News hit last week that Espirito Santo Financial Group, whose primary asset was a 20 per cent stake in the Portuguese bank Banco Espirito Santo, had declared bankruptcy, and not a moment too soon. Last Friday, the European Banking Authority announced 26 October as the official date for the reveal of the EU bank stress test results.
Lately, a number of my guests have suggested buying European banking stocks on the dips, as they could become beneficiaries of further ECB measures aimed at ensuring liquidity and lending within financials. Further, Linklaters released research on Sunday, examining how much capital banks have been raising to pass the stress tests.
David Ereira, a banking partner at the law firm, came on European Closing Bell to talk through some of the main findings. First, 42 per cent of all new capital raisings since the last stress tests took place this year. Some countries, like Cyprus, Austria, Greece and Portugal, however, all raised significantly more in 2014. Second, in raising more than €10.5bn this year, Italian institutions account for the biggest recapitalisations, followed by Greece (€8.3bn), Germany (€6.7bn) and Portugal (€3.4bn).
Third, some banks could still fall short of capital. Just over a quarter (25.7 per cent) of the 66 banks in the least capitalised areas were able to successfully raise capital in 2014. Under half of these banks accounted for three quarters of all the capital raised. In other words, a number of banks in the weaker districts still struggled to raise money. Finally, in total, 32 per cent more capital has been raised so far this year than in the entire year before the last stress tests.
GERMANY MAY CHANGE ITS MIND
The bigger point is that you need a healthy financial sector, or it gets very difficult to have healthy broader markets. Speculation continues that the ECB may, in fact, want to introduce full-blown quantitative easing (buying European sovereign bonds), but that president Mario Draghi’s hands are tied by German Bundesbank officials, who don’t want to mop up the bill for Europe.
But this “Germany on one side, Europe on the other” attitude could be changing. German data has been pretty awful. German exports dropped 5.8 per cent in August, while industrial production fell by 4 per cent in the same month. And as the German economy contracted by 0.2 per cent in the second quarter, you have to ask: if Germany falls into recession again, will this force Bundesbank officials to change their attitude? In other words, if weakness continues in powerhouse Germany, it might be asking for more ECB support, instead of opposing it.