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A global bank’s share price drops more than 10 per cent in a single day over concerns about its exposure to the eurozone’s spiralling sovereign debt crisis. Sounds familiar? For leading European institutions, such as France’s BNP Paribas and Société Générale or Italy’s UniCredit, such extreme volatility has become unremarkable amid the spectre of a Greek default.
However, when that bank is Morgan Stanley, the US-based investment bank, as it was on Friday – and then 7.6 per cent more on Monday – it raises broader questions about shareholders’ confidence in the fundamental integrity of some of the world’s largest financial institutions, and whether the worst of the bear market for banks is yet to come.
Analysts say there appears to be a growing disconnect on both sides of the Atlantic between what banks identify as their core challenges, and what investors appear to be punishing them for.
Banks’ failure to get to grips with market sentiment is starting to bear unwelcome similarities with 2008, when executives such as Dick Fuld, the former head of Lehman Brothers, claimed their institutions remained robust nearly up to the moment of collapse.
Take the leading French banks, for example. The share prices of BNP, SocGen and Crédit Agricole have fallen by an average of more than 45 per cent so far this year, largely on concerns over their exposure to the southern eurozone.
According to Fitch, the credit rating agency, those three banks hold €53bn ($70bn) worth of net sovereign exposure to Italy, Spain, Greece, Portugal and Ireland, exceeding the totals held by banks in other western countries, and driving persistent speculation about their need to recapitalise. So far, impairment charges have been taken only on Greek government debt, with bonds in the banking book written down by 21 per cent as envisaged in the eurozone’s July bail-out plan, as opposed to the 50 per cent haircut the market anticipates will be applied in a Greek restructuring.
In recent weeks, concerns about the dependency of French banks on wholesale funding have also intensified sharply amid signs that they are finding it more difficult – and more expensive – to borrow US dollars.
“French banks’ current capital ratios do not compare favourably with some large European peers, and market participants fear capital to be too weak to absorb the falling values of sovereign bond portfolios,” Fitch said last week. “The collective downward impact of negative market drivers and corresponding fundamental factors reinforces enhanced downside pressure on ratings of the large French banks.”
So it is somewhat surprising that French bank executives continue to insist that their priority is deleveraging, rather than recapitalisation. “In this kind of market, I wouldn’t even know how much capital I had to raise,” one top French banker said last week, while insisting that investors in the US, in particular, are peddling doomsday scenarios.
It is true that the hit from a Greek default, while painful, would be manageable. BNP, which holds the largest amount of Greek debt among French lenders, is expected to take an additional €1.7bn hit in its third-quarter accounts. The impact of a writedown of its Greek exposure would shave just 15 basis points off BNP’s core tier one capital ratio, the key measure of financial strength, according to the bank’s estimates.
Markets, however, are pricing in the impact not only of a Greek default, but of a substantial haircut on Italian and Spanish debt. Investors simply do not believe that French banks hold enough loss-absorbing capital to withstand contagion across Europe.
Which brings us back to Morgan Stanley, where its sharp sell-offs have been traced in part to a widely circulated report that claimed the bank held $39bn worth of exposure to France.
People familiar with the situation at Morgan Stanley say the figures reported were from the end of last year and were gross, rather than net, numbers. The bank’s net exposure to France, those people say, is actually near zero.
But investors’ reaction to speculation circulated on Twitter reflects how acute concerns have become about Morgan Stanley. One of the few remaining independent investment banks, alongside Goldman Sachs, Morgan Stanley’s share price has halved in value this year. The cost of buying protection against a default on Morgan Stanley’s bonds has soared to levels that are now above several big European lenders.
Turbulent markets and a drop-off in dealmaking in recent months are expected to take a heavy toll on Morgan Stanley’s earnings, but executives insist its fundamentals remain sound.
Like their European rivals, however, they may be shouting into the wind.
Megan Murphy is the Financial Times’s investment banking correspondent
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