The European Central Bank is expected to press the green light on a further round of stimulus in September to combat both slowing growth and inflation - and ECB President Mario Draghi seems to have little concern regarding the impact this will have on Eurozone banks including Santander [BNC], Deutsche Bank [DB] and BNP Paribas [BNP], and their respective share prices.
The Eurozone economy grew only marginally in the second quarter with its biggest market – Germany – suffering from a crash in manufacturing orders and slowing investment. Eurozone inflation, at 1%, also trails the ECB’s 2% target.
The ECB is forecasting a further economic slowdown in the third quarter as Europe is battered by the risk of a global trade war, as well as Brexit.
To combat these headwinds, Draghi is expected to launch a combination of quantitative easing and rate cuts next month. However, to ease the burden on Europe’s banks that more interest-rate cuts will inevitably bring, a deposit tiering system has been mooted, which would effectively lower the charge that banks pay on some of their excess cash.
However, analysts also forecast that the ECB will cut its deposit rate further - the interest banks receive for depositing money with the ECB overnight -, which currently stands at a historic low of -0.4% to -0.5%, which means the banks will be paying even more to the ECB.
The ECB is also expected to make further sovereign bond purchases.
What does this mean for major European banking stocks?
It’s already been a turbulent journey, with Reuters recently reporting that Eurozone banks have lost 84% of their value since 2007. A Money Week report found that because of negative interest rates, Eurozone banks have paid €21bn to the ECB since 2014.
Further stimulus could bring more discomfort.
Another rate cut could impact the banks already struggling profitability, with not even the tiering system offering much solace. “We do not expect it to be especially generous to the banking sector given the ECB’s belief that negative rates are not yet hurting banks’ profitability,” said Credit Suisse lead banking analyst Jon Peace.
Natixis analysts Patrick Artus says European firms looking for finance may have to look to the US or other foreign banks instead for cash.
“We do not expect it to be especially generous to the banking sector given the ECB’s belief that negative rates are not yet hurting banks’ profitability” - Credit Suisse lead banking analyst Jon Peace
Santander share price: set to rebound?
Santander, the biggest Eurozone bank by market cap, has seen its share price fall from around the €6 mark at the start of this year to €3.18 as of 27 August, with the bank’s dividend growth rate down 17.5% over the last 5 years.
However, analysts expect a 14.59% increase in its dividend this fiscal year as it stages a recovery.
In the three months to 30 June, underlying profit rose 5% to €2.1bn, which was described by Chairman Ana Botin as its best result in 8 years. This was despite a €706m hit from restructuring costs in Spain and the UK.
Santander continues to diversify away from troubled Europe with its Americas division now accounting for 55% of profits, led by Brazil. Analysts like the diversification and have a consensus ‘outperform’ rating for the bank.
|Return on Equity (TTM)||8.28%|
|Quarterly Revenue Growth (YoY)||3.10%|
Santander share price vitals, Yahoo Finance, 27 August 2019
Deutsche Bank share price struggles continue
Rival Deutsche Bank’s share price has dropped from €9.77 last August to a lowest-ever €5.81 on 15 August, since which it has marginally rebounded to €6.44 as of 27 August.
The German bank – which posted a €3.1bn loss in the second quarter, the biggest loss since 2008 - has been slow in responding to the challenges European banking faces. However, the bank is finally taking action, recently announcing a €6bn restructuring programme, cutting 18,000 jobs and closing its equity sales and trading business.
Deutsche Bank’s Q2 loss - their biggest since 2008
Deutsche are also setting up a "bad bank" to house €74bn worth of toxic assets from its investment bank, including interest rate and derivative trades.
But the moves are not wowing analysts.
Brian Whitmer, Elliott Wave International’s chief analyst, said: “Deutsche Bank’s creation of a ‘bad bank’ is a clear throwback to previous credit crises and is a harbinger of a rockier road ahead for the European financial sector. Any bad banks that pop up during the coming credit crisis will almost assuredly go belly up right alongside the good banks that they are purportedly saving.”
AJ Bell’s Russ Mould added: “History (and the lowly valuation attributed to Deutsche’s assets by the market) suggests another capital raise could be on the cards, at some stage even if it would be very dilutive to existing shareholders at a price anywhere near €7.”
“History (and the lowly valuation attributed to Deutsche’s assets by the market) suggests another capital raise could be on the cards, at some stage even if it would be very dilutive to existing shareholders at a price anywhere near €7” - AJ Bell’s Russ Mould
BNP Paribas share price: in the balance
Elsewhere, BNP Paribas shares are up 3.73% in 2019 (as of 27 Aug), and the bank recently posted a 3.1% hike in second-quarter profits to €2.47bn. The hike was boosted by its corporate and investment bank division and the first benefits of a €350m cost-cutting programme.
Its retail business, hit by low rates, performed less well, with profit falling 0.9%.
However, KBW analyst Jean-Pierre Lambert expects BNP to outperform in a “volatile environment” thanks to its strict cost discipline.