Traders See Stress-Test Relief After Europe Banks SlumpNamitha Jagadeesh and Sofia Horta e Costa
The correction that swept European stocks last week induced a full-blown bear market for lenders’ shares. Investors are betting central-bank stress test results later this month will provide relief.
Deutsche Bank AG, which fell 11 percent in a month, and BNP Paribas SA, down 13 percent, helped send equity returns to more than 2 percentage points lower than the broader market, according to data compiled by Bloomberg. Traders eyeing the stress tests are pushing the cost of hedging against further declines to a two-year low relative to the Euro Stoxx 50 Index.
In the Asset Quality Review, or AQR, the European Central Bank will pore over 130 balance sheets as part of a broader health check of lenders’ readiness for a hypothetical disruption. A positive outcome from the exam, the third in Europe since the sovereign-debt crisis in 2010, may help stem losses for banks, according to Teis Knuthsen, chief investment officer at Saxo Bank A/S’s private-banking unit.
“I would be very surprised if at this stage the AQR shows the banking sector is in a dismal state,” Knuthsen said from Hellerup, Denmark. “Both the ECB and banks have had so much time to prepare for this. Imagine that all the banks are given the green light and told they all look fine. This has not yet been priced into the market.”
Euro-region lenders surged as much as 123 percent since July 2012, when ECB President Mario Draghi said he’d do whatever it took to preserve the euro. The rally peaked even as BNP Paribas and Credit Suisse Group AG faced fines, while UBS AG and Deutsche Bank struggled to boost revenue amid regulatory probes. Lenders plunged 20 percent from an April high through Oct. 16, almost double the losses for the Euro Stoxx 50.
The Comprehensive Assessment started in October 2013 as a way to ensure that when the ECB becomes the euro-zone bank supervisor on Nov. 4 it will know exactly what it’s dealing with. Results are due Oct. 26.
Eight banks failed the last stress test in July 2011, with a combined capital shortfall of 2.5 billion euros ($3.2 billion). The gauge of lenders tumbled 14 percent in the month that followed. Barclays Plc expects Austria’s Raiffeisen Bank International AG, Greece’s Piraeus Bank SA and Italy’s Banco Popolare SC to be among eight banks less likely to pass.
Lenders aren’t as healthy as they should be, said Ashburton Ltd.’s Veronika Pechlaner. Draghi has warned that an ongoing contraction of bank loans to the private sector will probably continue to hamper the region’s recovery.
Total debt at Euro Stoxx 50 lenders has halved since 2007, while balance-sheet assets have dropped more than 40 percent, data compiled by Bloomberg show. Even after the ECB provided banks with more than 1 trillion euros of cheap loans for up to three years, credit growth in the euro area remains a problem. Lending to companies and households has contracted every month since March 2012, according to data from the central bank.
“We would like banks to be in a situation where they’ve got more capital and more ability to provide a cushion between monetary policy and the economy,” Pechlaner, who helps oversee $2.3 billion, said from Jersey, the Channel Islands. “They are not lending enough. There are still issues with translating liquidity, with how lending takes place in the real economy.”
Implied volatility, the key gauge of options prices, for one-month contracts on the Euro Stoxx Banks Index rose 18 percent this month, less than the 41 percent surge for the broader measure. The ratio between the two fell on Oct. 15 to the lowest level since 2012, data compiled by Bloomberg show.
The VStoxx Index, which tracks expectations for Euro Stoxx 50 swings, rose 1.4 percent to 25.9 at 9:54 a.m. in London.
The four most-owned options on the banks’ index are bullish. Bets that the gauge will rise 18 percent by December were the most owned, followed by those wagering it will rally 25 percent in the same period.
Banks probably won’t need to raise additional funds after the stress tests, HSBC Holdings Plc wrote in a note last week, which estimated excess capital at 146 billion euros as of June.
“I’m optimistic that we won’t see any major failures in the AQR results,” said Andrea Williams, who helps oversee about $80 billion at Royal London Asset Management in London. “People might think of the AQR as one last problem sorted out that would give banks a clean bill of health. After that, we keep an eye on loan growth and wait for Draghi’s next move.”