Do you still remember Lehman Brothers? The U.S. investment bank filed for insolvency on September 15, 2008, marking the peak of the 2008/2009 financial crisis. As a result, there was a veritable sell-off on the financial markets, which dragged down bank shares in particular. The EURO STOXX Banks index lost almost three quarters of its value within six months. Compared with its peak in June 2007, the index even lost more than 80%. Despite a subsequent recovery, the 22-member barometer has not yet managed to return to its former level.
History repeats itself, one might assume in view of current events. For example, just a few days ago in the U.S., U.S. start-up financier Silicon Valley Bank and other regional banks ran into trouble in the wake of liquidity concerns. Often, speculation about the insolvency of a bank is enough for the bear market virus to spread abruptly. In this case, however, there were even tangible facts on the table, so that the ensuing panic reaction on the markets came as little surprise.
Fears of loan defaults in the US banking sector also spilled over the pond and caused uncertainty among European financial stocks - above all among Credit Suisse, which was already in crisis. CS is one of the world's largest asset managers and is also considered systemically important. To prevent the shock waves from spreading further, the Swiss National Bank (SNB) took the reins a few days ago and engineered a merger of the 167-year-old bank with UBS. But that wasn't all the central banks did recently. It was quickly followed by a coordinated effort by the SNB, along with the ECB and monetary watchdogs from the U.S., Japan, the U.K. and Canada, to bolster liquidity in the markets. The daily measures are expected to continue until at least the end of April.
However, this is unlikely to completely dispel the concerns surrounding the financial sector. According to a report by Reuters, for example, two executives of European banks fear that the crisis of confidence will spread to other lenders, even if the sector is well capitalized and liquidity is strong. Others are bringing reforms into play. For example, the civic movement "Finanzwende," founded in Germany in 2018, is calling for much higher capital buffers at banks, a European resolution and deposit insurance authority with more powers, and a separation of commercial banks and investment banking. The British financial firm Barclays is already assuming increased regulatory control and lowered its assessment of European banks from "positive" to "neutral."
On the other hand, the ECB banking supervisory authority, the EU authority for the resolution of ailing institutions, the Single Resolution Board (SRB), and the EU banking authority EBA are sending a glimmer of hope. The three institutions continue to see the European financial sector as stable after the bailout of CS. "The European banking sector is resilient and has a solid capital and liquidity position," they said. In the U.S., reassurance is also being sought from the highest levels. Fed Chairman Jerome Powell and U.S. Treasury Secretary Janet Yellen jointly made clear that the U.S. banking system's capital and liquidity positions are strong and that the U.S. financial system is robust.
Speaking of central banks: Amid the biggest banking quake since the financial crisis, the Federal Reserve, as well as the SNB, is deciding this week on its future interest rate path. The question is whether the monetary guardians will continue the tightening series or keep their fingers still due to the turbulence on the stock markets. In the U.S., three quarters of economists currently expect a 25 basis point hike, while one quarter expect a pause. The development of interest rates, in turn, is a decisive criterion for the profits of financial institutions. Should the central banks decide to end the interest rate hike cycle significantly earlier due to concerns about market turbulence, this would put pressure on margins just as much as an increase in deposit rates from the banks' side in order to prevent a withdrawal of customer deposits as a preventive measure.
In the short term, investors should therefore expect further fluctuations in bank shares. In the longer term, however, the sector is anything but ambitiously valued in terms of the price/earnings ratio on the EURO STOXX Banks Index. With an expected P/E ratio of 6.4, the index is now close to past crisis levels again. This is despite the fact that the sector is in better shape today in terms of capitalization, profitability and liquidity. In addition, the barometer, in which BNP Paribas, Banco Santander and ING Group form the heavyweights with an index share of more than one third, is convincing in terms of dividend yield with around 6%. The EURO STOXX 50 does not even yield half that.
Two new softcallable barrier reverse convertibles on the EURO STOXX Banks offer the prospect of an even higher yield. For these to achieve their yield target, the index does not need to rebound. In fact, the product structure gives European banks much more downside scope without jeopardizing the profit opportunity. The BRCs, which are offered in CHF and EUR, each have a solid risk buffer of 40%. If the EURO STOXX Banks leaves the barrier intact during the maximum term of 15 months, the maximum return will be achieved. The coupon on the CHF variant is an attractive 10.00% p.a., while the EUR-denominated certificate guarantees an even more attractive 11.00% p.a. The term can end after 6 months at the earliest due to the softcallable function.
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