Are Europe’s Banks Next to be Stressed?
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Now that the results of the U.S. bank stress tests are finally in the books, the extent of the capital shortfalls are known and – in many cases – are actually being addressed.
But there’s now another problem looming – one that could ultimately weigh down the global financial system.
The problem: Europe’s banks.
As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.
Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.
Bank executives "[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1," Chief Executive Officer Stephen Hester told Reuters.
In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.
In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.
That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.
Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide "considerable comfort about the health of the banking system.”
But in the five months since that Institute of International Finance report was issued, it’s likely that European banks have experienced a major decline in their fortunes.
Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.
Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?
Market Matters
Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM). Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance. On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.
A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years. Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.
The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year. Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight. Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis. With stress tests out of the way, where will the next leaks come from?
| Market/ Index |
Year Close (2008) |
Qtr Close (03/31/09) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
8,776.39 |
7,608.92 |
8,212.41 |
8,574.65 |
-2.30% |
|
NASDAQ |
1,577.03 |
1,528.59 |
1,719.20 |
1,739.00 |
+10.27% |
|
S&P 500 |
903.25 |
797.87 |
877.52 |
929.23 |
+2.88% |
|
Russell 2000 |
499.45 |
422.75 |
486.98 |
511.82 |
+2.48% |
|
Fed Funds |
0.25% |
0.25% |
0.25% |
0.25% |
0 bps |
|
10 yr Treasury (Yield) |
2.24% |
2.68% |
3.17% |
3.29% |
+105 bps |
Economically Speaking
U.S. retailers released same-store sales data for April and the results were actually quite promising. As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations. A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.
|
On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy. Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.
Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy. The contraction represented the smallest in six months and was below most analysts’ expectations. Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.
Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best. In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain. Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.
Weekly Economic Calendar
| Date |
Release |
Comments |
|
May 4 |
Construction Spending (03/09) |
1st increase in 6 months |
|
May 5 |
ISM – Services (04/09) |
7th consecutive monthly contraction, but improving |
|
May 7 |
Initial Jobless Claims (05/02/09) |
Best showing in 14 weeks. |
|
|
Consumer Credit (03/09) |
Biggest decline in borrowing in 18 years |
|
May 8 |
Unemployment Rate (04/09) |
Climbed to 8.9%, highest since 1983 |
|
|
Non-farm Payroll (04/09) |
Fewer jobs lost than anticipated |
|
The Week Ahead |
|
|
|
May 12 |
Balance of Trade (03/09) |
|
|
May 13 |
Retail Sales (04/09) |
|
|
May 14 |
PPI (04/09) |
|
|
|
Initial Jobless Claims (05/09/09) |
|
|
May 15 |
CPI (04/09) |
|
|
|
Industrial Production (04/09) |
|
News and Related Story Links:
- Reuters:
U.S. banks raise capital; Europe peers’ bad debts soar. - ETFTrends.com:
Global Bank Losses: What’s the Damage to ETFs. - Money Morning News Analysis:
Bank of America Planning Stock and Asset Sales to Appease Government Requirements. - Money Morning:
Is China Detroit’s Lifeline?
Comment by Rick on 11 May 2009:
THE US WILL NOT SKIN OUT of blame amid this financial hoodwinking as though the stress test somehow reinstates sainthood to the selfish and the greedy, and thereby illuminates clarification for the whole world. Is it not true, as someone once said that although the US constitutes only about five percent (5%) of the world’s population, it consumes about ninety percent (90%) of the world’s goods?
If these numbers hold anywhere near true, and we momentarily put the born-at-home stress test fiasco decoy aside, then the US is not about to get off the hook, as far as the rest of the world is concerned.
To merely say that the world is “concerned” is the understatement of all time!
The Grim Reaper is on the march, and he is demanding payment!
Whitewashing will not do!
Comment by moneydragon on 11 May 2009:
I was struck by the fact that the vast majority of troubled banks (if that’s what we should call them) are banks following the anglo way of thinking: speculation and regulations wihout enforcement.
Comment by jimmy morr on 12 May 2009:
this is all deliberate if you want to know the trooth obama deception zeitgeist and addendum .com
Pingback by Banking Bellwether HSBC Forecasts a “Tough” Year on 12 May 2009:
[...] Royal Bank of Scotland PLC (NYSE ADR: RBS) joined Germany’s Commerzbank AG (OTC ADR: CRZBY) last week in reporting charges on bad loans in Europe as consumers and companies continued to run into trouble. [...]
Comment by Bill on 12 May 2009:
In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.
I believe that ever since countries stopped using gold as a standard that what resulted was pseudo money based on nothing except some ink saying what the paper was “worth”. How could the banks loose something that did not exist in the first place. 1$ used to vouch for 1$ worth of gold somewhere in custody. Now what does 1$ actually represent??
I have had no faith in the banking systems for many years and am not suprised that all of a sudden “nothing” has actually become nothing. One would indeed need some large place to store $1 trillion’s worth of gold! Would be tough to make that just disappear.
Any comment? I am not a money man and as an engineer speak from my ignorance. At least when I have designed and built something you can see it.
Comment by Rick on 12 May 2009:
Gold itself, of course, cannot nourish the human body, but there was a time when it was used to deter run-away money numbers by the blind and the greedy.
But nowadays, the ranks of the blind and the greedy have swelled to include the stupid, the dumb, the twisted and the sick, all of whom have mutated into raging “investment” savages who invent devices to make still more run-away money off run-away money.
Such animals smell and taste money itself, instinctively. But they sense it not to be edible.
When hungry or even starving, however, will money animals possess any capacity to create something that is edible and otherwise worthwhile within a practical community, of people?
Comment by Ed on 20 May 2009:
How come these senior banking mamagers and stock market investers have not gone to jail…?
This is white collar crime, at the worst, don’t you think?
People from around the globe need to united, against these criminals. The thuds on the street get jail, why these bankers are even worst than street gansters. The put familys lives at risk, even a collaspe in the family life, not to include suiside?
The Bankers must pay the piper, for the bad deeds.