European banks are in the midst of a crisis with one analyst telling CNBC that the sector's business models are broken.
"Investors, regulators and the average man on the street want banks to behave more like utilities than like casinos that they were previously," Kevin Boscher, CIO of Brooks Macdonald told CNBC Wednesday.
According to Boscher, the world is awash with too much debt and there are a lot of bad loans which haven't come to surface yet in the European and the U.K. banking space.
"A lot of these debts are intertwined, if one bank goes under, who knows what happens with the domino effect. For us, financials look cheap but where's their return on capitals going to come from. Where are their long-term returns going to come from?"
Banks across Europe have been hit by a series of blows including low interest rates, weak corporate earnings and uncertainty surrounding Brexit. Major banks like Deutsche Bank, Royal Bank of Scotland and Credit Suisse are just some of the lenders that have seen their shares hit record lows on the back of these factors.
Meanwhile troubles for German lender Deutsche Bank seem never-ending. The bank's shares are up more than 3 percent after seesawing Wednesday on the back of reports from German newspaper Die Zeit that the government was putting together a rescue plan for the bank. The German Finance Ministry later said that these reports were incorrect. But concerns over the state of the bank have been worrying investors across the globe after it was compared with the ill-fated Lehman Brothers. Shares in Deutsche Bank are down more than 50 percent since the start of the year.
"With the memories of what amounted to a financial system melt-down that was averted due to government intervention still very fresh in the minds of investors, it is little wonder that the markets' concerns are heightened when questions as regards the health and stability of such a large lender arise," Rabobbank said in a research note.
The note further explains that the market remains unconvinced that all the cobwebs have been swept away.
This resonates with the warning from banks this quarter of challenging times ahead as a result of uncertainty and volatility in equity markets. Following that, a number of banks have cut their exposure to equities due to the volatile nature of stocks in the first half the year. Earlier this month, Goldman Sachs downgraded stocks to"underweight" as part of its three-month asset allocation, citing global equities to be at the upper end of their "fat and flat range."
"The problem is at the moment the political and economic outlook is challenging not just in the next few months but in the longer term view as well. The global economy is struggling around 3 percent growth mark, the risks are skewed to downside, and there is plenty of downside risks as well," Brooks MacDonald's Boscher told CNBC.
Playing
Watch Next...
