Aurelia Butler

LONDON (Reuters) – European banking stocks were meant to shine in 2023.But after a two-week storm which had analysts and investors rushing to rework their spreadsheets, the outlook is clouded.Before the fall of Silicon Valley Bank (SVB) on March 10, stronger than expected euro zone economic data and 50% fourth quarter earnings growth had prompted positive predictions.That optimism lifted banking stocks in the region to a five-year high in February and fed hopes that the battered sector would finally see a rebound after years of underperformance compared to their U.S. competitors.European shares are trading at around 0.65 times their price-to-book value, according to Refinitiv Datastream. This is their lowest so far since early January. But the hit from the recent tumult was harder on U.S. banks, which are trading at around 0.87 times their price-to-book ratio, the lowest level since November 2020. And the ructions have left the gap between the ratios of European and U.S. banks at its narrowest since September 2017. (Graphic: European vs U.S. banks – https://fingfx.thomsonreuters.com/gfx/mkt/gdvzqkoeqpw/European%20vs%20U.S.%20banks.png) The weeks of turmoil and the emergency takeover of Credit Suisse by UBS have dashed expectations for European banks as 2008-style volatility whip-sawed bank shares, with investors rapidly reviewing their holdings.”We’ve been sharpening our pencils,” said Paras Anand, chief investment officer at 24 billion pound ($30 billion) fund Artemis. After closely examining his fund’s bank holdings, Anand decided to “selectively” add to positions.Reflecting concerns over the stability of the sector, bank shares are set for an almost 15% monthly drop in March, after five consecutive months of gains. And in a sign of wider uncertainty, Citigroup (NYSE:C) on Friday cut the global financials sector to neutral from overweight. Refinitiv data shows analysts cut their forward 12-month earnings growth forecast for STOXX 600 banks, which includes euro zone and British banks but not the big Swiss lenders banks, to 9.4% in mid-March from 15% in February. They have since revised up their expectations, to 11.2%. The February forecast had been the fastest for the sector since September 2021. (Graphic: European bank earnings growth expectations – https://fingfx.thomsonreuters.com/gfx/mkt/jnpwyjnjapw/European%20banks%20earnings%20growth%20expectations.png) ‘UNLIKELY TO BUY’Other investors see pressure on European bank earnings as they anticipate the euro zone economy will slow down.Investors are now forecasting that banks themselves will tighten lending standards and pay more to secure deposits as the rumblings which began in the U.S. banking system pressure institutions in Europe to demonstrate that they are well capitalised. Europe’s largest asset manager Amundi said a weaker economic backdrop means growth in net interest margins, a key measure of bank profitability, will be slower than expected and volumes will be lower given tighter credit conditions.Peter Doherty, head of investment research at private bank Arbuthnot Latham in London, said he was “unlikely to buy” European bank stocks in the medium term, with the latest German investor morale survey signalling a bleak economic outlook. “Traders will wait to see a bit more stability before they add more money to these (bank) stocks. A lot of people just want to make sure that the contagion fears abate before jumping back in,” said Patrick Spencer, vice chair of equities at RW Baird.Volatility last week in Deutsche Bank (ETR:DBKGn) shares, after the cost of insuring its debt against the risk of default jumped to a more than four-year high, intensified worries about the health of Europe’s financial sector.Politicians, regulators and central banks have stressed that the storm triggered by the collapse of SVB and Signature Bank (OTC:SBNY) in the U.S. was not a pre-cursor to a repeat of the 2008 global financial crisis and conditions now are very different.But while European Central Bank (ECB) President Christine Lagarde told European lawmakers on March 20 the exposure of euro zone banks to Credit Suisse was in the millions rather than billions of euros, she nevertheless warned that they should prepare for higher funding costs and lower lending volumes. ‘ROBUST’ LIQUIDITYECB chief Lagarde also said concerns over a credit crunch in Europe were excessive as banks have high liquidity levels.This view was echoed by Amundi, which said that the liquidity profile of European banks “still appears very robust with less competition from money market funds than in the U.S.”.Credit Suisse itself, which reduced European banks to ‘marginal overweight’, said they are in better shape than U.S. lenders as their liquidity coverage ratios (LCR), a measure of how much cash-like assets banks hold, are much higher.In Europe, LCRs stand at 146% for major banks and 200% for smaller banks – well above the minimum requirement of 100%, while the U.S. majors have LCRs of 119%, Credit Suisse said, with real estate looking far less vulnerable in Europe. But Barclays (LON:BARC), which upgraded European banks to overweight in late January, has cut the sector back to neutral, citing expectations for increased regulatory scrutiny, especially on liquidity requirements.Also in the calculation mix is the ECB’s campaign to raise interest rates to tackle rising inflation, which had previously been a boon for euro zone lenders. However, some investors now worry that if the central bank continues to raise the cost of borrowing it could actually be against the interest of the banking sector as a whole.The U.S. Federal Reserve’s rate increases have been partly blamed for sparking banking system turmoil, as clients pulled deposits from their banks to meet liquidity needs.($1 = 0.8123 pounds) More

The United Arab Emirates has cancelled the licence of Russia’s MTS Bank and ordered it to wind down its operations in the Gulf state, citing the “sanctions risks” associated with the lender.The decision comes as the region’s dominant trade and financial hub has been facing US pressure over western concerns that it is becoming a haven for Russian sanction busting. The UAE’s central bank said in a statement on Friday that it “has been decided to cancel MTS Bank’s Abu Dhabi licence, wind down its operations within six months from the date of the decision . . . and close the branch”.“This decision comes after considering the available options regarding the new status of the MTS Bank, and taking into account the sanctions risks associated with the bank after the designation,” the central bank said. “During the winding down, the branch will be prohibited from opening new accounts and conducting transactions, except for clearing prior obligations and the bank’s use of central bank’s payment systems will be restricted to this purpose only.”MTS Bank, which is a subsidiary of Russia’s largest mobile operator, Mobile TeleSystems, had sanctions imposed by the US and UK last month as part the waves of sanctions that the west has imposed on Russian individuals and entities since President Vladimir Putin launched his full invasion of Ukraine a year ago. The Russian lender was the first foreign bank in several years to receive a licence in the Gulf state. UAE officials have rejected western concerns about the country being used for sanctions evasion, saying the authorities had worked to halt financial flows from sanctioned Russian entities, while refusing to discriminate against non-sanctioned companies and individuals.The UAE, which is an Opec member, has maintained cordial relations with Moscow since the Russian invasion. Tens of thousands of Russians have settled in the UAE, mainly in Dubai, over the past year in a bid to escape financial restrictions in Europe or to avoid the military draft back home. Many have complained of difficulty in opening bank accounts, especially corporate facilities, at banks already operating in the Gulf state. US treasury officials had previously raised concerns about the granting of a banking licence to MTS.US president Joe Biden’s administration is also worried that the UAE is becoming a hub for the shipment of items such as electronics that can be repurposed to help Russia’s war effort. US, UK and EU officials visited the Gulf nation last month to raise concerns with Emirati officials. The pressure on the UAE over its links to Russians comes as the Gulf state seeks to demonstrate it has tightened financial compliance and boosted criminal enforcement following the global anti-money laundering watchdog’s decision a year ago to place it on its so-called “grey list”. UAE officials have said they have taken many steps to address the Paris-based Financial Action Task Force’s concerns. The Gulf state is a traditional western ally but in recent years it has sought to boost relations with other world powers, including Russia and China, as it has become frustrated with the US’s perceived disengagement from the Middle East.Dubai is the region’s premier trade, finance and tourism hub and has long been the destination of choice for international banks and multinationals operating in the Middle East. More

A campaign group has taken the first step towards legal action against the UK government over its free trade deal with Australia, arguing that it flouts Britain’s international climate obligations. Global Feedback, a UK and Netherlands-based group, said it would seek a judicial review, claiming ministers failed to carry out proper due diligence on the environmental impact of importing Australian agricultural products, such as beef and dairy.The move is the latest in a series of legal actions taken by campaigners against the government on environmental grounds. One recent successful case in the High Court forced the Department for Business, Energy and Industrial Strategy to rewrite its net zero strategy.The UK-Australia trade deal, signed in December 2021, was regarded as Britain’s first post-Brexit agreement negotiated “from scratch”. But critics argue it was rushed through to meet arbitrary targets set by then trade secretary Liz Truss, leaving the UK in a worse negotiating position.Former environment secretary George Eustice said last November that the deal “gave away far too much for far too little in return”. He had previously urged former prime minister Boris Johnson to avoid repeating the one-sided concessions made to Australia in UK trade negotiations with India.Global Feedback claimed the deal did not take into account the fact that Australian cattle and dairy industries are likely more carbon intensive than their UK equivalents, and called the government’s impact assessment “inadequate”.A government-commissioned independent report by former food adviser Henry Dimbleby in 2021 suggested that the carbon footprint of Australian beef was 50 per cent higher than UK beef.“The deal is poised to flood the UK market with Australian beef, sheep meat and dairy,” said Carina Millstone, executive director of Feedback.“We want the government to listen to experts and establish once and for all whether this trade deal — and others — will support our national climate pledges and global responsibilities under the Paris Agreement or fatally undermine them,” she said.The Paris Agreement is an international accord signed by 196 parties with the goal of limiting warming to 1.5C above pre-industrial levels.In a letter seen by the Financial Times, Feedback called on the government to publish any additional analysis and information on which the decision to sign the deal was based. The letter, sent on Thursday and addressed to the chancellor and the secretary of state for international trade, asked for an environmental impact assessment of the deal and threatened to bring formal legal action if the government failed to do so.Minette Batters, president of the National Farmers’ Union, said the government had “missed the opportunity to reach a genuinely innovative and world-class FTA with Australia”.“This FTA simply opens up UK agricultural markets for Australian produce, whether or not produced to the same environmental and climate-friendly standards that are expected of UK farmers,” she said.This is not the first time an NGO has threatened legal action against the government over climate obligations. Last year, the High Court ruled the government’s plan for reaching zero emissions was unlawful due to a lack of detail.A spokesperson for the government said it “does not comment on legal proceedings”. They added: “The UK is a global leader on climate action, and we continue to uphold our high environmental standards in our free trade agreements.”“We have agreed an ambitious environment chapter with Australia which affirms our shared commitment to the Paris Agreement — the first time Australia has done this in a trade deal — as well as strengthening co-operation on a range of environmental issues.”Additional reporting by Judith Evans More