In World Economy News 14/03/2016
European bank shares finished only modestly higher Thursday, as investors largely shrugged off some positive stimulus measures from the European Central Bank and continued to view the sector as one of the biggest losers from recent rounds of monetary action.
Bank shares had initially soared after the ECB announced stimulus measures that included cheaper funding for the sector and a less-than-expected cut in interest rates. But stocks fell later in the day as investors reacted to less-positive moves by the ECB, which also lowered its deposit facility rate to minus-0.4% from minus-0.3%, making it even more expensive for banks to hold reserves with the central bank.
Investors are concerned about the effect of negative interest rates on banks’ earnings, as lenders may struggle to pass on the cost of having to pay to deposit cash to their retail customers. But there is a wider concern that central banks’ efforts to stimulate the eurozone’s economy are increasingly ineffective, and that is bad news for lenders.
What ECB President Mario Draghi presented Thursday “was literally the last salvo,” says Chirantan Barua, an analyst at Bernstein Research. “Now there is nothing that he can do.”
The Euro Stoxx Banks Index, which includes 30 lenders in the common currency area, ended 0.9% higher, down from an earlier 7% gain. That still outperformed the wider index, which was down 1.4%. Many analysts had expected before the announcements that the news for banks could have been even worse.
While banks still ended slightly higher, the speed with which the sector had lost most of its gains appeared to cap a day in which all markets gradually shed their initially positive view of the ECB’s measures.
The euro rose and European stocks turned lower, marking a setback for the ECB given a weaker euro is one of its chief tools for driving up ultralow inflation.
Bank stocks were narrowly mixed in the U.S., along with the major U.S. stock indexes. Some of the large U.S. banks whose shares have risen most during the past month’s rebound declined, with J.P. Morgan Chase falling 51 cents to $58.61 and Wells Fargo dropping 28 cents to $48.51. Other bank shares that have been trading at lower valuations rose, with Bank of America rising 13 cents to $13.27 and Citigroup adding 22 cents to $41.37.
European bank shares initially gained after the ECB said it would offer cheaper funds to eurozone banks through an expansion of lending rounds known as targeted long-term refinancing operations or TLTROs.
Although the European banking system overall has more liquidity than it actually needs, lenders in Europe’s periphery, such as in Greece, Spain and Portugal, are still net borrowers from the ECB and will be relieved by these measures.
Banks in these countries climbed. Greek lenders Eurobank Ergasias SA and Alpha Bank AE rose about 10% and most Italian and Spanish banks reaped hefty gains.
Bank shares in core eurozone countries saw only modest gains, with the likes of Deutsche Bank AG, Commerzbank AG and Société Générale SA all edging up by less than 1%.
For some time, investors have concluded that unconventional central bank stimulus is bad for banks.
Lower interest rates coupled with the ECB’s massive bond-buying program have pushed down borrowing costs across the Continent, hitting profits as the interest that banks receive on products such as mortgages also declines.
Mr. Draghi said Thursday that negative rates weren’t expected to go lower. But he also said that if borrowing costs fall much further into negative territory, banks would take a hit.
“Does it mean we can go as negative as we want without any consequences for the banking sector? The answer is no,” he said.
Bond-buying programs also have increased the size of reserves the sector keeps with central banks, meaning an ever-larger share of their assets is losing value. On Thursday, the ECB announced an expansion of its bond-buying program, which will now amount to EUR80 billion ($88 billion) a month of purchases instead of EUR60 billion.
Negative rates could have different effects in different parts of the world. Central banks in Denmark, Sweden and Switzerland also have moved rates into negative territory, but their banks have largely offset lost revenue by raising the price of mortgages and making customers pay fees for products. Banks have benefited as fewer customers default on their loans.
Net interest income–the difference between the rates a bank borrows and lends–is down by a percentage in the mid-single digits for banks in the three countries, according to Morgan Stanley.
But Nordic banks benefit from tame competition and a healthy demand for mortgages, so are able to squeeze more cash from their customers, said Barrington Pitt Miller, a bank analyst at Janus Capital Group.
The picture is less rosy for eurozone lenders, especially in Southern Europe, where the pain is expected to trickle through more quickly. Italy and Spain have a plethora of banks, many of which are already considered chronically unprofitable by investors. A struggle to cut costs has also hampered many European banks’ ability to weather lower returns caused by negative rates.
Source: Dow Jones
