While the official line from European regulators clearly announces most eurozone banks to be safe, the slow economic growth and timid interest rates are cause for concern among some financial experts. But according to a stress test carried out by the European Banking Authority back in July of this year, most euro banks have enough capital resources to withstand a new financial crisis. That said, the test also revealed that not all of Europe’s banks are in good shape. So if you are reading this, wondering whether to invest – you may wish to get some top advice by reading some authority sites like Marketwatch and Trusted Binary Reviews.
The stress test looked at 51 banks in the eurozone, with combined assets equal to 70% of the EU total. The test did not apply to smaller banks. The goal of the test was to assess how the banks held up in various scenarios; one depicting modest economic growth, another a lengthy recession. There was no pass or fail but at the end of the test, the EBA issued specific guidelines for those banks they considered to be at the highest risk.
The test came at a time when several eurozone banking sectors are under a lot of pressure. Italian banks are coming under rising scrutiny from politicians, analysts and investors. In particular Monte de Paschi, which has been the subject of two recent bailouts and UniCredit, Italy’s biggest bank, which has seen a sharp decline in share prices over the past few weeks.
In Spain, the stress test showed that banks are stronger now than they were during the financial crisis, but even Santander, one of the largest lenders, is struggling with reduced profit margins. And in Germany the Deutsche Bank, weighted down by law suits and mediocre earnings have seen their share prices cut in half.
Part of the decline in share value can be attributed to structural issues, found the EBA, but a lot can also be blamed on the uncertainty following the UK Brexit decision.
It is true that banks in the eurozone have recently improved profits. But for the most part, recovery is weak and they still struggle with low profitability. Returns on equity for the first quarter of 2016 came in at around 5.8%, which is up on the fourth quarter of last year (4.7%) but compared with the first quarter of 2015’s 6.9% is a lot lower. Added to this is the 9% low return of equity (shareholder returns) for most Eurozone banks—a static state which has persisted since the begin of the 2008 financial crisis.
This weak profitability of the banks can be put down to various factors; one is the policy of the European Central Bank to progressively lower interest rates in the hope of creating Europe-wide economic growth. Another factor is the large backlog of nonperforming loans (loans where payments haven’t appeared for 90 days or more), which according to the ECB account for 950 billion euros. That’s 9% of the Eurozone’s GDP.
Yet another factor contributing to low profits are the recent changes in banking regulations which have caused many financial institutes to re-invent their business models.
And of course, just like anywhere else in the world, the health of the eurozone banking sector is invariably linked to the economic environment in which they operate. In the midst of the 2008 crisis for example, demand for company and household credit almost disappeared and the banks themselves became extremely cautious with their lending policies. Thankfully, the supply and demand for credit has recently improved and in July the ECB announced a general improvement in loan conditions with an explanation that the demand for loans had increased across the entire board.
Political considerations also play their part. As we saw during the darkest hours of the eurozone crisis, governments chose to use taxpayers money to save banks from a total collapse. And it was this measure which eventually led to what is now known as the bail-in process.
Yet the next uncertainties already lie in wait for the euro bankers as the Continent braces itself against the fallout of the British referendum. No two experts are as yet united in their predictions of the consequences of Brexit. But one general consensus of opinion would be that economic growth in both the UK and across Europe will probably slow to a crawl. And this too would once again put the banks under a lot of pressure.