“Bank stocks across Europe have shed 20% so far this year, but this is about more than just bad debts, crashing energy prices or emerging market jitters. (...) Judging by the hordes of investors fleeing European banks, they (...) are getting to the stage where they are worried banks won't be able to repay their bonds on time”
The German DAX index dropped 3.3% due to the 9.5% loss experienced by Deutsche Bank. Once Wall Street saw what was taking place in Europe, investors became hesitant and American bank stocks dropped (Goldman Sachs: 7.5%; Morgan Stanley: 6%). Even the big four banks of Australia slid more than 3% as well. So why are investors keeping their distance from these powerhouse financial institutions? Four reasons: 1) falling bank profitability (mainly in Europe); 2) failing loans to oil sector; 3) the liquidity desert; and 4) sovereign wealth funds from oil rich countries taking back their investments. With interest rates so low in Europe, the profits banks make on loans are taken away. Investors see this underperformance and have the feeling it will last for a while. Investors are also worried that, with such low returns, European banks won’t be able to pay back bonds on time. Also, negative deposit rates could lead banks to charge customers for depositing cash; and you can imagine this doesn’t sit well with investors either. Also, banks are heavily invested in oil projects. Due to falling prices, however, many companies behind these projects have busted. 42 US oil companies have filed for bankruptcy in 2015, and many more will follow in 2016. Some large banks are stuck with billions in failing loans to the energy sector. On the other hand, since the Fed raised interest rates in December, liquidity in financial markets has been drying up. New regulations have restricted bank-trading activity, thus drying up liquidity. Finally, sovereign wealth funds of oil producing nations are pulling money out of the market to cover the losses, due to the low oil prices. When oil prices were high, stocks in European banks were bought up by funds from the Middle East, Norway and Africa. But with prices of oil tumbling, they are selling off these assets. Oil producers are set to sell off $282 billion in global bonds and shares in 2016.