Europe’s sovereign debt crisis will stunt bank profit for years and could kill off the weakest, Deutsche Bank chief executive Josef Ackermann told industry bosses, amid intense scrutiny of the sector’s finances.
“Prospects for the financial sector overall are rather limited,” the CEO of Germany’s top bank said on Monday. “The outlook for the future growth of revenues is limited by both the current situation and structurally.” Ackermann was speaking at Frankfurt’s annual Banks in Transition conference against a backdrop of gloom in the capital markets, where fears some euro zone countries could default on their debts have sent investors scurrying for shelter.
Many European banks could go under if they had to accept a “haircut” at current market valuations on their entire sovereign debt holdings instead of the 21 percent writedown that has been proposed on Greek sovereign debt, Ackermann warned.
“It’s stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels,” he said. Shares in the banks that hold much of that debt dropped, with the STOXX Europe 600 banking index .SX7P falling nearly 5 percent to its lowest in 29 months.
Fears about how the crisis will play out have halted the takeovers and stock market listings that are the lifeblood of the bloc’s investment banks as slowing global economic growth put the prospect of recovery further into the future.
“The chances of a near-term recovery remain slim as eurozone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector,” Manoj Ladwa, a senior trader at ETX Capital, said.
Deutsche stock slumped more than 7 per cent, as did shares in Swiss rival Credit Suisse and Societe Generale, while Royal Bank of Scotland fell almost 12 per cent.
A US regulator sued 17 large banks and financial institutions on Friday over losses on about $200 billion of subprime bonds, adding to the sector’s woes. The European bank index has lost a third of its value this year and is the worst-performing sector. Credit Suisse Chairman Urs Rohner said the new regulatory environment had curtailed the risky activities for banks, but would also result in lower profits. “Shareholders in banks need to come to terms with lower returns,” Rohner told the conference.
Despite his gloomy outlook for profits, Ackermann rejected calls for urgent recapitalization.
International Monetary Fund (IMF) chief Christine Lagarde called in August for mandatory capitalization of European banks to prevent a world recession.
A forcible recapitalization would “threaten to send the signal that politics has lost faith in the ability of existing measures to succeed,” said the boss of Germany’s biggest lender. The chairman of French rival BNP Paribas (BNPP.PA) told a conference in Paris that most banks did not need to be recapitalised. “The stress tests that we carried out in Europe … lead one to think that it’s not obvious today that the banking system needs to be recapitalised, (although) some banks do, without a doubt,” said Michel Pebereau.
DOWNWARD SPIRAL?:
Bank lobby group the Institute of International Finance, of which Ackermann is the chairman, said in a statement: “In a pattern echoing that of the 2007-09 financial crisis, there is a growing risk of the real economy and financial conditions being locked into a mutually-reinforcing downward spiral.”
Ackermann said that the financial services industry needed to go beyond curbing the excesses of the past and reevaluate what role banks play in the global economy, signaling that the lender will not revive some of the risky businesses that in the past helped the investment bank led by Anshu Jain generate the lion’s share of profits.
Deutsche has already warned that reaching its goal of 6.4 billion euros ($9.1 billion) in pretax profit for this year was becoming more difficult and required a quick and sustained resolution of the European sovereign debt crisis.
