Chart of the Week: The Incredible Shrinking Market Capitalization of Euro-banks
Former British Chancellor of the Exchequer Ken Clarke described Europe’s banking system in an interview with Sky News as being “in tatters”, while fears of a region-wide run on the banks continue to ebb and flow. Meanwhile, Benoît Coeuré, executive director of the ECB, revealed last week in another media interview last week just how precarious the situation for European banks was last autumn. “We were very close to having a collapse in the banking system in the euro area, which would have also led to a collapse in the economy and to deflation.”
What we have seen, however, is a collapse in the market valuation of eurozone banks as a proportion of total market capitalization. As this week’s chart of the week, below, shows, eurozone bank valuations now make up only 8% of the eurozone’s total market capitalization, the lowest level in nearly 40 years and down from more than 20% at its height in 2007.
Admittedly, valuing eurozone banks has been tricky for analysts and investors in the wake of the financial crisis of 2007 and the subsequent emergence of the eurozone debt crisis. Traditional metrics – such as price to book, and price to earnings ratios – may not tell the full story of what is happening in the world of the eurozone banks. There are too many wild cards and unknowns, ranging from what impact a Greek exit from the euro – whether orderly or not – might have on the eurozone’s financial institutions, to the real magnitude of the questionable loans still on the books of Spain’s troubled banks. As recently as March, those banks estimated troubled loans had reached about 148 billion euros, hitting an 18-year record, and earlier this month, the country’s government demanded that they set aside some 30 billion euros to cover losses on their real estate loan. But given that that marks the fourth effort to clean up the mess in Spain, investors are divided as to whether that will mark an end to the industry’s woes – especially if a Greek exit undermines confidence in the eurozone as a whole.
Moody’s cut its ratings on Spanish banks last week, citing the weak economy and the difficulty the country’s government is having buoying its financial institutions. Then came a move by Fitch, which cut its ratings on major Greek banks, driving their debt securities further into “junk” territory.
It’s clear that the pressure will be on both policymakers and bankers to try and navigate the increasingly perilous waters of the eurozone debt crisis as a new week begins and investor anxiety ratchets up another notch.