Clean Up Like a Banker by Betting on a Banker?

The banking sector in Europe has been largely unable to staunch the heavy selling of stocks as investors bet the euro zone debt crisis will lead to recapitalization for the region's lenders and a second collapse in bank shares in the last three years.


Societe Generale, the French bank, has seen its stock fall by 61 percent since the beginning of 2011. On multiple days over the summer, the stock was sitting on double-digit percentage losses as investors worried over its exposure to the euro debt crisis, rating downgrades and rumors about its exposure in the credit default swap (CDS) and derivatives markets.

On August 10, it was speculation that France would lose its AAA rating that sparked heavy selling of Societe Generale’s stock, as the CEO called into CNBC's "Closing Bell" to dismiss the rumors and tell investors his bank was strong.

“I find it a bit surprising that just because one country is downgraded (the U.S.) by one notch, that others should follow,” Frederic Oudea told CNBC. “It’s a strange way to think about the situation in the economy.”

“We have very limited exposure to Spain and Italy,” said Oudea as he outlined the strength of his balance sheet.

One month later, and Oudea came back onto CNBC to outline plans to speed up asset disposals and, in his words, discuss the transformation of the bank.

Dismissing rumors that his bank had been locked out of the U.S. market, Oudea said his bank has a big liquidity buffer of €105 billion, with €80 billion of that amount eligible for central bank refinancing.

“Let me just highlight that in the last two years, we’ve reduced significantly the risk in our balance sheet in terms of capital markets. In August, we have the lowest level of market risk ever, which has enabled us to (get through) this period of turbulence, pretty well in my view,” said Oudea.

Over in Italy, Frederico Ghizzoni, the CEO of Unicredit, has been in the job a year and told the Financial Times Tuesday that he has no regrets so far. Year-to-date his stock is faring a little better than Oudea’s, falling by just 55 percent since January 1.

Amid fears over the health of the Italian economy, and debt burden, Ghizzoni is making it clear that Unicredit is more than an Italian bank.

Italy makes up only 40 percent, Ghizzoni told the FT. “We are also very present in high-growth countries. Not many banks have that kind of proposal for investors,”

He said he needs to present a strategic review and knows he does so under pressure.

“The markets want a plan but it has to be serious and credible. It takes some time to do that,” said Ghizzoni, as he made it clear he would have no problems raising capital if required.

Joseph Ackermann, the CEO of Deutsche Bank who has seen his stock fall by 45 percent since the beginning of the year, warned a banking conference earlier this month that some of his smaller rivals are in big trouble.

“Prospects for the financial sector overall are limited,” said the boss of Germany’s top bank and the man the New York Times called Europe’s real power broker. He warned that a third of Europe’s banks could be killed off. “The outlook for the future growth of revenues is limited by both the current situation and structurally," he said.

After weeks of heavy selling, Roger Bootle, the managing director of Capital Economics, is predicting that the “rout may not last much longer” ahead for Ackermann and some of his rivals.

Despite a hardening of public opinion against bailouts for euro zone members Bootle thinks recapitalization could be just around the corner.

“After all, the share prices of euro-zone banks are now very depressed. And if Germany decides that recapitalizing her banks to the value of their exposure to the Greek government is a prudent alternative to bailouts, the share prices of banks in Germany (and in other stronger countries that followed such a path) could well get a boost,” said Bootle in a research note.

Noting the cost of insuring against default is considerably higher, Bootle does not believe things are as bad as they were following the collapse of Lehman Brothersand thinks the bad news may already be priced in.

“One potentially good piece of news for euro-zone equities is that a lot of bad news appears to be discounted,” with German banks' total exposure to peripheral government debt at only €54 billion.

“More importantly, bank shares could get a lift if the governments of stronger countries like Germany decide that it makes more sense to recapitalize their banks to the value of their sovereign exposure than to offer more lifelines to troubled euro-zone countries,” said Bootle.

Others, such as Carl Weinberg, the chief economist at High Frequency Economics, are much more bearish on the outlook for the euro zone and its banks, although he agrees that recapitalization is in the cards.

Predicting that the periphery’s bond market, which is worth €3 trillion, could be sitting on losses of 50 cents on the euro, Weinberg predicts the CDS market will see huge losses as Europe enters depression.

“We do not know how many CDS have been written, we do not know who wrote them. We do not know if the originators of these contracts have the financial strength to raise funds they need to pay out their obligations if the CDS are triggered,” said Weinberg, who believes that the true scale of losses would become clear only after a crisis, not before.

The 2008 financial crisis saw global banks like Lehman Brothers, RBS , Fortis and Bear Stearns wiped out, but the perceived winners of the financial crisis, such as Barclays , HSBC and Goldman Sachs , saw their stock prices rise by more than 300 percent from their March 2009 lows.

Navigating the banking sector and its various players could see similar losses and profits made three years after the collapse of Lehman Brothers, but markets seem likely to be able to count on one thing: volatility.