A Look At How Central Planners Are Crushing Banks

A Look At How Central Planners Are Crushing Banks - Financials cartoon May 2016

Banks stocks around the world continue to crash today. No, it's not post-Brexit fallout. It's just another case of maniacal central planning gone awry. 

The latest news comes from Italy. Here's the wrap from the Wall Street Journal:

"In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans."

 

Isn't it ironic that the European Commission authorized €150 billion in liquidity support for Italian banks last week? This measure will prove counterproductive as the ECB maintains its negative interest rate policy (NIRP). With no end in sight, Eurozone banks will continue to see a squeeze in their net interest margins. 

So, while financial media continues to frame Italian banks as the problem child of Europe, it's more appropriate to turn your attention to the ECB. To be clear, central bank policies have been ravaging Europe's banks for quite some time now. Since the ECB announced NIRP in June 2014, European bank stocks are down -48% versus -6.1% for Euro Stoxx 600. 

A Look At How Central Planners Are Crushing Banks - european banks

Same story in Japan...

The BoJ announced NIRP in January 2016. Since then, Japanese bank stocks are down -27.3% versus -12.3% for the Topix.

A Look At How Central Planners Are Crushing Banks - japan bank

Meanwhile in the U.S. 

Year-to-date, Financials (XLF) remain the worst performing sector in the S&P 500. The XLF is down -6.2% as the Fed has dialed back its rate hike rhetoric. The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings via net interest margins) hit a cycle low today. (Incidentally, Financials remain our favorite 2016 sector short.)

As desperate central planners push interest rates ever lower, banks are apparently struggling to make a profit.

Who'd have thought?