The Big-Bank Bloodbath: Losses Near Half a Trillion Dollars
The Wall Street Journal
By David Reilly
18 hours ago
Big banks are nearly half a trillion dollars in the hole.
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Since the start of 2016, 20 of the world’s bigger banks have lost a quarter of their combined market value. Added up, it equals about $465 billion, according to FactSet data.
Brexit isn’t all to blame. True, bank stocks have plummeted since the U.K. voted last month to leave the European Union. But they have been losing value since the start of the year, when a group of factors—the Chinese economy, the path of U.S. interest rates, oil prices—weighed on the markets.
More than pride is at stake. Sharp share-price falls will make it much more difficult, and expensive, for banks to raise capital if that is what is ultimately needed to shore up their balance sheets.
Just as bad, a serious decline in market value can breed inaction among bank executives. Instead of selling equity when they can, executives may wait for share prices to recover, only to find themselves in a worse situation as stocks drop even further.
Another potential worry: As bank share prices decline, employees get antsy. Compensation packages that include stock options or restricted stock suddenly become a lot less attractive.
To get a handle on the severity of 2016 for banks, The Wall Street Journal examined the biggest U.S., U.K. and Swiss banks, some of the biggest European ones, as well as the biggest bank in each of China and Japan.
The group included: J.P. Morgan Chase & Co. Wells Fargo & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group, Morgan Stanley, Royal Bank of Scotland PLC, HSBC Holdings, Barclays PLC, Standard Chartered PLC, UBS Group AG, Credit Suisse Group AG, BNP Paribas SA, Credit Agricole SA, Société Générale SA, UniCredit SpA, Deutsche Bank AG, Banco Santander SA, Industrial and Commercial Bank of China Ltd. and Mitsubishi UFJ Financial Group Inc.
The biggest market-value losers, in dollar terms, so far this year: Italy’s UniCredit has lost nearly two-thirds of its value; Royal Bank of Scotland has fallen around 56%; and Credit Suisse, Deutsche Bank and Barclays have all about halved.
Those who have lost the least: J.P. Morgan Chase and Industrial and Commercial Bank of China, which are both down about 10%. In local-currency terms, share prices for all 20 banks are down year to date, except Standard Chartered, which is flat.
Despite such gloom, many banks say they don’t need to raise capital. Indeed, in the U.S. at least, the Fed’s recent bank stress tests asserted that big banks can weather particularly bad market storms. The Fed also approved plans at all the largest U.S. banks to return some capital to shareholders.
Valuations show investors aren’t feeling so confident. UniCredit, for instance, trades at about 21% of book value, a measure of a bank’s net worth, according to FactSet. Deutsche Bank trades at about 26%, or where it was during the darkest days of the financial crisis.
In fact, among the group of 20 big banks only one bank—Wells Fargo—trades at a premium to its book value. Only one other, J.P. Morgan Chase, trades near book value.
A bank trading below book value can signal that investors have questions about capital strength. It can also show markets are worried about future profitability and a firm’s ability to generate returns that exceed its cost of capital.
Plunging bond yields around the globe have exacerbated the latter concern by pressuring banks’ profit margins.
The fact that some banks are trading at less than half their book value flags even deeper concerns. Among the likely issues: A brewing battle within the EU over rules curtailing governments’ ability to bail out banks and whether those could be put on hold.
All of this has many once-mighty banks looking like shadows of their former selves. Deutsche Bank, Germany’s national banking champion and still a big player on Wall Street, now has a market value that in dollar terms is less than that of SunTrust Banks Inc., the regional U.S. bank focused on the Southeast. And the market values of UniCredit, Deutsche Bank and Credit Suisse combined wouldn’t equal that of Goldman Sachs—itself down about 20% this year.
Write to David Reilly at email@example.com