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Are EU banks fit for purpose?

And are they ready for post-Brexit business?
April 11, 2019

As Britain’s negotiations to exit the European Union threaten to stretch out into eternity, the two camps are as split on next steps as they were on the result. The left-leaning, liberal elite that tend to inhabit the inner circle of the M25 (and claim to favour a global economy) want another referendum. The rest of the country is sick and tired of the whole shebang and wants to get on with leaving.

Acres of newsprint/media time spent on talking trade and migration; hardly a peep on services. An absurd situation considering that the latter accounts for the bulk of our economy and employment. The UK, and the US, of course, lead in financial services and the ancillaries surrounding these. Today I’m focusing on some of the biggest banks, ex-UK, in the EU, wondering how they’ll cope in a brave new world. This has been prompted by America’s first-quarter reporting season, expectations managed down, which kicked off with JP Morgan and Wells Fargo, followed by Citi, Goldman Sachs, Bank of America and Morgan Stanley early next week.

I have not bothered with Italian banks as we know they are weak, fragmented, raddled with bad debt and operate under a legal system that favours the borrower. Unless you had to, you’d probably stay well away.

France’s BNP Paribas ranked second in 2018 (after the UK’s HSBC) by S&P Global Market Intelligence (based on the balance sheet), Credit Agricole third. The former has a good reputation in the capital markets sphere, the latter’s size based on its links to farming and Common Agricultural Policy payouts. BNP’s shares, listed on the Paris bourse, have held between €25 and €65 for most of the last 20 years – which is more stable than many. Looking ahead, we expect this broadly sideways trend to continue, probably in a tighter range between €35 and €60. So far, so reliable.

 

Germany’s Deutsche Bank remained in fourth position and is generally considered a large, systemically important financial organisation – which then begs the question: why is it trading at a fraction of book value? German politicians are worried indeed, especially as banking in the nation is dominated by tiny regional banks and Sparkasse. I have a feeling that these people do not understand, and have no inkling, as to what’s inside the derivatives book. It’s probably far too scary to look under the bonnet – and only the hedge fund fraternity might bite – at stupidly, deeply discounted prices. Basically, untouchable.

 

Spain’s Banco Santander rose from seventh to fifth, overtaking Barclays and, although listed in Madrid, roughly half its profits come from operations in Brazil and Britain. For what’s viewed as a conservatively run bank with a family dynasty, its share price has swung wildly, tripling and crashing by two-thirds, regularly. It’s forte is retail business – and it is currently mulling entry into Fintech banking in Argentina – but does stray into capital markets. Not quite as stable as one might have hoped.

 

Sweden’s Swedbank, which was ranked 35th last year, has recently been in the news for all the wrong reasons, resulting in almost a 100 Swedish krona price cut since February. Ironically, up until then, it had been the one trading closest to its record high of SKr235 in 2007. How quickly a good name gets tarnished.