Europe banks are ‘hostage’ to ECB’s dovish stance: Taking stock

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FRANKFURT (June 10): With Europe’s economic growth showing more cracks and inflation not moving in the desired direction, the ECB once again opened the door to further easing last week. Investors are worried it will continue to suck out any brightness from the banking sector’s outlook like a black hole.

After a disappointing May that saw bank stocks retreat to the levels of early January, the ECB’s commentary on Thursday — that rates will stay lower for longer — put pressure on the lenders’ stocks once again. What’s more, a new round of cheap funding for banks might not change the big picture.

Analysts at JPMorgan led by Kian Abouhossein see the sector as a “hostage” to the central bank’s dovish stance and expect a 2% negative earnings per share impact with every 25 basis points additional rate cut. And don’t forget the ever flattening yield curve in the second quarter, implying another 2% to 3% of earnings per share are gone, according to JPMorgan.

The central bank didn’t provide clear guidance on the chances of introducing so-called tiering, or the exemption of some lenders’ deposits at the ECB from the impact of negative rates. The message was that it remains possible, but not at present, analysts at BNP Paribas concluded. Bloomberg economist Maeva Cousin wrote that the re-calibrated rates guidance “increases the likelihood of the ECB unveiling some form of reserve tiering system soon.”

Yet, the idea that tiering will be the game changer for banks remains debatable. JPMorgan argues that a shift to even lower rates would be bad for valuations, even with tiering. They calculate a 5% positive impact on the system if all of banks’ excess reserves are exempt from negative rates, thereby merely offsetting the impact of lower rates. That said, the effects may vary from country to country and could be relatively good for German banks.

While the terms of the ECB’s new TLTRO program, designed to ensure credit flows to the economy, is considered favorable for lenders it does “not change the outlook for European banks materially,” Credit Suisse analysts led by Jan Wolter said. Still, some companies like Santander, UniCredit, BBVA or CaixaBank may benefit from continued low funding costs.

The broader sector is seen as likely to continue trading in a range, BNP Paribas said. It recommends investors look at option skews as the market is underpricing the downside risks to the banking sector.

In the meantime, Euro Stoxx 50 futures are trading 0.5% higher ahead of the open today.

Sectors in focus today:

European stocks exposed to Mexico are likely to gain on Monday, after U.S. President Donald Trump said he would drop plans for tariffs which had been planned to go into effect on Mexico on Monday. 

Watch automakers including Volkswagen and BMW, brewers including AB InBev and Heineken, and Spanish companies including BBVA, Santander and Telefonica. 

The European defense sector is likely to be in focus, following news that U.S. giants United Technologies and Raytheon are planning to merge. 

The news may lead to M&A speculation in the European defense industry, so watch for any read-across in shares of BAE Systems, Dassault Aviation, Rolls-Royce, Leonardo, Thales and Saab.


“Whether or not the U.S. has entered a ‘Twilight Recession Zone’ is certainly unclear, but it should be remembered that every U.S. recession has been accompanied by the yield curve inverting and the curve shifting upwards,” Jefferies strategists write in a note.

“It is interesting to note that the U.S. yield curve has shifted downwards, thereby easing policy quite dramatically. Hence there has been little or no evidence of credit distress to date. Real interest rates are close to zero.”