Europe’s banking crisis in charts

Parts of Europe’s banking system are creaking once more, with concerns focused on the whole Italian banking sector and German giant Deutsche Bank. The impact can clearly be illustrated using charts.

Nearly eight years after the peak of the financial crisis and the collapse of US investment bank Lehman Brothers, Europe’s banking system remains on life support, reliant on cheap money being thrown into the system by central banks. They’re struggling to grow profits and build capital buffers themselves, partly because of the low interest rates that those central banks brought in to try and stimulate growth and inflation in the wake of the financial crisis. Many banks are also still being hit by huge fines and charges for bad practices in the run-up to the crisis, and are relying on cost-cutting to preserve profits. 

After recent EU stress tests of the banks, officials insisted that the banking system is slowly returning to health, but it hasn’t stopped investors fleeing the sector, spooked by developments in Italy and Germany. There’s also been criticism of the EU tests for not being as tough as US tests.

Italy’s banks are in particular crisis, with Italian Prime Minister Matteo Renzi having to arrange a €5 billion private sector rescue of third-largest lender Monte dei Paschi di Siena, the third recapitalisation of the bank in as many years. The deal with a pool of investment banks will see nearly €28 billion of non-performing loans moved into a special vehicle that will be securitised for sale in an effort to give the bank a fresh start. Renzi is busy hailing the deal, but investors are showing scepticism.

A planned rescue deal for Monte dei Paschi di Siena has failed to convince investors

The new sell-off has affected the whole Italian sector, including Unicredit

Germany’s banks are also suffering

Over in Germany, Deutsche Bank is also in focus. The bank, which is set to drop from the Stoxx 50 index next week following a 50% drop in its share price this year, has pledged to accelerate cost-cutting after reporting that pre-tax profit dropped 68% in the first-half of 2016.

It has been described by the International Monetary Fund as the riskiest of all the world’s big banks — it is central to the whole German banking system — and had to reassure investors about its financial health after a steep drop in its share price at the start of the year. 

Deutsche Bank shares remain under pressure

Germany’s second-biggest bank, Commerzbank, this week reported a 30% drop in net profit for the first-half of the year, and issued a profit warning for the year as a whole. Commerzbank executives criticised the European Central Bank’s introduction of negative interest rates, saying the policy was set to wipe hundreds of millions of euros off profits. Still, they also said the bank was well capitalised and wouldn’t need to raise fresh equity.

UK banks have not been immune to the sell-off in recent days

The UK banks fared better than the Italian and German banks in the EU stress tests, but they haven’t been immune to the sell-off in the past few days. 



The sector index has stabilised early on Wednesday, with HSBC shares among the top gainers in the FTSE 100 after a $2.5 billion share buyback soothed investors who should have been spooked by the scrapping of a 'progressive' dividend policy, return-on-equity targets and a 29% drop in first-half pre-tax profit.

The buyback comes after HSBC sold its Brazilian business last month in a $5.2 billion deal, while profits are being hurt by slowing growth in both the UK and Hong Kong.

What next?

The banks are not currently in the same state of crisis as they were in 2008. The banking system is not frozen, banks in most countries are better capitalised than they were, and central banks are greasing the wheels of the system.

At the same time, the Italian banking system needs to be cleansed of the bad loans weighing on the entire system, and banks everywhere need to start seeing higher interest rates if they’re going to increase retail banking profitability. That prospect appears dim at the moment. 

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