By Josie Cox
European bank stocks have slipped in October, seemingly
dismissing satisfactory results from the European Central Bank's
stress tests and data showing a pickup in the appetite for
lending--both of which had been expected to cheer investors.
The Stoxx Europe 600 index dropped more than 1% Thursday, taking
declines so far this month to almost 6% and making the financials
sector one of the worst performing.
Banca Monte dei Paschi di Siena, which failed the ECB's health
check, was the worst performer across all sectors, closely followed
by Greek peers National Bank of Greece SA and Eurobank Ergasias SA,
who also flunked the assessment. Stocks in core European lenders
including Deutsche Bank AG also felt the heat.
Some traders pointed to comments from Andrea Enria, chairman of
the European Banking Authority, warning that even those lenders who
passed the stress tests shouldn't feel too secure and that "there
is still work to be done." Others said the sector may have become
overheated in recent weeks and was now suffering a snapback.
During the summer, the financials index took a beating on
mounting global economy fears. Mid-October saw signs of recovery,
with the index climbing by more than 7% to just before the stress
test results were announced on Oct. 26. So far this week it has
lost around 3%.
"Bank stocks had rallied because investors had been fearful of
getting caught-out underweight financials if, for example, the ECB
announces more stimulus measures or the Comprehensive Assessment
was benign," Nick Anderson, an analyst at Berenberg Bank, said.
"The stress test wasn't a disappointment for the market, and
results came in broadly in line with expectations, but investors
are still very cautious on the sector," Mr. Anderson added, saying
that the selloff appears to be self-perpetuating.
Over the weekend, regulators identified 13 banks in Europe that
still need to come up with a total of EUR9.5 billion ($12 billion)
in extra capital to ensure they would be able to weather a
potential financial crisis. Twenty-five banks technically failed
the tests, facing a cumulative shortfall of EUR24.6 billion.
Although equity markets initially rose after the results, they
snapped back quickly, with some analysts questioning the
assessment's credibility and others doubting whether the outcome
would stimulate a necessary revival in bank lending.
"A lot of people appear to have hoped that the results of the
bank stress tests would solve some of the problems still facing the
economy and the banking system," said Nick Lawson, Deutsche Bank's
head of macro, synthetics and cross-selling. "What they actually
did was simply hold up a mirror to the banks and investors, showing
them where the weaknesses still lie," he added.
A run of poor data from the eurozone published in the first half
of this October and largely covering August and September fueled
concerns the bloc's anemic recovery had ended, threatening a slide
into a period of deflation.
Sentiment remains fragile, even though data Thursday showed that
businesses and consumers across the eurozone became slightly more
upbeat about their prospects during October.
Bank earnings so far this season have also painted a mixed
picture at best.
Deutsche Bank AG on Wednesday reported that it had swung to a
net loss in the third quarter after it boosted its reserves to
cover possible fines from pending litigation.
Earlier in the week Swiss bank UBS AG reported a
weaker-than-expected rise in third-quarter profit, hurt by 1.8
billion Swiss francs ($1.9 billion) of legal provisions.
"I think that what people have realized anew is that bank
performance is intricately linked to the health of the macro
economy, where there are still a lot of underlying issues that need
to be solved," Mr. Lawson said.
Write to Josie Cox at josie.cox@wsj.com
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