Europe’s banks sucked into global rout as high rates reality hits home
European bank shares tumbled on Friday in the wake of a dramatic sell-off in U.S. lenders as concern spread that the sector will be vulnerable to the rising cost of money.
Europe's STOXX banking index fell more than 4%, set for its biggest one-day slide since early June, with declines for most major lenders, including HSBC, down 4.5%, and Deutsche Bank, down 7.9%. Shares in Italy's UniCredit and Intesa Sanpaolo also fell sharply, Reuters reported.
The global rout in bank stocks was prompted by Silicon Valley Bank (SVB), a major banking partner for the U.S. tech sector, which was forced to raise fresh capital after selling a package of bonds at a loss to meet depositor demands for cash.
"The market is treating this as a potential contagion risk," said Antoine Bouvet, senior rates strategist at ING in London.
"It makes sense to me that a remote probability of a U.S. banking system-wide crisis should also come with a small probability of contagion to Europe," he said.
Already bruised, the sector could face another bout of turmoil later on Friday if U.S. employment data points to a further racheting up of interest rates.
Shares in major U.S. banks such as JPMorgan Chase & Co and Citigroup were set to fall again when Wall Street reopens.
John Cronin, an analyst at Goodbody, said investors were worried about the falling value of banks' investments and how that could hit the capital underpinning their business, as well as savers switching banks for a better deal.
Offering higher deposits to attract customers could also eat into bank profits.
ECB seen taking rates to 3.75% peak
Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted U.S. rates by 450 basis points from near zero, while the European Central Bank hiked the eurozone's by 300 bps.
Other parts of Europe and many developing economies have done even more. There are concerns, however, that price inflation is staying high, something that would drive further rate hikes.
The ECB will step up its fight against stubborn inflation by raising interest rates four more times and unwinding its €5 trillion ($5.3 trillion) bond portfolio at a quicker pace, according to a Bloomberg survey of economists.
Three hikes of 25 basis points each will follow next week’s all-but-certain half-point move – bringing the deposit rate to 3.75% in July, respondents said.
Goldman Sachs and Deutsche Bank both predict that level, though they expect it to be reached in June. On the upper side, Morgan Stanley and Barclays see a so-called terminal rate of 4% -- matching money-market expectations.
The more aggressive path for borrowing costs compared with Bloomberg’s last survey will be accompanied by faster reductions in the stock of assets bought under previous stimulus drives. The initial trimming of €15 billion a month through June is seen gradually rising to double that by 2024.