(Bloomberg) — Credit Suisse Group AG shares plunged to the lowest in a generation on Thursday and a one-year contract to insure Deutsche Bank AG debt against default surged to a record as a global rout in financial companies intensified.
Theories abound as to what lies behind the months-long selloff, with some traders fretting over falling oil prices, China’s economy and negative interest rates. A pullback by some sovereign-wealth funds has also been blamed for lower asset prices. Whatever the cause, the hammering has been the worst in Europe, where concerns persist about the health of some of the biggest banks eight years after the financial crisis.
“The market is aggressively penalizing banks,” said Nikhil Srinivasan, who oversees 480 billion euros ($543 billion) as chief investment officer at Assicurazioni Generali SpA in Milan. “It’s going to be a challenging 2016, and I don’t see a short tunnel — this could go on for a while.”
Investors have fled lenders that show signs of weakness, as Société Générale SA did Thursday when the Paris-based bank said it might miss its profitability goal this year. The stock plunged 13 percent that day, the most since 2011. Both Credit Suisse and Deutsche Bank published dismal fourth-quarter results in recent weeks that have sent shareholders and bondholders to the exits.
Europe’s banks rebounded Friday, led by Commerzbank AG, after Germany’s second-largest lender reported a higher capital ratio than some analysts had anticipated and said it would wind down bad loans quicker than planned. Even after the bounce, the Stoxx Europe 600 Banks index remains down 26 percent this year.
“Many producers of oil and commodities invested part of their high profits in stock markets,” and may now face pressure to sell holdings because they need money to finance their budgets, Commerzbank Chief Executive Officer Martin Blessing told reporters in Frankfurt on Friday. “You just have to keep your nerve.”
U.S. lenders haven’t been spared. JPMorgan Chase & Co. dropped to the lowest in more than two years after Federal Reserve Chair Janet Yellen said Thursday that the central bank was taking another look at negative interest rates as a potential policy tool if the U.S. economy faltered, a scenario some investors view as a possibility amid a darkening outlook for world growth.
That didn’t stop JPMorgan CEO Jamie Dimon from buying 500,000 shares of the bank’s stock on Thursday, paying $26.6 million, according to a filing. The shares rose on the news in late trading in New York.
Shares of Zurich-based Credit Suisse have lost almost half their value since October, when CEO Tidjane Thiam embarked on an overhaul to focus on wealth management, especially in Asia, just as economic growth in China slowed. The cost of insuring the bank’s subordinated securities against default for five years rose Thursday to the highest level since 2012, even as the stock sank to a 27-year low.
“It’s not a great time to be a bank,” Thiam said in a presentation to investors Wednesday. “So I’m using the current challenging environment to accelerate the transformation that I’m driving.”
The damage hasn’t been confined to the stock market. The cost of insuring European financial firms against default has spiked to the highest in three years, according to the Markit iTraxx Europe Subordinated Financial Index of 30 companies.
Fears about Deutsche Bank’s woes have crept into the credit derivatives market, where a rush to insure against losses is distorting prices. That has pushed the cost of insurance for one year of protection to more than contracts insuring for five years, according to data from S&P Capital IQ. The cost to protect debt with swaps typically rises the longer the term of the contract as investors pay more for the risk of unexpected events.
German banking supervisor Bafin has monitored the volatility in Deutsche Bank and Commerzbank shares this week, Handelsblatt reported on Thursday, citing unidentified people in the finance industry.
An index of contingent convertible bank debt, or CoCos, which is supposed to act as a capital buffer by converting to equity in the event banks run into trouble, has fallen sharply this month.
Standard Chartered Plc’s $2 billion of subordinated notes that mature in 2044 have dropped more than 23 cents in less than a month, to 78.2 cents on the dollar on Thursday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
European banks have pushed back by pointing to stronger capital ratios. Deutsche Bank co-CEO John Cryan told staff in a memo on Tuesday that the Frankfurt-based company’s financial strength is “rock solid.” Societe Generale Deputy CEO Severin Cabannes called recent turbulence “disconnected from market reality” in an interview with Bloomberg TV on Thursday.
Still, global investment banking and trading revenue will probably fall 8.7 percent to $168 billion this year, analysts at Morgan Stanley said in a note to clients Wednesday.
“Banks are always going to suffer during periods of market volatility given transactions don’t take place,” said Martin Wilhelm, founder of IfK GmbH, which manages 500 million euros of fixed-income securities in Kiel, Germany. “They get hit across advisory, origination, trading and asset management.”
Europe’s two biggest investment banks — Deutsche Bank and Credit Suisse — may be hit especially hard as they unwind parts of their securities units and sell assets in restructurings the companies unveiled last year.
“Getting out of investment banking is a hell of a lot more difficult than getting in,” Oswald Gruebel, a former CEO of UBS Group AG, said in an interview Wednesday. “You have to get out of businesses that carry a lot of goodwill, which you’ll have to write down, and that carry huge positions of hundreds of billions of dollars.
“You need time to do that,” added Gruebel. “You cannot do that from today to tomorrow because the write-offs would be so big that you’d be left with no capital.”
Lenders are also set to face a spike in provisions for soured credit to the oil and gas industry as the slump in prices makes it tougher for companies to make payments. Analysts at Bank of America Corp. predict European banks may face potential loan losses from energy firms of $27 billion.
European banks are paying for not following their competitors and taking tough decisions to raise capital and trim their focus after the 2008 financial crisis, according to John Mack, a former Morgan Stanley CEO.
“Clearly people are scared, they’re worried about the banking system; they don’t see much growth in Europe,” Mack said in an interview Wednesday on Bloomberg TV. “All of these banks in Europe have been overly aggressive in the past. They’ve got to get back to basics, that’s the short answer.”
–With assistance from Donal Griffin, Tom Beardsworth, Sridhar Natarajan and Nabila Ahmed.