Earnings season has barely begun and it’s already gruesome for banks, especially in Europe. Japanese bank Nomura is calling it quits on Europe. The company is cutting 500 jobs in Europe, the Middle East and Africa. It will stay in the equity execution business but get rid of research, sales and underwriting in European stocks.
See. It didn’t even take Brexit for a financial firm to pull up stakes. The reason is simple: growth in Europe is awful. That’s the legacy of the last thirty years. Debt. Debt. More debt and low growth. You have to wonder how many time bomb bank stocks are out there, with balance sheets ready to blow up.
You’ll get a more precise picture of first quarter bank earnings this week. But the story is not complicated. Low rates erode the net interest margin of a bank, the spread between what a bank earns in income and what it pays you. Add in bad and non-performing loans and the picture gets worse.
The Italians have decided to do something to shore up the sector. They’ve set up a $5.7 billion fund to help some of their smaller banks raise capital and off-set bad loans. With Mediterranean flair, they have called the fund Atlante. According to Bloomberg:
Atlante, which was named after a Greek mythological god, will act as a buyer of last resort for banks that struggle to raise equity capital in the private markets or that can’t sell off the riskiest portions of their bad debts. The fund is being managed by a private manager, Quaestio, because Italy doesn’t want to fall afoul of European Union rules against providing state aid. Quaestio’s shareholders include Intesa Sanpaolo SpA’s top investor, Fondazione Cariplo.
Thus, Europe’s banks are stuck in negative rate limbo. They can’t grow the balance sheet or earnings in a zombie economy. And they can’t unload the bad loans. They can stand by and watch as central banks create their own digital helicopter money.
Category: Economics