Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It seems European bank investors can't win. Those who ignored headlines of an impending crisis in China and bought Asian banks, however, have done well this year. 

The board of Italy's Banca Monte dei Paschi di Siena SpA, the world's oldest lender still operating, met Sunday and decided to proceed with a debt-for-equity swap that will mean further losses for bond and stockholders. The move is likely to reverberate across bank securities in Italy and other parts of Europe.

It comes after a year European lenders would rather forget. While the Bloomberg Europe Banks & Financial Services Index is down 5.8 percent for the 12 months, the Bloomberg Asia Pacific Banks Index is about flat.

East Beats West
Asian bank stocks are flat for the year while European lenders are down 5.8 percent, after recovering from much worse losses
Source: Bloomberg

China, which was one of the region's poorer performers (Thai banks returned 22.4 percent), is ending 2016 up 2.6 percent. And while there were some bright spots in Europe -- Dutch and Norwegian financial stocks returned 25.2 percent and 38.2 percent respectively, for example -- investing in Greek, Italian, Irish, Portuguese or German banks resulted in losses from 22 percent to 45 percent.

Positive Vibration
Asian lenders, whose fates are closely aligned to those in China, are ending the year in the black. Buying financial institutions in some European countries, however, resulted in double-digit losses
Source: Bloomberg
* Based on the components of the Bloomberg Asia Pacific and Bloomberg Europe Banks indexes. Data is as of Dec. 9, 2016.

Monte dei Paschi's woes and the troubles faced by the likes of Deutsche Bank AG or Royal Bank of Scotland Plc suggest the worst isn't over. As Europe's lending balance sheets shrink, along with the purses of their backers, Asian banks, particularly those from China, are coming to the fore. Apart from the fact growth at home is still robust, Beijing's institutions are now taking a bigger chunk of global loans, currently the 10th-largest lenders in the international banking market, according to the Bank for International Settlements. 

While that carries risks of its own, expansion abroad also could fuel better returns as the yuan depreciates. It may help buoy stocks from other lenders in the region, too. 

Asian bank shares aren't completely immune to what happens in the West. The 89-day correlation between the Bloomberg Asia and Bloomberg Europe bank indexes still runs at 37 percent and was as high as 50 percent earlier this year. So as the selloff in Europe continues, Asian lenders will follow to some extent.

Yet the dynamics fueling both regions are very different, and most institutions this side of the world aren't as leveraged and depend less on wholesale funding.

While the negative hype is especially high-pitched when it comes to China, which could herald some pain in 2017, investors currently look to be on the right side of history.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net