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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Categorized | Banks, Currencies

Banks outperform after volatile year

Posted on August 31, 2016

ECB announces surprise rate cut to historic low to spur growth...epa04383668 (FILE) A file photo dated 07 August 2014 showing a over-sized barbed wire, part of an installation, seen in front of the European Central Bank (ECB) in Frankfurt Main, Germany. The European Central Bank (ECB) announced surprise interest rates cuts on 04 September 2014 as it steps up its efforts to spur economic growth in the eurozone and to fight the threat of deflation. The Frankfurt-based ECB said it had trimmed its benchmark refinancing rate for the second time in three months, lowering to a historic low of 0.05 per cent. The bank also lowered its deposit rate, which is the rate charged for banks depositing funds at the ECB, deeper into negative territory, cutting it by 10 basis points to minus 0.2 per cent. The move sent the euro down to 1.3 dollars, while shares climbed on markets across Europe. EPA/BORIS ROESSLER©EPA

Europe and Japan led a rally in global bank shares in August, as investors extended a summer respite to a sector that has been dogged all year by concerns over profitability in a world of negative interest rates.

The Euro Stoxx banks index, a broad measure of the continent’s major financial institutions, jumped 6.4 per cent. The Topix banks sub-index, home to Japan’s biggest lenders, advanced 7.4 per cent. Meanwhile in the US, where the backdrop has been less troublesome, the S&P 500 Banks index rose about 6 per cent in August.

    Banks in all three developed economies comfortably outperforming their wider markets – a marked contrast to the first quarter of the year. Fears over anaemic economic growth – and, in Europe and Japan, the drag on profits from negative interest rates – drove the shares of many banks to record lows. The immediate reaction to Britain’s vote for Brexit hit banks in Europe and the UK particularly hard.

    “We’re at the point now where the baton needs to be handed over, from extreme oversold conditions post-Brexit . . . to the fundamentals,” said James Sym, a portfolio manager at Schroders.

    The Euro Stoxx banks index is up 24 per cent since early July, when it plumbed its lowest levels in nearly three decades. UK banks have also recovered some of their losses since shortly after the EU referendum, with Barclays rising 36 per cent and RBS and Lloyds Banking Group each adding 17 per cent.

    However, despite the better performance for European and Japanese banks in recent weeks, doubts over profits in a period of low or negative rates remains a key concern.

    “Until you see rates stabilise or on an upward trajectory, then the focus is still going to be on the profitability, like it’s been all year,” said Chris Telfer, a portfolio manager at ECM asset management. “With profitability being squeezed from the rate environment, and on the other side you’ve got capital requirements, it’s just all in all not a good picture for bank equity dividends,” he added.

    While the share price gains reflect a rebound from an extremely low base, they have also come as central banks have sought to ease concerns over the sector. In the US, bank stocks have benefitted as policymakers primedinvestors for a rate rise potentially as soon as September.

    The gains in Japan’s banking sector came after concerns over US dollar funding and the impact of the Bank of Japan’s negative interest rates policy (NIRP) have at least eased.

    In the months since NIRP was first announced by the BoJ in January, Japanese banks have fallen out of favour with investors. At the end of July, however, the BoJ announced additions to monetary easing that were clearly designed to address concerns over the health of the banking sector.

    As well as the announcement that it would double its ETF purchasing programme to Y6tn a year — a move that has provided general support to the Tokyo stock market and raised hopes of further rallies — the BoJ said that it would introduce measures to alleviate US dollar funding problems for Japanese financial institutions.

    Other central banks have introduced measures designed to support banks. The European Central Bank is running a long term refinancing operation that lends to institutions at extremely low rates. The Bank of England in Augustintroduced a new funding scheme for UK banks, in which it lends to institutions at a generous rate.

    “The action of the bank of England — that is not positive for profitability, no matter how they they’re trying to smooth the impact,” said Filippo Alloatti, an analyst at Hermes.