Tidjane Thiam, the chief executive officer of Credit Suisse, has a warning for investors, and it’s about his own industry. European banks are in a “very fragile situation,” he said yesterday, and are “not really investable as a sector.”
Speaking at a Bloomberg conference on Sept. 28, Thiam said there’s a lot of uncertainty in the industry created by regulatory change and ongoing fines that the banks are facing for their involvement in the financial crisis. Worse still, he said there’s doubt as to whether there is a viable business model for banks that covers their cost of equity.
The lesson from the financial crisis is that trouble in the banking sector should not be taken lightly. The global economy has hardly recovered from the 2007-2008 collapse, when several banks went under and the UK and US governments bailed out other lenders with taxpayer money to try and contain the damage.
While regulation has been introduced to limit the risks banks can cause to the wider economy, the problems among European banks are still stacking up. In Italy, the whole sector is under stress and needs to increase its capital to cover bad loans. Monte dei Paschi, the world’s oldest bank, is in so much trouble there is speculation it will need to be bailed out by the government if it fails to recapitalize again.
In Germany, Deutsche Bank’s share price dropped to multi-decade lows this week after the US Justice Department said it should pay $14 billion for its selling of mortgage-backed securities ahead of the financial crisis. That’s far more than the bank had set aside for legal fines, and more than it can really afford in the midst of a five-year restructuring plan.
Few European banks are immune to the challenges posed by low growth, low interest rates, and low returns. They are desperately trying to cut costs to make up for profit losses. Thiam is overseeing a huge overhaul of Credit Suisse, which began in October last year and involves cutting 6,000 jobs.
Meanwhile, the negative interest-rate policy of the European Central Bank is making it even harder for banks to restructure. The charges for depositing money overnight eat away at their margins and are one more thing discouraging outside investors. European bank shares have not recovered since the financial crisis or the 2012 sovereign debt crisis, whereas US bank stocks have recouped their losses.