We have often written of the difficulties of the Eurozone Banking System (See China? Oil prices? Saudi Arabia? Iran? Why Volatility? The Grand Surpise Part Two, January 12th 2016, Octavian Report Interviews Asher Edelman, March 3rd 2016, Brussels Proposes “Guillotine” to Stabilise Failing Banks, May 16th 2016, the State of the World Economy, June 10th 2016, BREXIT – the Economics, June 27th 2016) and its ultimate effect on the world economy. Today, in the Financial Times, there appear two quite interesting articles, not all inclusive but interesting.
European Banks brace for downturn with more cost cuts
by Martin Arnold and Laura Noonan
European banks from Barclays to BBVA are launching another round of cost-cutting as they brace for conditions to deteriorate this year, due to low interest rates, the UK vote to exit the EU and the latest stress test results.
Barclays has shed 11,000 of its 130,000 staff since Jes Staley took over as chief executive in December through a hiring freeze and the closure of its operations in nine countries, mostly in Asia.
The UK bank aims to lower its headcount to 80,000 after selling its African operation, which employs 40,000 people.
Spain’s BBVA is shedding at least 1,500 jobs, just over 1 per cent of its total staff, mostly to complete integration of the CatalunyaCaixa acquisition two years ago.
Italy’s UniCredit is drawing up plans to slash costs with a fresh restructuring that is expected to result in many job losses among its 143,000 staff. Other banks, such as France’s Société Générale and Lloyds Banking Group in the UK, are also cutting thousands of jobs.
The moves underline how Europe’s banks are grappling with the toxic cocktail of sluggish economic growth, downward pressure on interest rates, rising regulatory pressure and political uncertainty because of the Brexit vote in the UK.
“When you think about this quarter, it is going to be less about the results and more about the outlook, with particular focus on the impact of Brexit,” said James Chappell, banks analyst at Berenberg.
Analysts have already cut their consensus estimates for 2016 earnings per share of the 70 biggest European banks by more 30 per cent since the start of the year.
But Mr Chappell said the focus would now be on whether they needed to also cut their 2017 forecasts, which foresee a 23 per cent rise in average earnings for European banks next year. “It is very hard to see how banks will deliver on that,” he added.
As Italy scrambles to find a way of supporting its banking system, analysts will also be closely watching the results of the latest European stress tests of the continent’s biggest lenders when they are released on Friday.
After the big US banks mostly reported lacklustre growth in investment banking in the second quarter, their European rivals including Deutsche Bank and Credit Suisse, are expected to report at best a modest rebound in fixed income trading income.
“Like US peers, European banks are likely to beat fixed income expectations – the bar is low,” said Kinner Lakhani, banks analyst at Deutsche Bank. “However, to get a franchise re-rating requires sustainability and improving returns.”
Portuguese banks face potential big losses
by Peter Wise in London
Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo.
Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break-up or liquidation.
The sale of Novo Banco is among critical decisions that will shortly determine the future shape of Portugal’s banking industry, which the International Monetary Fundhas linked with the problems facing Italian lenders as among potential risks to global growth.
Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state-owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn.
The Bank of Portugal and Lisbon’s eight-month-old “anti-austerity” government are also calling for a “systemic solution” to deal with more than €30bn in bad debts and problem assets, adding to other calls for public bailouts of troubled EU banks.
In a recent report, Barclays estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was bringing the country under “close market scrutiny.”
Investors fear the capital needs of banks could further burden the public finances of a struggling country already facing potential EU sanctions for failing to meet deficit targets.
“Some banks are in need of a large capital injection,” said Antonio Garcia Pascual, chief European economist with Barclays. “This means any material losses from the sale of Novo Banco could end up having to be met by the sovereign, as the capacity of Portuguese banks to absorb them is rather limited.”
Portugal’s second attempt to sell Novo Bancohas attracted four offers. The central bank has not yet identified the candidates, but Lisbon bankers have listed Portugal’s Banco BPI and private equity firms Apollo Global Management, Lone Star Funds and Centerbridge as among those potentially interested.
Apollo reached the final stage of the first attempt to sell Novo Banco, but the Bank of Portugal last September rejected all three shortlisted bids.
The central bank is expected to make an announcement next month on the progress of the second auction, although EU authorities have extended the official deadline for completing the sale by a year to August 2017.
Eduardo Stock da Cunha, Novo Banco’s outgoing chief executive, has warned of potential big losses on the sale, drawing a comparison with Millennium BCP, Portugal’s largest listed bank, whose shares have dropped more than 60 per cent this year and which has a market value of just over €1bn.
“Portugal has to be realistic about Novo Banco when BCP is trading at a price/book value of around 0.4 and southern European banks in general at 0.5,” said a Lisbon banking analyst.
Of course the damage is considerably greater than these articles indicate. The entire banking systems of Germany, France, Italy, Portugal, Greece and Spain are in a state of total disarray, a situation that continues to be systemically threatening to the world’s economies more so as the EU continues to “kick the can down the road.”