It's been an ugly start to the year for U.S.-based financials, but across the pond, the troubles for banks have been -- and continue to be -- far worse.
Despite recent stock performance, U.S.-based banks are in somewhat of a growth mode after years spent strengthening their balance sheets, paying hefty fines tied to the financial crisis, and meeting stricter capital requirements. European banks, however, are behind in their efforts to rid themselves of non-performing loans. Making matters worse, they tend to have more emerging market exposure than their U.S. counterparts.
Shares of Deutsche Bank (DB) are down 27% on the New York Stock Exchange over the last month. That pain is also seen in its other securities as the price of one of its perpetual call notes has fallen 12.6% to $79.47, according to data provided by Thomson Reuters. In October, Deutsche Bank announced that it planned to shed 35,000 positions -- some full time and others contracted -- while also closing operations in 10 countries.
Meanwhile, shares of Italy-based Banca Monte dei Pashi di Siena (BMPS.MI), the oldest bank in the world, fell nearly 50% over the last month on the Milan Stock Exchange. Part of the decline is due to Italy's stock of bad loans, which total $382 billion, according to data provided by the Financial Times. Last week, Italy reached a deal with the European Union that would allow Italian banks to sell portfolios of non-performing loans to private investors. The troubled loans would come with a government guarantee, the Financial Times reported.
Deutsche Bank and Banca Monte dei Pashi are just two examples of the periodic waves of bad news from Europe washing up on U.S. shores. Last month, U.K.-based Barclays (BCS) announced plans to cut 1,000 jobs in an effort to focus on operations in the U.S. and U.K. In November, U.K.-based Standard Chartered announced plans to cut 15,000 jobs over three years, in order to focus more on retail and private banking.
Standard Chartered is unique in that over 90% of its income and profits are derived from Asia, Africa, and the Middle East. It goes without saying, that these areas of concern to global investors. The bank is currently under a review for downgrade by Moody's as the ratings agency noted that the bank's earnings and asset quality have been under pressure due to low interest rates, the weakening credit cycle, and other factors.
Meanwhile, shares of Spain-based Banco Santander (SAN) are down 19% over the last month. The bank reported results last week, which saw its profits plunge 98% in the fourth quarter, compared to the same quarter last year as it set aside $648 million to handle potental claims by clients who were mis-sold payment protection insurance. While bad debts across the bank's businesses fell to 4.36% of total credit from 4.5% in the third quarter, its level of non-performing loans did not fall in Brazil, the Wall Street Journal reported.
All banks have found it increasingly difficult to earn money amid increased capital requirements and low interest rates. While the U.S. appears to be on the path to rate normalization after the Federal Reserve increased the target range for the federal funds rate by 25 basis points in December, the European Central Bank extended its quantitative easing program by six months, and lowered its deposit rate to negative 0.3%.
Weak balance sheets, emerging market worries, and a commodities rout are all likely to spell continued trouble for these banks.