Monday, September 5, 2011

Europe banks slide to 29-mth low on multiple headwinds

LONDON: European bank shares slid to a 29-month low on Monday, Sept 5, leading the broader market down on fresh sub-prime mortgage woes, fears of recession and yet more evidence of political disunity that could hamper efforts to solve the region's debt crisis.

After snapping a five-week losing streak last week, the STOXX Europe 600 Banks index was down around 5.5 percent at 1051 GMT. It has a year-to-date loss of 33 percent after four straight months of declines.

"The chances of a near-term recovery remain slim as euro zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector," Manoj Ladwa, senior trader at ETX Capital said.

Royal Bank of Scotland was among the worst hit in a broad sector slide, down 10 percent, while the five-year credit default swap spread on its subordinated debt widened by more than 240 basis points.

The bank is among the worst-placed of European lenders facing a multi-billion-dollar U.S. regulatory lawsuit accusing them of misrepresenting the checks they made on mortgages before securitising them.

German peer Deutsche Bank , also affected by the U.S. legal moves, was also hit by a UK press report naming it the subject of a probe into asset-backed securities by Britain's Serious Fraud Office.

The lender was down 9 percent in volume three-quarters of its 90-day daily average near midday, while the five-year CDS spread on its senior debt was more than 7 basis points wider.

Adding to sector falls were fresh concerns over European political unity as it looks to contain the region's debt crisis, after German Chancellor Angela Merkel's coalition lost ground in a state election on Sunday.

That goal will be further tested this week, with a court ruling due on Wednesday over German involvement in the region's bailout fund, divisions in the European Central Bank over bond buying and uncertainty over private sector involvement in the second Greek bailout.

The need for agreement was highlighted by Deutsche Bank boss Josef Ackermann who called sector prospects "rather limited" and said some European banks would not survive a revaluation of the sovereign debt on their books.

The multiple bank sector concerns heighten fears over counterparty risk among lenders, Andrew Lim, banks equity analyst at Espirito Santo, said, citing reduced lending to some European banks from U.S. money market funds.

"There is massive tailrisk in the system right now," he added, citing the need to expand the size of the bailout fund, thereby improving the debt-funding metrics of sovereigns and corporates alike.

"The banks' cost of funding goes up in tandem with the country's cost of funding, and eventually they get denied access to the credit market."

That relationship was once again thrown into focus on Monday as both Italian and Spanish 10-year yields rose to near 1-month highs. Peripheral euro zone sovereign CDS yields also rose, with French yields at a record high.

ECB President Jean-Claude Trichet on Monday called for the fund to be "immediately" strengthened, and urged more structural reforms to boost the flagging financial sector.

The months of sectoral woe for lenders, particularly in the euro zone, have seen equity valuations fall sharply.

The 12-month forward price-to-earnings ratio on the banks currently stands at 7.54, with a price-to-book ratio of 0.61, Thomson Reuters data shows, while euro zone lenders are even cheaper, with a P/E of 6.29 and P/B of 0.47.


Pressured by the chunky bank sector falls, the broader FTSEurofirst 300 was down 3.1 percent by 1056 GMT in volume a third of its 90-day daily average, while equity market volatility was up 16 percent to 46.53.

Germany's blue-chip DAX , meanwhile, fell more than 4 percent to a fresh two-year low.

While the market had sold off on Friday after the release of much weaker than expected U.S. jobs data -- no jobs were added in August -- the scale of the miss continued to underpin part of Monday's fall in Europe, exacerbated by thin volumes as the U.S. market is closed for a holiday.

Adding to growing concern over a return to recession in the developed world, data showed euro zone services sector growth eased for the fifth consecutive month in August.

Recent data showed a world economy growing at "near stall speed", analysts at Societe Generale said in a note, although they did not believe the world would return to recession as it needed a trigger, "which we believe will remain absent".

"Taming burgeoning public debts on both sides of the Atlantic will take time and we forecast a prolonged period of low growth for both the US and Europe," they add. - Reuters

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