Europe Banks at Post-Lehman Lows Show Sovereign Risk Rising

Europe Banks at Post-Lehman Lows
A pedestrian enters the headquarters of BNP Paribas SA in Paris, France. Photographer: Antoine Antoniol/Bloomberg

Investors are valuing European banks at levels not seen since the depths of the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. as concern over a Greek default and debt contagion escalates.

A Bloomberg index shows 46 lenders trading at 0.56 times book value, the cheapest since the post-Lehman lows of March 2009, signaling investors estimate their net assets are worth less than the companies claim and are demanding discounts for perceived risks. Valuations reflect the impact of a potential sovereign default for some banks, according to Barclays Capital analysts led by Jeremy Sigee.

Group of Seven finance chiefs meeting in Marseille, France, over the weekend vowed to support banks amid growing concern that the debt crisis is morphing into a banking crisis. As doubts linger about the ability of some European lenders to withstand a Greek default and its ripple effects, the cost of insuring their debt rose to records, while a measure of their reluctance to lend to each other climbed to a 2 1/2-year high.

“Politicians need to get their heads together and deal with the inevitable: a Greek default and recapitalization of some banks,” said Peter Thorne, a London-based analyst at Helvea Ltd. “You have to make the banks look financially stable and secure so that people are prepared to deposit money with them for more than 24 hours.”

Funding Costs Rise

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on Sept. 5 that market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 12 basis points to 312 and the subordinated index jumped 25 to 560, according to JPMorgan Chase & Co. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, rose to 0.853 percentage point, the widest gap since March 2009.

August was the worst month for long-term debt issuance for the region’s lenders in more than five years, Bank of America Corp. analysts led by Derek De Vries said in a note last week.

The Bloomberg Europe Banks and Financial Services Index of stocks dropped 4.1 percent today to the lowest level in almost 2 1/2 years. The index has slumped 37 percent so far this year, led by financial companies based in peripheral Europe, such as Banco Comercial Portugues SA and National Bank of Greece SA, as well as those with investments there, such as Commerzbank AG of Germany and France’s Societe Generale SA.

Implied Writedowns

In the case of some banks, the plunge implies writedowns beyond the current level of sovereign bond prices, according to a note from Sigee on Sept. 7.

BNP Paribas SA, Societe Generale and Credit Agricole SA, France’s largest banks by market value, are trading at levels that imply a 100 percent loss on Greek, Irish and Portuguese holdings, according to Barclays. In the case of Paris-based Societe Generale, the share price even implies full writedowns on Italian and Spanish debt, according to Barclays.

“The current discounts to book are driven by much broader macro concerns, and attributing all of the discount to a single risk factor like sovereign is too simplistic,” Sigee wrote, adding that the French banks’ risks remain manageable. “However, it does give a sense of how severely sovereign risks have been priced into equity valuations.”

Credit Ratings

BNP Paribas, Societe Generale and Credit Agricole tumbled in Paris trading on a possible ratings cut by Moody’s Investors Service, extending their more than 40 percent slide in the last three months. They may have their credit ratings cut as early as this week because of their Greek holdings, two people with knowledge of the matter said.

Societe Generale said today it plans to sell 4 billion euros ($5.4 billion) in assets by 2013 to reassure investors about its finances. The lender said it holds about 900 million euros of Greek bonds and has “no significant” Irish or Portuguese debt.

Bank of France Governor Christian Noyer said French banks are capable of facing any Greek response to sovereign-debt difficulties and have no liquidity or solvency problems.

“Whatever the Greek scenario, and whatever provisions have to be made, French banks have the means to face it,” Noyer said in an e-mailed statement today. “French banks have neither liquidity nor solvency problems.”

Greek Cuts

The 90 banks that underwent European stress tests would face an estimated capital shortfall of 350 billion euros if Greek, Portuguese, Irish, Italian and Spanish government bonds were written down to market values, according to Nomura analysts led by Jon Peace. No “practical” amount of capital can prepare them for a large sovereign debt impairment or default, Nomura said in a note on Sept. 7.

Prime Minister George Papandreou, vowing to avoid a default and keep Greece in the euro, approved new measures to help plug a yawning budget gap as resistance builds to extending more aid to the European Union’s most-indebted nation.

Greek 10-year bonds are trading at a 52 percent discount to face value, according to Bloomberg data. By comparison, some banks agreed in July to write down the value of their Greek securities by an average 21 percent as part of a bond exchange and debt buyback program for Greece.

ECB Rift

Reflecting concern that Greece may fail to meet the terms of its aid package and miss its payment obligations, German Chancellor Angela Merkel’s government is preparing plans to shore up its nation’s financial sector, three coalition officials said Sept. 9. The surprise resignation of Juergen Stark from the European Central Bank on the same day exposed the policy rifts aggravating the debt turmoil.

“Stark resigning is another development that suggests Germany isn’t really behind a lot of what the ECB needs to do to shore up the situation,” said Jonathan Fayman, a fund manager at BlueBay Asset Management Plc in London. With Merkel preparing banks for the possibility of a default, “the market is scared and it looks like it should be,” he said.

Henrik Drusebjerg, senior strategist at Nordea Bank AB in Copenhagen, said the financial turmoil will force policy makers to find a solution that would otherwise have taken decades.

“Why?” he said. “Because the alternative is a total breakdown.”

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