Coverage: Anxiety over global banking market increases

The week is off to a rocky start for the world’s biggest banks, as stocks tumbled upon increased anxiety over the future of the industry.

Peter Eavis of The New York Times had the day’s unsettling news:

An unsettling trend has emerged from the heavy selling that sent global markets tumbling this year: Investors are getting nervous about the world’s biggest banks.

The concerns about the banks are clearly reflected in the stock markets, where shares in banking giants are plunging. But there are also ominous signs in markets that investors use to bet on the perceived creditworthiness of large financial firms.

A crucial benchmark for the banking sector, the KBW Nasdaq Bank Index, was down more than 3 percent on Monday and had lost nearly 20 percent of its value this year.

There were other signs of nervousness.

Investors are again rushing into benchmark government bonds. The yield on the 10-year Treasury note, which falls as its price rises, declined to 1.75 percent on Monday; it yielded 2.27 percent at the end of last year. The price of gold is rising. The Vix, which measures investors’ expectations of volatility and is known as Wall Street’s fear gauge, rose over 10 percent.

But the plunge in bank stocks seemed to stir up the most concern.

When investors sell bank shares or bet against the banks in credit markets, it can be a signal that a period of financial turbulence has entered a new, potentially more serious phase. It suggests that banks — meant to act as the gears of an economy, transmitting credit to firms and households — are becoming more vulnerable to the market volatility and any underlying economic weaknesses. In sluggish economic times, banks may suffer higher losses on some loans, while the current low interest rates make it hard for lenders to earn robust profits on other loans.

Alexandra Gibbs, Arjun Kharpal and Holly Ellyatt of CNBC broke down how European banks did during Monday’s trading period, and it was not positive:

European markets tumbled at Monday’s close to finish sharply lower, as heavy losses in several sectors, a continued decline in commodity prices and Friday’s mixed U.S. employment data, added to concerns over global growth.

The pan-European STOXX 600 fell to close near session lows, off 3.5 percent provisionally. Meanwhile, Europe’s FTSEurofirst 300 fell to end 3.4 percent down, hitting its lowest level since October 2013.

Germany’s DAX briefly fell below the 9,000 mark more than once during trade, for the first time since late October 2014, with its index closing 3.3 percent down. London’s FTSE was off 2.7 percent, while France’s CAC 40 finished 3.2 percent lower.

The Athens index was Europe’s worst-performing index, closing 7.9 percent lower, with analysts saying the fall was due to uncertainty that a bailout review by the country’s lenders could drag on, Reuters reported.

Lionel Laurent of Bloomberg looked at European banks recent performances:

Some of Europe’s bank stocks haven’t been this low since Quentin Tarantino was just making his mark with the bloody hit Reservoir Dogs.

Two of the region’s lenders are embroiled in their own bloodbath as regulators force them to cut off some of their own limbs: Deutsche Bank’s stock is trading at its lowest since 1992 and Credit Suisse is at its lowest since 1991.That’s not a sign the European economy is in a worse state than the great financial crisis: The economy is still growing, even if there are signs of a slowdown. Signs of financial stress aren’t close to the levels they hit before 2008.

But what it does show is the banking industry’s business model has been squeezed by regulators and central bankers — and investors don’t see profitability returning soon. Concern about a slowdown in China and losses from commodities lending is only making the industry even less attractive to investors.

Even after years of post-crisis balance-sheet surgery, revenue is still shrinking and regulatory costs are still mounting. Returns on equity haven’t exceeded banks’ cost of equity since the crisis. Most of the region’s lenders trade for less than book value, indicating investors don’t believe their balance sheets.

So when Deutsche and Credit Suisse both posted their worst results since 2008 in 2015, it signalled far more than a cyclical downturn — investors now see this as the death throes of a business model.

Not all bank stocks are being hurt to the same extent: Barclays and France’s BNP Paribas are only down to a level last seen in 2013. Both have large consumer-banking units to fall back on.

And elsewhere in the market, things don’t look quite as gloomy. Even if early indicators such as freight volumes and truck orders are slowing, economists still estimate the European Union economy will still grow by 1.9 percent in 2016 and 2017.