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Why European Bank Stocks May Have At Least 40% More Downside

Tyler Durden's picture




 

Last week we noted how up to 90% of the European banking system's equity market capital (or ultimate risk buffer) would be wiped out if they were forced to transform (and price risk appropriately) their mis-marked asset base. The market itself has already started to adjust for this possibility (just look at Italian and Spanish bank stocks recently) but it is the similarity of Europe's bursting bubble of credit extension and current balance sheet recession that brings Japan to mind, and, as Barclays notes, if European banks follow the same trajectory as Japanese banks did from their peak in 1993 (as Europe has been since their peak in 2006), then Europe's banks market cap as a percentage of the total market is likely to drop from the current 11% to around 6% within the next year. Combine that with reality with Deutsche Bank's note that Spanish and Portuguese banks (and less so Italy for now) appear perilously short of ECB-eligible collateral, and is it any wonder things are shifting from bad to worse over there as bank recap plans are critical.

As Barclays notes:

Two banking systems separated by two decades are bound to be different... Compared to Japanese banks, then, today's European banks are more profitable, are more consolidated and have recognised losses much earlier.

 

...but disturbing similarities? For both systems, a private sector credit boom – followed by a bust – has seen loan books shrink and revenue growth stall. Europe's banks now closely track the Japanese experience on several metrics.

 

But perhaps the clearest evidence of Europe's 'Japan-isation' is the verdict of the stock market. Both banking systems reached ~20% of their respective stock markets, and six years from peak, both halved to ~10%. Worryingly, Japan's banks then went on to decline a further 40% over the next half decade.

 

 

 

And while Deutsche Bank notes that the ECB could further ease collateral requirements (which would seem a critical short-term step for Spain already) the following chart shows just why Europe is so encumbered already - as they note that the first and most critical step in Europe is a bank recap (which can only be dilutive for current shareholders) before any of the liquidity can flow into the real economy...

 

 

In the US, the ETF EUFN is the simplest way to play a position in European financial stocks but the ETF is small, illiquid, and has in the past been heavily shorted so buyer (or seller) beware.

 

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Fri, 05/04/2012 - 14:25 | 2397642 ArrestBobRubin
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Only 40% more downside for "banks" that are only beyond totally insolvent? That's a darn good deal!

Fri, 05/04/2012 - 15:29 | 2397832 Body of Lies
Body of Lies's picture

You're right ... they are already nationalized and their equity is only is only based on the largesse of their sovereigns.

Fri, 05/04/2012 - 16:17 | 2398067 ArrestBobRubin
ArrestBobRubin's picture

Body, you can Lie To Me anytime :-)

Fri, 05/04/2012 - 16:58 | 2398257 Body of Lies
Body of Lies's picture

Sorry ... Only Truth comes from 'Body of Lies'

Sat, 05/05/2012 - 19:25 | 2400069 rocker
rocker's picture

Hence, are we to believe Greenspan, Blackrock, or good ole Goldman,  "Buy Stocks" ???  Not

Sun, 05/06/2012 - 07:40 | 2400485 CPL
CPL's picture

You ladies can use the chat feature to pick each other up now here on ZH and discover the magic truth of the internet.

 

It's a sausage fest.

Mon, 05/07/2012 - 20:07 | 2405137 ArrestBobRubin
ArrestBobRubin's picture

Sorry, was a reference to your handle, not your comment :-) Comment was La Verdad.

Fri, 05/04/2012 - 14:29 | 2397648 Dr. Engali
Dr. Engali's picture

This might as well have been titled :  U.S Bank Stock Should be at Zero but Thanks to the Perpetual Fraud They Are Still Hanging Around.

Fri, 05/04/2012 - 14:44 | 2397688 JustObserving
JustObserving's picture

US banks own the Fed.  The Fed owns the economy.  And the economy owns you.  Most US citizens will go to zero before the banks do.

Fri, 05/04/2012 - 14:31 | 2397655 NewWorldOrange
NewWorldOrange's picture

It's not going to help European companies much when Europeans are all out in the streets rioting and looting, or worse.

Fri, 05/04/2012 - 14:34 | 2397663 Stoploss
Stoploss's picture

Get out the gold!

We need Euro's!! Er, dollars!! Er, paper! Any kind of paper!!!

Fri, 05/04/2012 - 15:17 | 2397781 Sudden Debt
Sudden Debt's picture

Let me just wipe my ass and you can have as many BROWNBACKS as you want!
Spend it all at once!.... Because it's going to stink even worse after a while..l

Fri, 05/04/2012 - 14:35 | 2397664 mayhem_korner
mayhem_korner's picture

 

 

Mayday!

BTW, gold up a nice, modest peg today while equities are having a bowel movement.  It's a rarity when the paper "markets" look like they understand reality, so I'm going to pour some scotch to celebrate.

Fri, 05/04/2012 - 14:38 | 2397669 The Big Ching-aso
The Big Ching-aso's picture

 

 

Gotta feelin' Europeons sayin' the same jazz about us. So who's really pointing the best finger?

 

Fri, 05/04/2012 - 16:02 | 2398007 Doubleguns
Doubleguns's picture

...and can you just imagine what the Icelanders are saying about all of us.  I can here them in the distance. bwaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaahaaaaaaaaaaaaaaahaaaaaaaaaaaaa

Fri, 05/04/2012 - 14:36 | 2397670 q99x2
q99x2's picture

They need a few TBTF (middle class crushing) crimminal banks like we have so they can fire up a TSA DHS program with everyone's money.

Fri, 05/04/2012 - 14:53 | 2397728 navy62802
navy62802's picture

Wow. 10-year below 1.9%.

Fri, 05/04/2012 - 14:59 | 2397747 orangegeek
orangegeek's picture

Some elliott wavers are calling for the Dow to hit 1000 or less before this debt fiasco is all said and done.

 

Have a look.

http://bullandbearmash.com/index/djia/weekly/

 

40% is very conservative.  I think many would say more - perhaps 80-90%.

Fri, 05/04/2012 - 15:25 | 2397809 skank
Fri, 05/04/2012 - 15:54 | 2397981 shuckster
shuckster's picture

Gold is evil 

Fri, 05/04/2012 - 19:10 | 2398513 Likstane
Likstane's picture

Gold is an element with certain unique properties.  It is not a living organism, has no mind, and is not capable of propagating evil.   You must be retarded. 

Fri, 05/04/2012 - 16:53 | 2398233 falak pema
falak pema's picture

I love this Euro bashing, if the euro banks feel the heat its because they don't have ZIRP/QE of FED; unlimited cheap money, holding up WS stocks. The harder the fall all the while you rile the more exposed Euro Pile, the WS will get its comeuppance like the City; written in the winds of change. 

Fri, 05/04/2012 - 17:00 | 2398259 Sandmann
Sandmann's picture

Since the Banks will be forcibly nationalised anyway it is academic what the share price is. Once the Capital Controls and Import Controls follow and the EU locks into an Extended Economic Area with Russia it can simply shut out the Offshore Capital Flows from The CIty. The realignment of the Eurasian Bloc is just beginning.

Fri, 05/04/2012 - 17:45 | 2398361 falak pema
falak pema's picture

lets see how the potentially new french and conservative minded german govts interact. If they have any sense they will inevitably move to Euro integration via fiscal federation which will make Eurobonding easier, and by accessing Russian RM base they will effectively be able to decouple with the mad world of anglo saxon finance and Mid-east Pax Americana oil lobby.

There has to be a will to euro convergence that reinstates the Kohl-Mitterrand spirit. Back to basic principles of solidifying the Euroconstruct. Europeans have to rebuild this convergence that Chirac/Schroeder lost the thread of, at Nice summit in 1999. Its been downhill since...

Sat, 05/05/2012 - 11:10 | 2399262 emersonreturn
emersonreturn's picture

falak perma, your coments are consistently insightful, could you please enlighten me on france?  france appears in charts relatively strong, but for years i've heard from associates doing business in france that it has two sets of books, not dissimiliar to italy.  was this simply wrong-headed hearsay, or are the french numbers and its apparent strengh dubious?

Fri, 05/04/2012 - 21:14 | 2398722 Yen Cross
Yen Cross's picture

 I would be looking for some sort of re-trace Sunday! The " Golden Week" Asian Holiday is over, and China has some really sweet, entry points!

Fri, 05/04/2012 - 22:11 | 2398793 Ned Zeppelin
Ned Zeppelin's picture

I said a long time ago that Europe goes first. I haven't changed that opinion.  But to think we escape their fate - that's dumb. We're just bigger and meaner here and it will take the rot longer here to take out the foundations. 

Sat, 05/05/2012 - 01:30 | 2398964 Bohm Squad
Bohm Squad's picture

EUFN short interest at roughly 20% of shares outstanding...and increased from ~87K to ~255K shares sold short.

Looks like I'm late to the party.  Maybe good for a bounce when it all goes south?  Eh, I'm not that nimble.

Above numbers appear accurate for Apr2012.

Sat, 05/05/2012 - 09:19 | 2399136 shovelhead
shovelhead's picture

Long on Russian Kalashnikov, FN and Glock.

 

Sun, 05/06/2012 - 21:29 | 2402254 dserfc
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