A sell-off in EU banks is ill-boding
EU banks have been caught in a real storm of market turmoil. Unfortunately, lackluster profits combined with negative interest rates have made investors dump their shares in the sector.
According to the head of equity strategy of Saxo Bank, Peter Garnry, the current environment for EU banks is extremely negative. Over a full business cycle, it’s quite questionable whether European banks can cover the cost of their equity or not. Undoubtedly, the situation is unattractive for long-term investors, to put it mildly.
At the end of 2015, banks were considered to be one of the most promising sectors for in the upcoming year due to expected benefits from bond yields, improved economic growth, and positive inflation expectations. That peaceful outlook dominated until the sharp slump of oil and China’s slowdown.
The given slump in EU bank shares is somewhat odd, especially considering the recent growth of the European economy as well as aggressive easing from the ECB. As usual, banks derive decent benefits from such measures as quantitative easing, but that doesn’t work in Europe.
That’s a very gloomy situation, because in Europe banks play a more essential role in the credit mechanism of the economy than in America. The USA boasts a developed capital market, where it’s so easy to issue corporate bonds or get funding outside the country’s commercial banking system. That’s unreal in EU and it makes investors worry.