Cryan Rains On ECB's Parade
Deutsche Bank Chief Executive John Cryan had a bitter digestif for investors that gobbled up bank stocks on the back of fresh stimulus from the European Central Bank: a profit warning for 2016, on the back of two straight quarterly warnings in 2015.
Cryan wasn't alone in giving a reality check. Several bank chiefs took to the stage at Morgan Stanley's financial-sector conference in London on Wednesday with fairly bleak assessments. UBS's Sergio Ermotti said the first quarter of 2016 had showed a marked slowdown year-on-year. Barclays' Jes Staley boasted of having cut 6,000 positions in his first 100 days in charge. Rather than a party atmosphere, the mood felt more like a wake.
The initial enthusiasm that greeted the ECB's announcement of fresh cheap funding for banks has dissipated, and European bank stocks are now back below where they were before Draghi's March 10 press conference. The cost of insuring against a Deutsche Bank debt default has picked up since then too. We're still some way off the worst of the February panic, but the tone is more in tune with Cryan's bleaker assessment.
The shift reflects the work that still lies ahead of big global firms more exposed to investment banking, such as Deutsche Bank, Barclays and Credit Suisse. Revenues lost in the wake of the crisis -- bond and proprietary trading, risky debt -- aren't coming back anytime soon. And even if banks' cost of funding falls, the cost of doing business -- from tougher regulation to litigation -- remains too high. There will be more cuts and ultimately more losses before management is able to give a more confident message.
This explains why earnings-per-share estimates for European banks have continued to fall steadily, even over the past week. Banks are cutting assets and businesses in a bid to slash costs and jobs and improve returns. But that also has a cost as revenue streams disappear.
For 2016, adjusted net revenue is expected to fall 14.2 percent at Deutsche Bank, 4.5 percent at Credit Suisse and 13 percent at Barclays. UBS is expected to only see a drop of 0.7 percent -- it has moved quicker to overhaul its business model away from investment banking -- but Ermotti also warned that risk aversion was hitting revenue.
What this means is that the lift to asset prices from ECB stimulus may be used to help banks continue to unload unwanted businesses, and not embark on a lending spree that's hoped will ultimately translate into faster inflation.
Bond guru Bill Gross said earlier this month that the banking sector was "permanently damaged". That still looks correct. The bank parade won't be in full swing for a while yet.
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