European bank stocks, which posted their best three-day rally in a year last week, may struggle to maintain those gains as investors expect more writedowns, capital raisings and more contagion from the debt crisis.
The Stoxx 600 Banks Index tumbled as much as 3.1 percent as today in London. The gauge jumped 5.7 percent last week after the European Union extended debt maturities for Greece and announced a plan to enhance a rescue fund to buy bonds and recapitalize lenders. The initiative didn’t spell out a way to avoid debt-crisis contagion outside of Greece, investors said. Making banks raise capital as governments cut spending may hurt economic growth, they said.
“They made a huge patch, but it is still a patch,” Henrik Drusebjerg, a senior strategist at Nordea Investment Management in Copenhagen, which oversees $220 billion, said in a telephone interview. “We are not out of the woods yet.”
The Stoxx Banks gauge is still trading for 20 percent less than the average price estimate of analyst projections tracked by Bloomberg, and 20 percent below the reported value of their assets, as Europe’s 21-month debt crisis sent borrowing costs from Greece to Italy soaring. The industry index has underperformed all other 18 groups in the broader Stoxx 600 since the start of 2010, having lost 18 percent in the period.
After eight hours of talks in Brussels on July 21, leaders announced 159 billion euros ($229 billion) in new aid for Greece and cajoled bondholders into footing part of the bill. They also empowered their 440 billion-euro rescue fund to buy debt across stressed euro nations after a market rout the previous week sparked concern the crisis was spreading. The fund can also aid troubled banks and offer credit-lines to repel speculators.
The Stoxx banks index jumped 4.1 percent on July 21 as expectations grew that the EU would agree on a further bailout of Greece, posting its best session in six months and the biggest three-day gain since July 2010. The measure was down 2.7 percent at 3:45 p.m. today in London, with Italian and Spanish banks including Banca Popolare di Milano Scrl, Intesa Sanpaolo SpA (ISP) and Bankinter SA losing at least 4 percent as both countries’ bonds dropped.
Banks including UBS AG (UBSN), Banco Santander SA (SAN), Deutsche Bank AG (DBK), Credit Suisse Group AG (CSGN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) will report results this week, their first since both Europe’s bank stress tests and the details of the Greece’s new rescue package.
“All the news has done is bought Greece some time to grow its way out of the problem,” said Oliver Brown, who oversees 230 million pounds ($375 million) as investment director at R. C. Brown in Bristol, England. Brown said he had sold banks including Milan-based UniCredit SpA (UCG) and Frankfurt-based Commerzbank AG. (CBK) “If growth was sedate or to slip into recession, some European banks would have insufficient capital to cover the impairments they’d have to make,” he said.
Jamie Dannhauser, an analyst at Lombard Street Research in London, said austerity plans in the region may worsen the economic situation and hurt banks’ earnings as growth “could be looking pretty awful over the next six months.”
The European Commission forecast in May the euro zone may grow 1.8 percent in 2012. Greece’s gross domestic product may shrink 3.8 percent this year before growing 0.6 percent in 2012, the Commission predicted this month. The economy contracted 4.4 percent last year.
Europe’s biggest banks stand to lose 20.6 billion euros on their Greek government bonds after lenders in the region pledged to contribute to the new rescue package. Europe’s 90 largest banks hold about 98 billion euros of Greek debt, according to the European Banking Authority. Any writedown would come as the EU proposed on July 20 boosting minimum capital and liquid assets at more than 8,300 banks to stave off insolvency.
Some investors increased their bank holdings in light of the agreement in Brussels.
Frederic Jeanmaire, who helps oversee about 30 billion euros at Threadneedle Asset Management Ltd. in London, bought Intesa, Societe Generale SA and BBVA, moving from “underweight” to “neutral” positions.
Equity strategists led by Edmund Shing at Barclays Capital upgraded European banks to “marketweight” in a July 22 note. Veronika Pechlaner, who helps manage 1.1 billion pounds at Jersey, Channel Islands-based Ashburton Ltd., also said she bought European bank stocks.
“We’ve probably avoided the abyss, now let’s look at what the earnings have done,” Jeanmaire said in an interview. “Should earnings be less bad than expected, that could continue the rally.”
Investors bought shares of banks that have fallen the most in the 21-month debt crisis. National Bank of Greece SA (ETE), trading at half the value of its assets, climbed 28 percent last week. Dexia SA (DEXB), the Belgian bank valued at 0.4 times its assets, surged 19 percent. Commerzbank, which slumped 65 percent since September 2009, rose 13 percent. Goldman Sachs Group Inc. raised its recommendation on the shares to “conviction buy.”
“As we expect material positive improvement in the bond spreads over the next few days and weeks, we expect this discount to revert and the stocks in our coverage to move toward target prices and beyond,” analysts at Sanford C. Bernstein & Co. led by Dirk Hoffmann-Becking and Marcello Zanardo wrote in a note to clients on July 22. They rate Credit Agricole SA (ACA), Societe Generale (GLE), Credit Suisse and UBS “outperform” and target each bank to have at least 72 percent of gains.
Bertie Thomson, who helps oversee 1.5 billion pounds in European equities at Aberdeen Asset Management Plc, said he is “significantly underweight” in European banks, owning only Nordea Bank AB in Stockholm and London-based Standard Chartered Plc (STAN), and plans to stay that way.
“The Brussels agreement is a ‘sticking plaster,’” Thomson said in a telephone interview. “It still seems to me that if you look at the crisis as a whole, there’s not the political will to actually overturn what needs to be done, which is fiscal union. You’re not going to sort out these peripheral problems until there is.”