't help sentiment, either. In the UK, next month's final report from the Independent Commission on Banking is expected to recommend ring-fencing retail and investment banking operations. That means uncertainty and possibly greater costs for banks such as
|Right now, the role call of outsiders is too large to list. But, with liquidity worries growing, avoid those banks that appear relatively reliant on shorter-term funding - including
|This is a very short list and, after looking around the globe, comprises just two:
|Banking meltdown - the world's big players||Price fall 1-12 Aug (%)||Core tier 1 capital ratio||Price/tangible book value||Dividend yield|
|Bank of America||-26%||8.23%||0.59||0.55%|
|JP Morgan Chase||-9%||10.1%||1.17||2.73%|
|Banco Santander (Spain)||-11%||10.4%||0.85||10.0%|
Source: company reports/Capital IQ
"It is much easier to lose trust in an institution than to win it back," observes banking analyst Bruce Packard of Seymour Pierce. And winning back that trust against the backdrop of US recession fears, an apparently insoluble European debt crisis and, possibly, liquidity issues seems fiendishly difficult. So, while a small number of carefully selected lenders may still deserve investors' trust, most do not - even though dividend yields can look enticing and bank shares often trade well below tangible book values.
Also see the broker view:
Bank shares unsettled - Gareth Hunt of Investec discusses the issues facing investors in the banking sector