Concerns about Europe's banking sector have intensified
following the crisis surrounding Portugal's banking giant Banco
Espírito Santo. Despite the optimism generated by the rescue plan
unveiled by the country's central bank, questions about the
industry have come to the fore. In this context, ECB's decision to
conduct a series of exercises before it creates a Eurozone-wide
banking watchdog gains special significance.
Banco Espírito's Rescue Plan
Last week, Portugal's central bank announced a rescue plan for
Banco Espírito Santo (BES). BES had incurred a loss of €3.58
billion in first half of 2014. This is the biggest loss in
Portuguese banking history. The central bank announced it will
split BES into a "good bank" and a "bad bank." The 'good bank' will
receive a bailout of €4.9 billion from the bank resolution fund.
Out of this, €4.4 billion will be provided by the Portuguese
government as a loan and the rest as cash. Investors welcomed this
plan as it may help Portugal recover from the banking crisis.
The "good bank" will be called Novo Banco. BES' potential assets
such as deposits and loans, which can be repaid, will accrue to the
"good bank." Good bank will use BES' existing branding and
framework to continue its operations.
BES will become the "bad bank." The "problem" assets of the bank
will remain with BES. Shareholders and the creditors will be liable
for these assets and may lose all of their investments. The
Espírito Santo Financial Group, which is one of the owners of BES,
and Crédit Agricole (one of the biggest French lenders) are among
those who stand to lose.
ECB's Asset Review and Stress Tests
The ECB has decided to create a unified watchdog for all Eurozone
banks before the end of the year. Ahead of its assumption of formal
control on Nov 4 this year, the ECB is carrying out an exhaustive
evaluation of the health of banks in the economic union. This
includes 128 banks that hold 85% of all banking assets in the 18
countries which use a common currency.
All the 28 members of the EU will also undergo stress tests to
determine how they would respond to another economic slowdown and a
slump in the markets. In the past, stress tests have performed
poorly in achieving their objectives. Both lenders and their
supervisors are sceptical about their efficacy since they have
upheld the financial soundness of banks which have collapsed
shortly afterwards. This includes the likes of Franco-Belgian bank
Dexia which failed in 2011.
However, EU officials have emphasized that things will be different
this time around. Firstly, banks can no longer depend on their
national regulators to protect them from such measures. Secondly,
the decision to conduct asset quality reviews ahead of stress tests
increases the efficacy of such measures. The wisdom of such an
approach has been borne out by their effectiveness in Ireland,
Spain and Slovenia in 2011, 2012 and 2013, respectively.
Portugal's Action In-Line with ECB Approach
Portugal's approach is in consonance with the ECB's approach on
resolving crises relating to troubled banks. The country has
followed Spain's approach toward such situations by letting
shareholders and junior debt holders take losses. This has spared
senior creditors and unsecured depositors.
Though such an approach hurts shareholders and creditors, analysts
believe that it is good for the banking industry as a whole. It is
also in line with EU's new approach to tackling banking crises. New
rules mandate that funds spent on stabilizing distressed banks be
recovered from the private sector once the crisis is over. Earlier
this month, the EU said the rescue plan for Banco Espírito Santo
was in keeping with rules on state-aid.
The approach taken by Portugal's central bank shows that banks in
the EU have taken a more prudent approach to tackling crises. Below
we present three stocks from this sector which possess the
potential to grow appreciably, each of which also has a good Zacks
Banco Santander, S.A.
) is the biggest bank in Spain as well as Latin America. It
also operates across four segments: Sovereign, Latin America, UK
and Continental Europe. The Bank provides banking services for
individuals and companies, leasing, factoring, stockbrokerage and
mutual fund services. Its European operations are conducted via
Bank Zachodni WBK, Santander Totta and Santander Consumer Bank.
Banco Santander holds a Zacks Rank #2 (Buy) and has expected
earnings growth of 14.8%. The forward price-to-earnings ratio (P/E)
for the current financial year (F1) is 15.63.
) is a major global banking and financial services company, with
over £1.4 trillion ($2.1 trillion) in assets as of Mar 31, 2014.
The company operates through an international network in over 50
countries and regions in Europe, the U.S., Africa and Asia, the
company provides a wide range of financial services to individuals,
corporations and institutions.
Currently the company holds a Zacks Rank #3 (Hold) and has expected
earnings growth of 30.7%. It has a P/E (F1) of 10.13.
Deutsche Bank AG
) is the largest bank in Germany and one of the largest financial
institutions in Europe and the world, as measured by total assets
(1,637 billion as of Mar 31, 2014). As of that date, the company
had 97,184 full-time employees and operated in 72 countries with
2,853 branches, of which about 66% were in Germany.
Apart from a Zacks Rank #3 (Hold), Deutsche Bank has expected
earnings growth of 130.3%. It has a P/E (F1) of 8.76.
The ECB and banking regulators across the region have taken
measures to ensure that stability returns to the sector. This is
why these stocks would make good additions to your portfolio.
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BARCLAY PLC-ADR (BCS): Free Stock Analysis
DEUTSCHE BK AG (DB): Free Stock Analysis Report
BANCO SANTAN SA (SAN): Free Stock Analysis
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