European Economies and Stock Markets

The European banking system is a mess, and it is not improving. Instead, it continues to erode, and the European Central Bank cannot figure out a way to get the European economy working.  Pretty difficult to get a dead horse to hop up and show life.  There are so many systemic risks including the size of non-performing loans on the books of European banks. From a Country perspective, Italy poses the greatest systemic risks, but looking at massive Banks: HSBC Holdings, BNP Paribas, Credit Agricole Group, Deutsche Bank and Barclays PLC, all pose threats to the financial system worldwide…..

Let’s look at one of the areas that are the biggest concern – Italy.  One of the world’s biggest rating agencies, Fitch, has warned of the risks looming over large Italian banks as a result of the government’s latest effort to prop up the country’s financial sector.  There are an estimated Euro360B of non-performing loans and increasing pressure to raise capital. But who wants to invest in a dying sector that has little hope. That is a massive number.  It is the size of 22% of the total Italian economy.  Even a massive bailout is highly unlikely, as the Germans will not back such massive numbers.

Fitch is warning of “considerable contingency risks’ facing large banks, because “they are continuously being called upon to support the government’s efforts to prop up the country’s weaker banks and preserve financial stability”.  In late March, Fitch changed the outlook on Italian banks UniCredit and UBI Banca to negative, due to asset quality weakness and capital pressures.  These are huge banks.  There is little hope in site.  The core problem is Non Performing Loans (NPL’s) on Italian bank books.  It is estimated that between 17% to 21% of total loans are NPL. The risk of contagion from failure in Italy’s banks poses the greatest thread to an already burdened world financial system.  Italian bank share prices have been in a freefall in 2016.  There is fear all around.

European Banks Overall – Not Far Behind Italy and The Biggest Banks Fair The Worst In Many Cases

Let’s now look at a chart of the European bank sector and see how the sector has performed:


There fear of collapse and major contagion back in 2011-12 and the bank index collapsed all the way down to $13.68.   The index appeared to have stabilized based on bailouts and re-capitalization. The index ran up to $26.63 on June 6, 2014.  Life appeared good.  Well, things have changed dramatically since them.  The sector is once against getting close to testing out its long-term lows, as European banks balance sheets continue to erode.

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We have to remember that we live in a world of linkage.  If massive Italian banks fail, watch out Europe.  If Europe is in trouble, so is the world.  There is a systemic connection via economic linkage and derivative exposure in the banks. Any major bank(s) failure will lead to a world systemic failure.

Let’s look at one major European bank, in the strongest European economy, Deutsch Bank in Germany.  You would hope that a German bank would be safer than periphery countries with much weaker economies.  Germany has led Europe for many years and is needed for their leadership in numerous ways.  Here is a chart on Deutsche Bank:


This is called a classic collapse.  The stock is down 91% since its 2007 peak and is trading at all-time lows.   It continues to fall which is the biggest concern and is much lower now, than its lows in the financial crisis bottom of 2009.

European Banks Relative to Canadian Banks – Maybe This is Why Canadian Banks Look So Strong….Relative To Messes

Let’s put the size of European Banks into perspective.  Canadians have five megabanks, with the biggest being Royal Bank.  The size the big 5 Canadian Bank assets is $3.962T.  Well, Deutsche Bank asset size is $1.770T.  That is 116% bigger than Canada’s biggest bank.  The size of the 5 largest European Banks (see chart below) is $10.667T.  They are massive. That is 169% or $6.7T bigger than mega Canadian Banks.  Any failure here, watch out.  The world will be in trouble as bailouts of such a massive level are highly unlikely.  Yes, we may get bailins, where they confiscate depositors’ money to recapitalize banks.  No matter what the method, it will fail.

Let’s show you the biggest European banks verus the Big 5 in Canada;


Something massive has to happen in Europe, but the world is so over indebted, that the game of using debt to clean up debt is ending.  Preparation will be the key as the financial system worldwide is so undercapitalized, any major economic contraction, the system will break.

Here are two charts, one showing the 5 biggest European banks and their stock performance, over 1 and 10 years:


Of the 5 biggest European Banks by asset size, the average price has fallen by 68%, with Deutsche Bank and Barclays down more than 75%.  That is staggering.  After a brief respite from rallying, the banks have again fallen in the last year by on average 34%.  They continue to fall.

Wait to see what will happen during the next major economic contraction.  Hoarding and saving will be the themes like we have not seen since the 1930’s.  This is a major warning sign of what is coming.

Brace yourself as the day of reckoning is getting nearer.

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