Why Is Coronavirus Fear Hitting the Banks?

Euro Stoxx banks is down 24% since since coronavirus outbreak began.

Crypto 1

Whilst with some stocks such as travel and tourism stocks it is simple to understand why they are falling so sharply with increasing coronavirus restrictions. With tech stocks - they are experiencing a massive supply chain disruption, again it is simple to understand why they are falling. Precious metal miners are also experiencing solid sessions despite the stock markets around them falling off the proverbial cliff.

And what about banks? The Euro Stoxx banks index has plunged 24% since the start of the coronavirus outbreak, a steeper fall than the broader market. The link between the banks and coronavirus maybe less obvious than the increase of Dettol sales and rise of Rickett Benckiser.

Assuming no major ECB monetary policy changes
Whilst the Fed has cut interest rates by 50 basis points, the ECB is certainly in no position to behave in a similar fashion. The ECB monetary policy meeting is next week and to say that the ECB is short of ammunition would be an understatement. So, assuming no major changes to eurozone monetary policy there are other headwinds to consider:

A jump in bad loans – an economic slowdown is likely to increase the number of problem loans. Whilst the coronavirus outbreak is not expected to be a long-term issue, for any firms that are already under pressure the demand and potentially a toxic supply demand shock could be the straw that breaks the camel’s back.

A drop in investment banking revenue. This outbreak could well result in all but the top priority deals being pulled. With potentially fewer staff working due to elevated sickness levels work on all levels will be prioritized.

Interest income is already squeezed. The German 10-year bond yield hit its record low of -0.74% as investors seek out the safety of the bond market. Falling bond yields will add extra pressure to already pressurized margins.

On the CaC the worst performing stocks have been Credit Agricole, BNP Paribas and Société Generale. Italy’s Banco BPM has dropped 23% whilst Deutsche Bank is down 34% from its recent 2020 highs.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.