Questions grow over banks as profit warnings pile up

Questions are growing over the financial health of banks, particularly in Europe, as they face a toxic mix of low economic growth, bad loans and squeezed earnings.

France's Societe Generale became on Thursday the latest bank to issue a confidence-shattering profit warning, which helped trigger a new sell-off in financial stocks. The bank saw its share price stumble 12 per cent and major rivals like Deutsche Bank and UniCredit saw losses of nearly 10 per cent.

European banks are not the only ones to suffer. Japanese bank Mitsubishi Financial fell seven per cent on Thursday. In the United States, Morgan Stanley is down 22 per cent so far this year.

Among the top concerns is that the global economy will weaken more than expected, souring some of the loans that banks have issued to companies around the world - particularly in distressed sectors like the energy industry.

Mike van Dulken, head of research at Accendo Markets, says the latest weakness in bank stocks stems from US Federal Reserve Chair Janet Yellen "warning on current financial market turbulence and suggesting further rate hikes could be delayed, which added to already raised anxiety about the health of the global economy".

On Wednesday, Yellen cautioned that global weakness and falling financial markets could depress the US economy's growth and slow the pace of Fed interest rate hikes. That's a particular concern as the US economy has been one of the few bright spots in the global economy, which is seeing a slowdown in China and stagnation in Japan and Europe.

The fact that many central banks keep cutting interest rates, pushing down market lending rates, is further hurting banks by squeezing their profits. Banks mainly make money by lending, so as rates drop, so do earnings.

The situation is worsened in some regions, particularly the Eurozone and Japan, where the central banks charge commercial banks to deposit money with them.

Analysts at Capital Economics say that if the European Central Bank cuts one of its key interest rates further below zero, "this could have adverse effects on banks' profitability."

Citing ECB chief Mario Draghi's recent statements that the central bank could take more action in March, the analysts said the ECB "seems prepared to squeeze banks' profitability further in the short term in order to support the economy".

The Stoxx index of European bank shares is down 20 per cent in the last month, when Draghi first mentioned the chance that the ECB might try to offer more stimulus in March to lower market rates.

In some markets, bad loans are already piling up - or have not been dealt with effectively since the global financial crisis.

That's the case in Italy, where banks are estimated to hold some €350 billion in soured loans, or more than 30 per cent of the Eurozone's total. The government is trying to mop up those bad loans, but the banks are seeing their shares slide in the meantime. Banca Monte del Paschi, which was down nine per cent on Thursday, is down 60 per cent so far this year.

More narrowly, some banks are being targeted for complex financial investments they have made in recent years. That's the case of Deutsche Bank, which has seen the value of its so-called contingent convertible bonds fall sharply. The bank has some €350 million in payments on such bonds due by April 30, and had to issue a statement Monday evening assuring it had the money to pay.

Deutsche Bank's shares were down nine per cent, bringing its drop this year to 41 per cent.

- AP