Europe banks valued at lowest since Lehman collapse

London: Investors are valuing European banks at levels not seen since the depths of the credit crunch that followed the collapse of Lehman Brothers Holdings as concern over a Greek default and debt contagion escalates.

A Bloomberg index shows 46 lenders trading at 0.58 times book value, the cheapest since the post-Lehman lows of March 2009, signalling investors estimate their net assets are worth less than the companies claim and are demanding discounts for perceived risks. Valuations reflect the impact of a potential sovereign default for some banks, according to Barclays Capital analysts led by Jeremy Sigee.

Group of Seven finance chiefs meeting in Marseille, France, over the weekend vowed to support banks amid growing concern that the debt crisis is morphing into a banking crisis. As doubts linger about the ability of some European lenders to withstand a Greek default and its ripple effects, the cost of insuring their debt rose to records, while a measure of their reluctance to lend to each other climbed to a two-and-a-half year high.

Inevitable

"Politicians need to get their heads together and deal with the inevitable: a Greek default and recapitalisation of some banks," said Peter Thorne, a London-based analyst at Helvea. "You have to make the banks look financially stable and secure so that people are prepared to deposit money with them for more than 24 hours."

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on September 5 that market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression.

The Bloomberg Europe Banks and Financial Services Index of stocks dropped five per cent on September 9 to the lowest level in almost two and a half years. The index has slumped 35 per cent so far this year, led by fin-ancial companies based in peripheral Europe, such as Banco Comercial Portugues and National Bank of Greece, as well as those with investments there, such as Commerzbank of Germany and France's Societe Generale.

In the case of some banks, the plunge implies writedowns beyond the current level of sovereign bond prices, according to a note from Sigee on September 7. BNP Paribas, Societe Generale and Credit Agricole, France's largest banks by market value, are trading at levels that imply a 100 per cent loss on Greek, Irish and Portuguese holdings, according to Barclays. In the case of Paris-based Societe Generale, the share price even implies full writedowns on Italian and Spanish debt, according to Barclays.

"The current discounts to book are driven by much broader macro concerns, and attributing all of the discount to a single risk factor like sovereign is too simplistic," Sigee wrote, adding that the French banks' risks remain manageable. "However, it does give a sense of how severely sovereign risks have been priced into equity valuations."

BNP Paribas, Societe Generale and Credit Agricole may have their credit ratings cut by Moody's Investors Service as soon as this week because of their Greek holdings, sources said.

Ratings on review

Moody's placed the three banks' ratings on review in June to examine "the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels," the rating company said at the time.

The 90 banks that underwent European stress tests would face an estimated capital shortfall of €350 billion (Dh1.76 trillion) if Greek, Portuguese, Irish, Italian and Spanish government bonds were written down to market values, according to Nomura analysts.

Greek ten-year bonds are trading at a 52 per cent discount to face value, according to Bloomberg data.

Confidence down: Funding Costs Rise

The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers increased 26 basis points to 290 on September 9 in London, according to JPMorgan Chase. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks' reluctance to lend to each other, rose to 0.834 percentage point, the widest gap since March 2009.

August was the worst month for long-term debt issuance for the region's lenders in more than five years, Bank of America Corp analysts led by Derek De Vries said in a note last week.