European View

From Berlin to Lisbon, the banking crisis is European

by Luca Davi and Morya Longo

24 Exclusive content for IT24

All European banks suffer from low profitability and high costs. Adding to the problem, every single country has its specific issues. In Italy and Portugal, non-performing loans weigh on banks' balance sheets, in Germany and some Nordic countries derivatives held by big banks are a concern, while in the UK the property crisis worries analysts. Let alone the huge problems of Germany's regional banks, under scrutiny by the International Monetary Fund. Without playing down the seriousness of the Italian situation, we should not forget that the banking crisis is European.

The profitability problem
The first reason of concern (for all countries) comes from the zero interest rate policy of the European Central Bank: erasing the cost of money means cutting the earnings of intermediaries, like banks. For the top 20 European lenders, according to data by Capital IQ, earnings from issuing credit have fallen from €709 billion in 2007 to €433 billion in 2015: in few years, banks have lost €276 billion.

Italy is not the country to suffer the most from this specific problem. According to a report by At Kearney, low profitability is even more painful for banks with still too-high costs: too many branches, offices and so on. This problem is less pronounced in Italy than abroad: Italian banks have a cost-to-revenues ratio in line with the European average. Austria, despite being a “virtuous” country for many other aspects, is the worst performer.

Bad loans
Low profitability makes the countries' specific problems worse. For some, these are represented by the non-performing loans. The countries with higher levels of NPLs were hit the hardest by the recession: Cyprus and Greece come first (with bad loans accounting for 35-40% of total loans), followed by Ireland (21.5% according to the European Banking Authority), Italy (16.7%) and Portugal (16.3%).

Instead, this is not a problem in countries which have suffered less from the crisis, like Germany (where impaired loans amount to 3.5% of total loans), France (4.3%), and Finland (1.7%).

However, in Italy bad loans are “covered” in the balance sheets better than abroad (and better than in Germany), but not enough according to market standards. This is why Italy's and Portugal's banks are in the hot seat in the stock markets and need capital increases (€7.5 billion in Portugal according to Barclays, and up to €40 billion in Italy according to Morgan Stanley).

“Toxic” assets
Even if loans to households and businesses have become “radioactive” in Italy, for some big German banks the toxic assets are the illiquid securities in their balance sheets.

Deutsche Bank and Commerzbank, according to data by R&S Mediobanca from June 2015, have “toxic” assets (that cannot be valued, and are illiquid) respectively for 51.3% and 23.4% of their net tangible assets. The value of such securities cannot be estimated because they don't have a market and nobody would buy them: banks therefore assign them a theoretical value, as a result of a simulation.

If these assets were worth half in the simulation, banks would see their net assets eroded, and would need a capital increase, like in the case of Monte dei Paschi di Siena. The same would happen to the main Swiss banks (Credit Suisse has toxic assets for 72.6% of its tangible net assets), or French lenders. On the other end, Italian banks almost don't know what these are.

Same for derivatives, which weigh heavily on banks like Germany's Deutsche Bank, Switzerland's Credit Suisse, France's Credit Agricole and some Nordic lenders.