How Europe's Banks Got Hit by a Perfect Storm in Five Charts

  • Swaps tied to senior debt on longest run of gains since 2013
  • Banks in Stoxx Europe 600 Index lead declines this year

How Healthy Are Banks Today?

A stock plunge by Europe’s banks deepened Monday, while credit markets showed investors are most worried in years about lenders’ bond risks.

“It’s a perfect storm,” said David Moss, who helps to oversee more than $237 billion of assets as head of European equities at BMO Global Asset Management in London. “People think ‘the share price must be telling me something’ and that induces ongoing panic. It’s been a pretty indiscriminate selloff.”

The following charts show how investors are shunning banks:

Banks in the Stoxx Europe 600 Index have dropped about 39 percent since a peak in July. Their slump this year is the worst of any other industry group. While Greek and Italian banks have led declines, Credit Suisse Group AG shares plunged to the lowest since 1991. Some of the region’s largest lenders, including Deutsche Bank AG, Barclays Plc, BNP Paribas SA and Banco Santander SA have lost more than a fifth of their value this year.

As bank shares tumble, expectations for further turmoil increase. The cost of hedging against more swings in euro-area lenders doubled this year, reaching its highest level in three years relative to the broader market.

Banks and insurers are leading a surge in the cost of insuring corporate bonds to the highest levels since 2013. The Markit iTraxx Europe Subordinated Financial index of credit-default swaps on the junior debt of 30 firms soared for an eighth day, rising 47 basis points to 312 basis points, the highest since March 2013, according to data compiled by Bloomberg.

Deutsche Bank’s CDS and AT1 Yield

Deutsche Bank may struggle next year to pay coupons on its riskiest bonds, known as CoCos, if operating results disappoint or litigation costs are higher than expected, according to analysts at CreditSights Inc. Bonds and shares of Germany’s largest bank have plunged this year, while the cost of protecting the company’s subordinated debt from default for five years using credit-default swaps has more than doubled since the end of 2015.

The soaring yields on a Merrill Lynch index of banks’ Tier 1 bonds indicate growing concern that the asset class may be hit by decisions to withhold coupon payments. Investors say this, rather than bail-in, is the main source of risk for these instruments.

“The scenario that’s being priced in this year is too bearish. ,” said Francois Savary, chief investment officer at Prime Partners SA, a Geneva-based investment manager. “If you believe that the market has an ability to recover, then financial stocks are going to be a main participant of that rebound.”

Before it's here, it's on the Bloomberg Terminal.