European Deadpool Part 2: The Banks
Welcome back everyone! This post is Part 2 of the four-part series on Europe.
Today I am analyzing the health of the banking industry for the same 7 countries that I profiled in Part 1 by evaluating their assets, liabilities, and profit. As an extra bonus, I’ll drill down to specific banks to see which of those might win the “individual bank” deadpool.
All of the numbers come from the European Banking Authority which aggregated data from over 100 of the EU’s biggest banks. These banks represent at least 50% market share for their respective countries.
As you can see below, each of the nations’ banks have a similar composition of assets. The biggest deviation is Cyprus’ banks’ 18.4% cash- a result of the 2013-2016 €10B bailout.
Each nation has roughly 2/3rds of their assets in loans; however, the quality of those loans is very different. The figure below is a scatter plot of the % of loans that are 90-days past due (also called Non-Performing Loans) on the vertical access and the Coverage Ratio (allowance for bad loans / gross amount of bad loans).
Over 45% of all bank loans are 90-days past due in both Greece and Cyprus.
Cyprus has the further distinction of an insufficient coverage ratio of only 38%, so if most of those non-performing loans default, its banks won’t have enough allowance to cover the losses.
Again, focusing on Cyprus, we see something unusual. Almost 90% of its liabilities are deposits from customers. Basically, those banks can only get money from Cypriots and EU/IMF bailouts. Cyprus already faced a near run on its banks a few years ago; it simply cannot afford to let that happen again.
The saving grace for the EU is that the combined amounts of Greece’s & Cyprus’ banks’ liabilities are relatively quite small- less than €306 billion. So even if these two nations’ banks blow up, it can probably be contained.
At some point, money from the ECB and IMF will dry up for banks in need, so these banks must be able to fund themselves through profit. Unfortunately, Cypriot and Italian banks have little profit; those of Portugal and Greece are actually negative. So much for that…
Given all this, the deadpool in the national banking industry category is really a two-horse race to the bottom between Greece and Cyprus.
Portugal isn’t too far behind with Italy in fourth.
So that was short and sweet.
Bonus: Individual Banks At Risk
Since we have the time, lets go one level further and look at specific banks that are in harm’s way. Below is a scatter plot of all the 100+ largest European banks. This time, I put the % of Non-Performing Loans on the horizontal access. On the vertical access is the % of collateral received from NPLs divided by the gross amount of NPLs. In other words, how well can the bank recoup collateral from failed loans. The further right and down you go, the worse the situation is.
The 10 red diamonds are the 10 worst big banks in Europe based on this metric. Each of those is detailed below.
The big Italian Banca Monte dei Paschi (the world’s oldest bank founded in the same year that Christopher Columbus set sail for the new world!) is already making headlines for its precarious situation. At any rate, all of the above are in serious jeopardy.
There’s one last bank that deserves special attention- Germany’s Deutsche Bank, the largest in all of Europe. The quality of its loans is not the problem; rather, its threat comes from perception. Ill will has taken root due to the bank’s capitalization, its portfolio of derivatives, and an upcoming penalty from the US government.
In notional value, Deutsche Bank’s derivatives book is an otherworldly $47T. To put that in perspective, that’s more than half of the world’s $75T combined GDP!
When it comes to derivatives, it is not the notional value that matters, but rather the market value. That market value probably comes in around 1/50th of the notional value—so somewhere in the neighborhood of €1T. About €29B of those derivatives are what’s called “Level 3”. Basically, they are so convoluted (and illiquid) that not even Deutsche Bank can figure out how much those derivatives are actually worth. Maybe those derivatives are worth €29B, but maybe they are worth €0. Who knows?!?
On top of this, Deutsche Bank is negotiating a penalty with the U.S. government for its bad behavior during the 2008 crisis. The U.S. Justice Department’s opening salvo was $14B, but most think the final amount will be around $4B.
All of this has some of its largest clients (hedge funds) running for the exits. Deutsche Bank’s €233 billion in liquidity reserves should be able to withstand all of the pressures, but if more hedge funds and large institutional investors take their money out, it could trigger a run on the bank. Let’s all pray that doesn’t happen because Deutsche Bank is much larger and much more entangled in the global financial web than was Lehman Brothers.
Perhaps the Deutsche Bank forward slash logo’s unintended meaning is that the firm will accidentally divide and destroy value all over the world…