The European banking industry has braved the subprime meltdown to a large extent but only till now...
For those who wrote off the possibility that the
subprime monster’s binge won’t make for a continental cuisine will have to check the order once again. Interestingly, European banks, unlike their US counterparts, seem to have eluded themselves to a large extent from being brutally pulverised by the sub-prime mess and have kept the lid on their balance sheets; but then, times will be getting harder by the day.
“The financial inter-linkages have already resulted into significant spillover into the Euro area, particularly affecting money markets and banks’ balance sheets,” exclaims Silvia Pepino Giuliani, Senior European Economist, Executive Director, JPMorgan. Well, for the past few fiscals, European banks have raked in staggering profits, which has left them with tremendous cushion to sustain write-downs. But the headwinds are getting stronger for them now. Substantiating the fact, the ROE (Weighted average & annualised) of large banks reporting under International Financial Reporting Standards, rose from 18.2% (2006) to 20.4% (1st half 2007).
“Though major write-downs have come from US banks, one shouldn’t underestimate the spillover effects on European banks, which have a major investment banking component,” reveals Elena Guglielmin, Vice President, Credit Research Analyst, Financial Institutions, Credit Suisse. According to a recently (November 14, 2007) published report by ECB’s Banking Supervision Committee, there will be a significant drag on the profitability of European banks because of the subprime meltdown, as a large proportion of their profits stemmed from fee, commission & trading income, most of which might be non-recurrent. Moreover, tightening lending, coupled up with high funding costs, will also undermine profitability of European banks. It is expected that banks like UBS are exposed to further write-downs because of their exposure to CDS, which is considered to be extremely high. Same is the case with Royal Bank of Scotland, Barclays Capital et al. So, don’t write off the write-downs yet as the subprime monster is just about to unleash itself further.
For those who wrote off the possibility that the
subprime monster’s binge won’t make for a continental cuisine will have to check the order once again. Interestingly, European banks, unlike their US counterparts, seem to have eluded themselves to a large extent from being brutally pulverised by the sub-prime mess and have kept the lid on their balance sheets; but then, times will be getting harder by the day.“The financial inter-linkages have already resulted into significant spillover into the Euro area, particularly affecting money markets and banks’ balance sheets,” exclaims Silvia Pepino Giuliani, Senior European Economist, Executive Director, JPMorgan. Well, for the past few fiscals, European banks have raked in staggering profits, which has left them with tremendous cushion to sustain write-downs. But the headwinds are getting stronger for them now. Substantiating the fact, the ROE (Weighted average & annualised) of large banks reporting under International Financial Reporting Standards, rose from 18.2% (2006) to 20.4% (1st half 2007).
“Though major write-downs have come from US banks, one shouldn’t underestimate the spillover effects on European banks, which have a major investment banking component,” reveals Elena Guglielmin, Vice President, Credit Research Analyst, Financial Institutions, Credit Suisse. According to a recently (November 14, 2007) published report by ECB’s Banking Supervision Committee, there will be a significant drag on the profitability of European banks because of the subprime meltdown, as a large proportion of their profits stemmed from fee, commission & trading income, most of which might be non-recurrent. Moreover, tightening lending, coupled up with high funding costs, will also undermine profitability of European banks. It is expected that banks like UBS are exposed to further write-downs because of their exposure to CDS, which is considered to be extremely high. Same is the case with Royal Bank of Scotland, Barclays Capital et al. So, don’t write off the write-downs yet as the subprime monster is just about to unleash itself further.
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