Bank Stocks Cautiously Recover After the Italian Job, Watch for France

November 10th, 2011 by Trefis Team
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Nerves at the Wall Street were stretched again yesterday with rising yield rates on Italian bonds unleashing a fresh round of fear about a worsening debt scenario in Europe. Within days of pushing through the recovery plans for Greece – heralded as a breakthrough step towards bringing the region’s economy under reins – Italy saw yields on its 10-year bonds rise by nearly half a percent over yesterday to cross the danger threshold of 7%. [1] With yields reaching the highest they have ever been since the country adopted the Euro, Italy’s credit default swaps have also reached record levels. Banks in U.K. fell the most over trading yesterday, with Barclays (NYSE:BCS) and RBS (NYSE:RBS) dipping 11%. German banking giant Deutsche Bank (NYSE:DB) also fell by more than 10%, followed by the Swiss banks UBS (NYSE:UBS) and Credit Suisse (NYSE:CS). U.S.-based banks also shed more than 6% of their value.

While today stocks are very cautiously inching higher, the continued structural risks remain until European countries can find a way to support the weaker economies through the European System of Financial Supervisors (ESFS) bailout fund without undermining the credibility of their own balance sheets and open the way for downgrades on their debt, which is an issue France is currently facing.

See our full analysis for RBS |Barclays

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According to data compiled by the World Bank, Italy ranks 6th in the world in terms of total external debt outstanding for the country. Although the country is getting ready to undergo a change in its government to improve investor confidence and put various debt-reduction measures in place, signs of default by the country loom large. Markets across the globe suffered a setback from the rising fears about Italy, which is the second-largest debtor nation in the Euro zone – considerably larger than Greece.

The impact on the share prices of RBS, Barclays & Deutsche Bank is evident from their exposures to the Italian economy. According to data provided by the European Banking Authority (EBA) the three banks had a gross exposure of $18.6 billion, $37.2 billion and $57.1 billion respectively at the end of 2010.

If the situation in Italy does not improve soon, the banks would end up writing-off more of their debt in subsequent quarters, and will also have a significant reduction in their deployed debt capital.

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Notes:
  1. Italy Government Bond 10-Y, TradingEconomics.com [↩]