European Banks Worst Performance Since 2011

The European banking index has fallen 35% since early January. Investors are hanging on the prospect of rising rates in Europe.

In the depressed market environment, the fall of European banking stocks would go almost unnoticed. Yet this year – and except last minute surprise – European banks were to sign their worst performance since the crisis in the euro area in 2011.

Shifted by the uncertainties related to Brexit and the political situation in Italy, the European banking index Euro STOXX Bank has yielded 35.06% since early January. As a reminder of the year of the sovereign debt crisis in the euro zone, the index fell by 37.63%. The defeat of banking stocks is also significantly larger than that observed on the Euro STOXX 50.

This index, which includes the main values ​​of the euro zone (all sectors combined) has fallen by 17.89% since the beginning of the year. In Europe, no bank value seems to be spared: only the title of the Italian FinecoBank, a subsidiary of UniCredit, shows a positive performance in 2018, within the Euro STOXX Bank.

Severity of investors
Disenchantment with the banking sector is not specifically European. In the United States, since January the Dow Jones US Banks index has also fallen 21.67%, but less heavily than in Europe. In fact, market perception of banking giants remains much more favorable across the Atlantic. The “price to book ratio” attests to this: now European banks are worth only 0.6 times their net assets on average against 1.1 times for US banks. In other words, investors do not even value the banks of the Vieux contains up to their assets.

At stake for investors: the profitability levels of European banks that have not recovered to their pre-crisis levels. At the end of September, for example, BNP Paribas posted a return on equity ratio (ROE excluding exceptional items) of 9.5% while JP Morgan claimed a ratio of 14%.

These discrepancies should partly fade when the ECB follows the path set by the Fed to raise interest rates, which banks would benefit from. But this perspective is still uncertain. In the eyes of investors, worries about a possible economic slowdown could prompt the ECB to start a rise in interest rates later or more modestly.

On the market, European banks are also paying the price for unfinished restructurings and new business. Since January, Deutsche Bank saw its stock plummet 57.68% and its capitalization melt of some 18 billion euros, thus signing the worst performance of the European sector, just ahead of Commerzbank.

Investors punish both strategic uncertainties, but also possible ramifications of Danske Bank’s huge money laundering case in Germany’s largest bank.

In this landscape, French banks – rather less well capitalized than their European competitors – have failed to shine. Natixis, BNP Paribas and Societe Generale are among the ten players with the worst stock market performance in 2018 in the Euro STOXX Bank European Index.