By Margot Patrick
European bank shares slid and prices on their riskiest debt touched new lows as the region braced for a prolonged economic slowdown as a result of the spreading coronavirus.
Investors are trying to calculate banks' exposure to hard-hit airline, retail and oil giants -- as well as hundreds of thousands of small businesses across the region -- while also worrying about the longer-term impact for lenders' profitability and capital positions. Central banks and governments are providing liquidity, easing capital buffers and laying out debt-relief measures but so far the steps have done little to halt the slide in stock prices for the region's largest banks.
Shares in Barclays PLC fell 13% and Credit Suisse Group AG was off 9% Monday, reflecting concern about their corporate counterparties, while UniCredit SpA slumped 12% as the death toll rose in Italy. The main European banks stock index fell 8.4%, bringing its decline this year to 42%.
The price of Unicredit's perpetual bonds, callable from June 2023, fell to EUR80 ($89.30), from around EUR113 in mid-February, indicating investors see a significant risk its capital could be depleted enough to trigger the bonds' conversion to equity. The price on a similar bond from Deutsche Bank AG ended the day Monday at EUR65, down EUR9 from Friday.
Danske Bank AS, Denmark's largest lender by assets, scrapped its profit guidance for the year and said it expects loan impairment charges to rise from the economic disruption. It said its capital and liquidity "remain strong with significant buffers well above the regulatory requirements."
Italy's government on Monday approved a financing package to help businesses and households ride out the outbreak, as other countries including Spain, France and Germany introduced tougher measures against travel and socializing to curb the virus's spread. The European Commission is proposing a 30-day ban for nonessential travel into the European Union.
European banks have raised capital, cleaned up their loan books and undergone an array of stress tests over recent years to prepare them for market and economic shocks, after many needed bailing out in the previous financial crisis of 2008.
On Monday, S&P Global Ratings credit analyst Bernd Ackermann said banks' "saving grace" is that their balance sheets have rarely been stronger, and the core capitalization is at record highs.
According to data from the European Banking Authority, capital ratios were 14.41% last year, from around 8% before the 2008 financial crisis.
"The vast majority of European financial institutions we rate have solid credit profiles and we believe are well placed to withstand the difficult period to come," Mr. Ackermann said.
To help ease stresses, the European Central Bank on Thursday offered up to EUR2.3 trillion in cheap borrowing for eurozone banks, and freed up some EUR550 billion in capital by temporarily lowering requirements, according to estimates by Jérôme Legras, head of research at Axiom Alternative Investments.
But risks abound.
Low profitability at banks, for instance, spells potential capital trouble. Deutsche Bank AG and German peer Commerzbank AG are particularly vulnerable because the sector has struggled to make money in an overcrowded German market even during the economic boom. Loan losses eat capital, and new accounting rules means banks have to anticipate potential losses in real time and based on macroeconomic conditions.
"While it is hard to fathom the depth of the oncoming asset-quality cycle, it is already clear at this point that the profitability of many banks is inadequate to manage through a prolonged economic crisis that results in heightened provisioning needs," Marco Troiano, deputy head of the banks team at rating agency Scope Ratings, said.
Another potentially trouble spot lies in the endless loop between banks and sovereign risks in Europe. After the financial crisis in 2008, governments had to rescue banks, which overstretched their own finances. That led to the sovereign-debt crisis in 2010, which hurt banks even more.
Tom Kinmonth, a fixed income strategist at Dutch lender ABN AMRO Bank NV, said the key thing for banks is the length of the disruption.
"If things get better over the next few weeks, things will be OK on the banking side. If they last longer, then it's a problem," he said.
"The banks that make it through will have a big upside after all this," Mr. Kinmonth said.