Barclays Plc (BARC) Chief Executive Officer Robert Diamond and Deutsche Bank AG (DBK)’s Anshu Jain said investor optimism is growing in 2012, as the European Central Bank provides unlimited loans to the region’s lenders.
“We are seeing a big change driven by somewhat more confidence in the U.S. economy and, most importantly, that Europe is on the right path,” Diamond said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland today. Markets have been spurred on by the ECB’s loans last month, he said. “There is a bit more confidence in the market today.”
The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized in the second half of last year and cash from U.S. money market funds dried up. The ECB last month lent banks an unprecedented 489 billion euros ($644 billion) for three years. Since then, financial stocks have rebounded 16 percent while the cost of insuring bank debt against default has fallen.
“We are beginning this year on a mildly better note than the one we finished on in the fourth quarter,” Jain, who takes over as co-CEO of Frankfurt-based Deutsche Bank at the end of May, said in an interview today.
Both Citigroup Inc. (C) CEO Vikram Pandit and Christian Meissner, Bank of America Corp.’s co-head of global corporate and investment banking, also said the mood among investors in Europe has improved.
‘A Lot Better’
“Sentiment is a lot better than it was a few weeks back and that’s because of the very strong actions taken by the ECB,” Pandit said. “A lot of the actions that are happening are moving in the right direction of a stronger euro and euro zone.”
The 43-member Bloomberg Europe Banks and Financial Services Index has rebounded 16 percent since the ECB’s so-called Long Term Refinancing Operation on Dec. 21. Germany’s DAX index has climbed 10 percent this year, the biggest gain among European benchmarks. The DAX was up 85 points, or 1.3 percent, at 1:15 p.m. Frankfurt time.
The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers declined 10 basis points to 217 today, the lowest since Oct. 28. The index hit a record of 354 on Nov. 25. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The spread between three-month Euribor and the overnight indexed swap rate -- a barometer of European banks’ willingness to lend to one another -- narrowed to 78 basis points today from about 100 basis points on Dec. 8.
“The first three weeks of this year have been much better than the final quarter of 2011,” Meissner said in an interview. “Certainly the ECB’s actions before Christmas were a big component in that but on the other hand there is not yet a clear sense that the end game is clear or imminent. It’s more positive for sure but there is some ways to go.”
Other Davos attendees have warned it’s too early to sound the all clear on Europe even after the ECB’s emergency cash.
The ECB’s measures “have relieved the liquidity problems of European banks but didn’t cure the financing disadvantages highly indebted countries suffer,” billionaire investor George Soros told reporters yesterday. “Half a solution isn’t enough.”
The industry will also be smaller as lenders eliminate jobs and increased regulation in the wake of the collapse of Lehman Brothers Holdings Inc. (LEH) in 2008 makes it harder for banks to maintain their levels of profitability, executives said.
Financial firms globally announced more than 200,000 job losses in 2011, up from about 58,000 the previous year, according to data compiled by Bloomberg.
“It’s hard to see how the spate of regulations that we’ve seen unfold over last 18 months will do other than consolidate our industry even further,” Jain said. “You have to be in the top three or maximum top seven to be able to sustain profitability,” he said. “A lot” of the job losses in the industry are “from some of the new entrants.”
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