Quick outlook for the banking sector in EU . .

 

As we already step-up in the Digital age the technology has put some pressure in several branches  of the world economy . .  Likewise we are speaking for pressure and deteriorating in some sectors the banking sector in the European Union is starting to shaking all over the place (sarcastically told), also with the uncertainty of the  Brexit case  and some other political turmoil are contributed to this “shaky situation”  . .  

 Technology has put pressure on bank profits as alternative-payment services, crowdfunding and peer-to-peer lending are only growing in popularity, scale and scope. This trend will continue to take business share away from these institutions. In fact, many of them have taken the approach,”if you can’t beat them, join them” and have launched competing services meant to retain their influence on our wallets. We see a lot of smoke coming from the European banking system in the form of low-to-negative interest rates, downward bond yields, the risk of under-performing loan exposure, and the uncertainty of Brexit. Therefore, we are steering clear. Many European financial institutions are currently in full compliance with Basel III requirements, this compliance will come at a cost to profitability. These new rules intend to make banks safer. Add to all of this the complex derivative exposure and the interdependency of these institutions on one another and we can easily see a picture emerging that says to invest elsewhere. Wall Street didn’t see the Brexit coming. This has created a tremendous amount of uncertainty. Housing bubbles have risen in certain select locations across Europe and the capital ratios of some institutions are well below 5% . . .  Underperforming loan exposure is another large risk for these institutions. Current estimates show banks in the euro area have nonperforming loan ratios (NPLs) of over 7%. At the height of the financial crisis, U.S. banks had a NPL ratio of just 5%. In fact, current estimates show Italian banks have a NPL ratio as high as 17%. Accordingly, share prices of some of the oldest banks in Italy reflect this reality. 

eubanks1

 

Week to week change

0.82%

52 week change

-40.89%

Year to date change

-26.38%

Daily change (absolute)

+0.82% (0.41)

 

On an economic basis, many financial institutions, but especially those headquartered in Europe, are fighting strong headwinds that may grow to gale-force strength if conditions continue to deteriorate. One of the largest structural issues is low to negative interest rates throughout much of the European Union.

 With nearly $13 trillion in negative-yielding sovereign bonds worldwide, it appears some of the strongest nations are caught in a disinflationary trend as evidenced by the reaction of bond yields that continue to spiral lower. For example, the Swiss Yield Curve remains negative past 30 years. While financing for the nation is cheap, the cost is felt at the banks. The European Central Bank may soon be put in a position to support some of the largest financial institutions in order to prevent further contagion across the sector and the economy as a whole.

 

 

 

J. Mason ♦

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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