How low can the European banking stocks go?

It’s not the first time we see the European banking stocks in a free-fall. It was worse in 2008. The problem is, we haven’t seen the banking shares rallying since that time. Right now, you can buy some of the European banks shares like Deutsche Bank, Credit Suisse, Societe’ Generale at the cheapest price in a decade. The European banking crisis is spreading again all around the old continent. It turned out to be a bad investment for those who bought these stocks and hold them for almost a decade. If interest rates are next to zero and the money is cheap, unfortunately banks can’t make profits, as cash is banks’ raw material, just like it’s oil for the oil companies.

The first condition to see the banks stocks rebounding, is the rise of the cost of borrowing. The second condition is the cleaning of the balance sheets from the bad loans and the non performing loans. Both these conditions require a major fact, the improvement of the economy which remains stagnant in most of the major European countries. The latest banking crisis in Europe is also a result of some other requests made by the politicians in the attempt to reach a deal on the inter-bank deposit guarantee fund.

  • Some European politicians have required to put a limit of 25% on the Sovereign bonds that the European banks can hold in their portfolios.
  • The Bail-in is another proposed mechanism, so in case a bank fails, the depositors with more than Eur 100k will participate to the losses.

These two requests turned out to be a double-edged sword, as they spread panic on depositor and investors. The banking sector index in Europe accelerated the fall, after the report of Deutsche bank’s and Credit Suisse’s financial statements, both in deep red.  Deutsche Bank reported around $ 7Bln of losses for the last year, meanwhile Credit Swiss “surprised” with $ 2.8 Bln of losses  for the same period. Credit Suisse share prices have already reached its lowest level in the last 24 years.

Many European banking stocks have already erased gains made in the last period of recovery. The sell-off in the banking sector is not going to finish soon. The world is entering into a negative rates’ spiral and for the banks, it could get worse. There has to be a big change in the macro-politic decision of the European Union. The inter bank deposit guarantee fund must be done without causing panic, and the negative interest rates should be managed only in an economy without cash.

Otherwise the Bail-in and the negative rates could be a good reason to see huge outflows of capitals from European banks and the bank stock prices fall further. All these things should be done in the hurry, before the burst of the Chinese bad loans’ bubble, as it can be too late to save the banking system from a catastrophic event, just like the Lehman Brothers’ one.

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