LONDON/NEW YORK (Reuters) - Banking stocks fell sharply again on Friday, with European giants Deutsche Bank and UBS knocked by worries that regulators and central banks have not yet contained the worst shock to the sector since the 2008 global financial crisis.
The S&P 500 Banks Index was 1.5% lower and wider indicators of financial market stress were also flashing warning signs. The euro fell against the dollar, bond yields sank and the costs of insuring against bank defaults surged despite efforts by policymakers worldwide to reassure investors.
JOHN CAREY, MANAGING DIRECTOR AND PORTFOLIO MANAGER, AMUNDI US, BOSTON
"We've had some failures and shutdowns, and people are wary of the sector. I'm of the opinion that most of the banks - at least here in the U.S. and Europe, too - are going to make it through this period of difficulty. The credit quality is generally better than it was back in the '07-‘09 period. A lot of people are making comparisons between this situation and what happened then. In general, the credit quality is better now, although we have to watch closely the commercial real estate. Back in the '07-‘09 subprime meltdown period, it was largely residential mortgages, and this time I think the concern centers on commercial real estate. I don't know that the issues will be as difficult to resolve, but we have some months ahead of us of uncertainty.
"The sharp increase in interest rates last year caught a lot of people by surprise. People were caught off guard by how quickly rates rose, and obviously some companies made some imprudent decisions in their investment portfolios.
"I'm not in a panic mode myself but it is prudent to exercise some caution and be patient and not think this is all going to be resolved over the weekend."
JOSEPH TREVISANI, SENIOR ANALYST, FXSTREET.COM, NEW JERSEY
“After you have one event like that, SVB, and then Signature, and Credit Suisse following that, and then Deutsche Bank, everyone suspects that there are more problems out there that have surfaced. Any bank is going to be reluctant to go public with any of its problems for obvious reasons, since SVB, and Credit Suisse were suffering serious withdrawals - that was the engine which got those concerns into the market.”
“The market is suspicious, or weary is maybe a better way to put it, that there are more problems out there that have come forth.”
“It takes time. It's going to have to be weeks without any problems in the banking system before markets will be convinced that it's not a systemic problem.”
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA
"Two weeks ago we thought this was kind of an isolated event that began with Silicon Valley Bank and then it spread to First Republic and Signature Bank... Today it kind of confirmed this is a global issue right now, and nobody knows where it will end. So people are acting with their feet and continuing to sell bank stocks.
"I think it's going to go on through the first quarter of earnings season because not until you see the numbers and hear management talk about the balance sheet and their business and what the rest of the year looks like is there the potential for things to calm down. That could calm down the industry. If their business looks increasingly risky after the first quarter, then who knows. But my guess is every bank management team has about a week now to prepare their balance sheet to look as good as it can at the end of March, and that may stabilize the industry.
"I think we're in for about three more weeks of turmoil."
ING ECONOMICS TEAM (emailed)"Most European banks are impacted by these events mainly via the more cautious market sentiment. Debt risk premiums have widened, and the sharp swings in financial markets have guaranteed that the primary bond markets have remained steadily closed so far. The wider spreads make it more expensive for banks to fund their operations, the impact of which will come through only slowly as banks advance with their funding programmes."
“The decision of the Swiss authorities to wipe out the Credit Suisse AT1 debtholders resulted in the AT1 market being severely hit. It is doubtful that banks will be able to issue new AT1 anytime soon, increasing the likelihood of outstanding AT1 notes being extended.”
“We consider that the recent events in the banking sector have resulted in substantially increased uncertainty, which is likely to continue to be reflected as substantial short-term volatility in credit markets. We expect bank spreads to be negatively impacted in general and also in the longer term, whether in bank capital or in bank senior debt, as bank investors factor in more uncertainty regarding resolution practices.”
PETER GARNRY, HEAD OF EQUITY STRATEGY, SAXO BANK, DENMARK
“The developments in the AT1 market mean that most European banks are incentivized at this point to issue common equity which is diluting for shareholders and also the reason why banking stocks are being reset lower. “
“The pressure on bank stocks continued yesterday even after Yellen tried to soften her rhetoric on the Biden administration's stance on official action if the turmoil in the banking system continues. Headline risk and the price action in bank stocks will remain in focus, and not just in the US, but also in Europe, where the stress on Tier1 bank debt shows that banks' profitability outlook is under threat on rising funding costs.”
FREDERIQUE CARRIER, HEAD OF INVESTMENT STRATEGY, RBC WEALTH MANAGEMENT, LONDON
“When the tide recedes, it tends to expose weakness and this is what we have seen. We are optimistic that the cases of SVB and Credit Suisse are isolated and contained, but in our view the tail risk has not entirely gone. Scars heal slowly and concerns about the sector are likely to linger. The banking system is based on confidence so we have to monitor future developments very closely.
"Bank stocks have fallen a lot and look cheap. As part of a global diversified portfolio, there is certainly room for high quality banks, but we would be cautious. We wouldn't hold more than a benchmark position, because with an uncertain economic outlook it is likely to become more difficult for banks- their cost of capital and funding are likely to increase and they will probably have to pay more to attract deposits. In the case of European banks, capital distribution is uncertain as capital preservation may have to take precedence.”
PAUL VAN DER WESTHUIZEN, SENIOR STRATEGIST, RABOBANK, NETHERLANDS
"It seems to be driven by a serious downturn in Deutsche Bank's equity price... Deutsche is a bank that has had its own issues with regulators, it has also seen profit volatility and gone through a restructuring. There is a fundamental difference in that Deutsche has returned to profitability over the last few quarters, whereas Credit Suisse did not have a profitable outlook for 2023 at all."
"It seems like post what happened to Credit Suisse last weekend, two things might be at play here. First of all, investors don't want to hold on to positions that have any concern around them over the weekend. Getting out of such positions is probably what we're seeing with Deutsche Bank. And of course there is money to be made if you're on the right side of an overreaction in the stocks."
“European banks probably suffered from contagion from what was going on in the US, where the regional banks seem to be under pressure in the rising rate environment. European banks have, in fact, had no fundamental issues whatsoever. They are sound and historically stronger than they've ever been. They have been benefiting from the rising interest rate environment and their profitability metrics are finally started kicking up. We had the outlier of Credit Suisse which was there was a sudden lack of trust that led to the run on the bank, but that came from quite a few years of mismanagement and scandal.”
AUTONOMOUS RESEARCH, LONDON
“We are relatively relaxed in view of Deutsche's robust capital and liquidity positions.””
“We have no concerns about Deutsche's viability or asset marks. To be crystal clear - Deutsche is NOT the next Credit Suisse.”
JAN VON GERICH, CHIEF ANALYST, NORDEA, HELSINKI
"Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk on."
"It's very volatile and it's too early to say things will calm down."
"It's crazy how volatile markets are."
"All of this is happening at a time of exceptionally high inflation environment and adds to the volatility."
JUSSI HILJANEN, HEAD OF EUROPEAN RATES STRATEGY, SEB, SWEDEN
“Generally speaking in this kind of environment markets are quite keen on looking at the weakest link. In general markets are quite worried and are focusing on the potential next domino. If it’s reasonable to focus on Deutsche or not I really don’t know.”
“When these kind of worries hit the market, it’s quite usual that markets buy (the bonds of) Germany, which is outperforming as a flow to safety.”
(Compiled by the Global Finance & Markets Breaking News team)