Global banks are seeing massive selloffs and reduced stock prices, a problem that could compound upon itself. Over the course of this year, 20 of the world’s largest financial institutions have lost $465 billion in market capitalization, based on data from FactSet. However, why are these banks seeing their share prices plummet? It is not the Brexit.
Even before British voters chose to leave the European Union, global banks were already hurting. While the world economy is struggling to find growth, all the key economic regions of the world have low demand and bad debts. There’s no denying that the Brexit has impacted bank shares, but only looking at the losses since the vote would not show the entire picture.
The first major hit to global banks came last year when China’s economy showed severe signs of distress. Chinese share markets plummeted, exports fell off the map, and business profit and investment dried up. The second sign of distress has been growing for some time now. Commodity prices across the globe have plummeted. Oil and iron ore, in particular, have hurt many major companies and lead banks to write down bad loans to these businesses and reduce loan volumes. Going into 2016, banks were already in a weak position. After raising interest rates in December, the Fed was forced to push back its timeline and the US joined the rest of the world with sluggish growth. Now most major sectors across the globe are down; banks are struggling with bad debt charges and investors are selling off their banking shares.
A recent report from the Wall Street Journal unveiled the performance of some of the world’s largest banks. The biggest banks are found in the United States, Europe, Japan, and China. Some of the banks the WSJ evaluated included: Royal Bank of Scotland (RBS), Barclays, BNP Paribas, Credit Agricole, UBS Group, Credit Suisse, Industrial and Commercial Bank of China, Mitsubishi UFJ Financial Group, JP Morgan Chase, Goldman Sachs are a few other powerhouse banks. The analysis of these banks painted an ugly picture.
First, banks in almost all regions were performing terribly, except US banks. Although American banks are down for the year as well, they have far outperformed their European, Japanese and Chinese counterparts. Some of this may be due to the relative success of the US economy compared to the rest of world. It might also have something to do with new regulations from the Federal Reserve that forces banks to take fewer risks and save a certain percentage of assets in case of financial distress.
Banks in Europe performed the worse by far. The Italian bank UniCredit posted the worst performance, losing almost 66 percent of its market value over the year. Royal Bank of Scotland has seen its share price fall by more than 56 percent over the same period. Switzerland-based Credit Suisse, UK-based Barclays and Germany-based Deutsche Bank have lost close to half of their market valuation over the year. Compare that to the two best-performing banks, the American bank JP Morgan Chase and Industrial and Commercial Bank of China, which have both fallen only 10 percent.
Analysts are concerned about these banks’ ability to raise capital to balance rising bad debts and lower profit. With lower share prices, not only will banks find it difficult to raise capital, but it will also be more expensive. Investors themselves are concerned with the rate of return they can expect on banking stocks, in addition to anxious executives who are too afraid to make major moves during a period of low share prices. Combine this with plummeting bond yields across the globe, and banks are starting to run out of places to invest.
What does the future hold for these banks? Currently, European banks cannot even compare to their global peers. The combined value of Deutsche Bank and Credit Suisse does not even reach the value of Goldman Sachs’, who has also seen its share price tumble this year. Italian and British banks are a mere fraction of the size they once were. There doesn’t seem to be any signs of growth in the short-term for these banks and the downward pressure on global assets may keep these banks down for some time.