By Thyagaraju Adinarayan
LONDON (Reuters) - Negative interest rates, toppling bond yields, greater regulation and rising recession signals have wiped out most of the value of European banks, with their shares now at meltdown prices approaching the days of the Berlin Wall.
The index of the bloc's big banks (SX7E) plunged on Thursday to the level it hit in 2012 at the peak of the euro zone debt crisis.
That means the banks are worth now what they were when Greece, Ireland and Portugal needed bailouts, Cyprus ordered its banks to seize some deposits and Spain's banks were saved from collapse only by a government rescue.
Though it still hasn't quite matched the bottom of the 2008 financial crisis, the index has lost 84% of its value since its peak in 2007.
It is now a few points away from hitting levels seen in the 1980s, when the euro was barely a dream and some of the countries that now use it were still using Soviet roubles.
The wider banking sector for the bloc is now worth less than half a trillion dollars -- about half the size of Microsoft (NASDAQ:MSFT). It was down nearly 3% on Wednesday after Germany's economy shrank and the U.S. bond market showed red flags pointing to recession.
At their 2007 peak, euro-zone banks were worth $1.7 trillion, well above the value of their U.S. peers. Today, they are just one-third the size of banks on the other side of the pond.
1/ BANKS HAVE LOST OF 84% OF THEIR VALUE SINCE 2007
Eurozone banks performance - https://fingfx.thomsonreuters.com/gfx/buzzifr/14/4037/4037/Pasted%20Image.jpg
Rates are already in negative territory and markets are pricing in at least another 20 basis point cut by the European Central Bank (ECB), which would hit the banks' already low profitability.
Though the ECB has promised some mitigating measures such as deposit tiering -- lowering the charge that banks pay on some of their excess cash -- to dampen the impact of negative interest rates, it's still not clear how much it would help them.
"We do not expect it to be especially generous to the banking sector given the ECB's belief that negative rates are not yet hurting banks' profitability," Credit Suisse (SIX:CSGN) lead banking analyst Jon Peace said.
2/ EARNINGS EXPECTATIONS TRACK BUND YIELDS
Euro-zone bank earnings versus bund yields - https://fingfx.thomsonreuters.com/gfx/buzzifr/14/4040/4040/Pasted%20Image.jpg
Europe's largest economy, Germany, is also at the brink of a recession and this is unnerving investors as this could mean that another banking crisis is looming.
The concerns this time are mainly centred around their profitability unlike last time when solvency was the issue, said Jerome Legras, head of research at Axiom Alternative Investments.
"It's simply the consequence of a decade of extra regulation, unconventional monetary policy and deleveraging... There are not that many ways for banks to get out of this."
On the other hand, U.S. banks have outperformed Europe by a huge margin on higher interest rates and stronger performance in investment banking and with elevated capital levels. They were also unscathed by the euro zone's sovereign debt crisis.
3/ U.S. BANKS ARE NOW THREE TIMES BIGGER
EZ banks market capitalisation - https://fingfx.thomsonreuters.com/gfx/buzzifr/14/4041/4041/Pasted%20Image.jpg
Natixis believes the "abnormally low capitalisation" of euro-zone banks would make them easy prey for U.S. banks.
The low level of return on equity also prevents the European banks from raising capital. Since they can't expand, they will have less capacity to fund business on the continent.
European companies looking for financing will increasingly have to raise it from markets or borrow it from U.S. or other foreign banks, Natixis analyst Patrick Artus said.
4/ JAPANIFICATION OF EUROPE OR EUROPIFICATION OF JAPAN?
Japanification of European Banks - https://fingfx.thomsonreuters.com/gfx/buzzifr/14/4045/4045/Pasted%20Image.jpg
Since 2012, euro-zone and Japanese bank stocks have moved in tandem, with both of them grappling with ultra-low or negative interest rates for decades.
5/ CHEAP, BUT NOT ATTRACTIVE
Euro-zone banks cheap on P/E basis - https://fingfx.thomsonreuters.com/gfx/buzzifr/14/4055/4055/Pasted%20Image.jpg