A new financial storm may be brewing

Lisbon Strategy for Growth and Jobs Seminar " Excellence and partnership for an innovative Europe"
Lisbon Strategy for Growth and Jobs Seminar " Excellence and partnership for an innovative Europe"

Since the beginning of the year markets have faced desperately difficult conditions, but the banking sector has seen a disastrous 2016 so far.

The FTSE 100 has slipped 4.7 per cent at the start of this week since December 31, but banking sectors across the world have done far worse. Financial stocks in the US have fallen 19 per cent since January 1, Japanese banks have fallen over 35 per cent and European banks have plunged 24 per cent to levels reminiscent of 2012 when Mario Draghi memorably pledged to do “whatever it takes” to save the euro zone.

There has been a concerted effort to make European banks more resilient through capital raising and regulation. Between 2007 and 2014 eurozone banks have issued over €250 billion of new equity. The European Central Bank took over the job of regulating the sector in 2014 and found only relatively modest shortfalls in capital.

There are several negative headwinds, most notably the concerns about the slowdown in global growth, but also the increasing move towards negative interest rates, adopted in an effort to stimulate economic activity, which could have a further detrimental impact on banks’ profits.

In the last few weeks worries have resurfaced about specific European banks: Deutsche was one of the first to evoke fears of inadequate resources to pay coupons on its riskiest bonds as early as next year, inevitably leading to a sharp decline in its share price. Other banks have also come under scrutiny, but it may be a more fundamental change in the industry is called for: there are probably too many banks in Europe, many of which are not profitable and have clung to flawed business models in rapidly changing times.

The UK has not escaped this pressure. Barclays is down by a quarter, Royal Bank of Scotland by 18 per cent, HSBC by a similar amount and Lloyds by 14.5 per cent. Standard Chartered, a rather different animal, has encountered major problems in its operating area of the Far East and is down by 24 per cent.

Last week HSBC saw a positive reaction when it announced its intention to keep its headquarters in the UK, ending months of speculation that it might relocate to Hong Kong. However, the Brexit question still hangs over the industry and HSBC has revealed it could move the centre of its operations to Paris should the UK vote to leave the EU in June.

This of course presents yet more uncertainty as the opposing campaigns now kick off in earnest. There is also the intention of the government to sell off its stake in Lloyds and Royal Bank of Scotland.

For many years this was the largest sector and one which investors avoided at their peril. Times have changed, however, and it now looks to be a somewhat precarious home for hard earned funds. An early resolution to the problems that beset the sector that was erstwhile regarded as one of the safest within the market seems as far away as ever.

:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.