Friday, December 12, 2014

Opinion: European banks are stuck in a severe crisis

Twenty-one are in worse shape than Bank of America was at the height of the credit crisis



Big banks in Europe are riskier than anywhere else in the world.
They have higher non-performing loans, greater asset shrinkage, larger losses and higher debt-to-equity ratios. And European banks are bracing for even worse loan losses.
It’s the combination of those characteristics that lead to a crisis, and the eurozone essentially is in one today.
Non-performing loans over total loans
There are 200 banks in the world with market values of more than $5 billion, 48 of which are in Europe. The chart below plots non-performing loans over total loans on the y-axis and market capitalization (or value) on the x-axis for that population of banks.
To give a perspective on this, at the height of the Great Recession, after Bank of America BAC, -0.57%  had integrated all Countrywide loans and Merrill Lynch debt, the combined entity hit an all-time high of 4.5% non-performing loans to total loans.
If we take the population of world banks greater than $5 billion in market capitalization and select those with non-performing loans over total loans that are greater than 5% (worse than the Bank of America/Countrywide/Merrill Lynch combination), we are left with 24 banks. Twenty-one of those are in Europe.
Total assets, 2-year growth rate
Taking the same population of world banks over $5 billion in market cap and charting only those that show asset shrinkage over the past two years, we are left with 31 banks. Twenty-seven of those are in Europe. In addition, all 22 banks in the world with a 2% shrinkage in assets or worse (per year over two years) are in Europe.
Below we plot total assets, with the 2-year compound annual growth rate (CAGR) on the y-axis and market cap on the x-axis.
Net income margin
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