Europe banks hit 5 year low on outlook

Analysis

Europe’s bank shares extended a recent tumble to their lowest level for over five years on Tuesday as a grim economic outlook compounded concern that more big writedowns could force more capital raisings.

Swiss bank UBS plunged to its lowest level in its current form, and Credit Suisse, France’s Credit Agricole and Britain’s Royal Bank of Scotland were among the biggest fallers, all down over 4%. By 9:15 a.m. GMT the DJ Stoxx European bank index was down 3.3% at 267.6 points, after touching 267.1, its lowest level since May 2003. Even after steep falls this year -- the European bank index is down 37% -- a worsening macroeconomic outlook is unsettling investors on both sides of the Atlantic that worse is to come.

US bank stocks plunged to their lowest level in more than a decade on Monday as the prospect of soaring credit losses stoked fears that upcoming earnings will fall short of already low expectations. Big names such as Citigroup fell, but US regional banks were even harder hit on concern they will take big credit losses. Steven Pearson, chief strategist at Bank of Scotland, said in a note to clients this showed “the epicenter of this crisis shifts from investment to commercial bank balance sheets”. He added: “A reliance on very short-term and increasingly central bank provided funding limits the ability of the banking sector to extend credit on previously normal terms or tenors.”

UBS shares dropped 4.5% to 19.08 Swiss francs, having hit their lowest point since the bank was founded from a merger between Swiss Bank Corporation and Union Bank of Switzerland in 1998. Credit Suisse shares were 3.9% lower. “Given the poor performance of banks/brokerage stocks yesterday in the US -- due to growing concerns over Freddie Mac & Fannie Mae to raise more capital -- we expect a similar development in Switzerland,” Julius Baer analysts said.

Banks exposed to a slow structured credit market and those in economies showing the most severe stress, such as Britain and Ireland, were among the biggest fallers. Deutsche Bank, France’s Societe Generale, Spain’s BBVA and Italy’s Unicredit all lost over 3%. Ireland’s Allied Irish Banks fell 7% and Belgian-French firm Dexia lost 5%. (Reuters)

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