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Big Banks Lose Big Bucks

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Big Banks Lose Big Bucks

2016 is proving to be a year that has picked up where 2015 left off in regards to finances, but has taken it one step further.

Since the beginning of the year, big banks have lost almost a trillion dollars in value.

Value has been wiped off of stock values due to market investor anxieties and market fragility.

Read on for the reasons behind this.  

193 Days gone, $465 billion lost

This is the total figure that has been wiped off of big banks’ combined market value this year.

Much of this has been since Britain voted to leave the European Union on June 23, which is now three weeks ago.

The important aspect of the vote is that it has now thrown into question Britain’s future access to the European single market, as well as the integrity of the single market as a whole.

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Some think that the European Union project is now in danger, such is Britain’s importance to it and the chance that it leaving could start a contagion effect for other parties and governments with Eurosceptic tendencies.

Regarding Britain though, the immediate worry is that its role as an investment target for companies wanting to have access to EU markets, thanks to Britain’s language and global ties, is now in question.

This is why British banks like RBS, Barclays and HSBC have all lost so much value.

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Wasn’t a great year to start with though

However, it’s not just Brexit.

–    The Chinese economy has been lagging, with slowed growth.

–    Investors have been sheepish about whether the Federal Reserve will raise rates again.

–    Oil prices have remained low, very low.

–    Bond yields have reached all-time low levels

All these have led to the loss of share prices.

Banks need to raise capital to rectify balance sheets and falling values make this more difficult; while the instability leads executive to be more hesitant with decisions regarding the selling of equities, a position which itself contributes to stocks losing value.

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Banks also have the added worry of employee dissatisfaction, as their stock options make up a larger proportion of salaries than other industries.

Lower stock values, lower wages, less happy employees.

Losers and… bigger losers

The biggest loser so far has been an Italian bank (the Italian economy is closely tied to that of the UK), UniCredit, who have seen a whopping two-thirds of their stock value wiped off.

RBS, the Royal Bank of Scotland, has similarly seen more than half (56%) of its value fall.

This is especially significant as it is a part public owned bank, so the British taxpayer has lost upwards of $10 billion.

Meanwhile, Barclays, another UK Bank, along with Credit Suisse and Deutsche Bank have seen their values down by 50 % in this time.

Some lesser losses of around 10% were observed by banks such as JP Morgan (who are rumored to be preparing to axe a few thousand jobs from the UK) and the Commercial Bank of China.

Regarding local currency, all banks are down except Standard Chartered who have maintained.

So, to recap:

–    UniCredit has lost 2/3 of their value

–    RBS has lost 56%

–    Barclays, Credit Suisse, Deutsche Bank, 50%

–    JP Morgan, CBoC, 10%

–    All banks down in local currency terms, bar Standard Chartered (UK)

However, banks are surprisingly confident that they don’t need to embark on a capital-raising frenzy to survive.

Fed research has shown that most are well-prepared to weather the upcoming storms.

Investors aren’t very optimistic.

Trading values of UniCredit and Deutsche Bank are at the levels harrowingly reminiscent of the dark days of the 2008 financial crisis.

Wells Fargo is the only current bank trading at a premium to their book value, while out of the others, JP Morgan is nearest it.

What’s the significance?

When a bank finds itself trading below its book value as most currently are it brings into question the capital strength of that bank and its surrounding market: it floats worries of future profitability and a firm’s ability to produce results that outstrip capital costs.

As we’ve talked about previously, bond yields are also at an all-time low (though they have been steadily decreasing for the best part of 30 years, so this isn’t as dramatic as it sounds) which is also bringing concerns to investors, by hurting the profit margins of the banks.

But trading at half of your book value creates concerns that stretch far beyond how profitably or capital-strong you are.

It feeds into the debate currently being held at the EU level over whether governments should be able to bail out failing banks.

Iceland famously didn’t bail out its banks, let them fall, lost 25% of its national GDP but transformed its economy and mentality towards finance.

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The falling sterling and Euro have made mincemeat of what were massive behemoths in the industry when compared with American banks now.

For example, Deutsche Bank, Germany’s national bank par excellence and a big player on Wall Street now has a smaller market value (in dollars) than a little twinkie-sized regional player, SunTrust Banks.

Goldman Sachs is now more valuable than UniCredit, Credit Suisse, and Deutsche Bank, even though it is down 20% since the start of 2016.

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