DB Deutsche Bank Aktiengesellschaft

By Patricia Kowsmann 

European banks have long been considered one of the weaker links in the global financial system. The coronavirus outbreak on the continent poses a fresh test of their health.

Shares in European banks have been among the worst hit since the virus began to spread, first through Italy, and now through much of the rest of the region. Their stocks took another hammering Monday amid signs the impact of the virus is starting to hurt economies, which has immediate effects on banks' business of taking and lending money.

Shares of UniCredit SpA and Intesa Sanpaolo SpA, both based in Milan, the epicenter of the virus outbreak in Europe, were down more than 6% and 5% respectively just after midday. UniCredit, which has reported the first case of coronavirus among its staff, is down more than 17% so far this year.

Germany's troubled Deutsche Bank AG, which is undergoing a big overhaul seen key to its survival, was seeing its stock make rare gains until the coronavirus took effect. Shares of the bank were down 5.8% for the day Monday having fallen 17% last week, although the stock is still up 7% on the year.

France's BNP Paribas SA and Société Générale SA are down close to 20% this year. Asia-focused but London-listed Standard Chartered PLC and HSBC Holdings PLC have also seen their shares fall sharply.

Already toiling amid negative-rates and slow growth, banks have been slashing costs to survive. Now they face the prospect of the economies and companies they serve being severely hit by the coronavirus outbreak, making a challenging outlook much worse.

The cost of funding of major European banks -- a measure of how risky investors perceive them to be -- has risen sharply since last week as markets grapple with the speed at which the virus spread to the continent. Bank stocks, meanwhile, have sunk, leaving many banks deeper into red so far this year.

"The market conditions and sentiment continue to head south, with no bottom as-of-yet seen," said Tom Kinmonth, a fixed income strategist at Dutch bank ABN AMRO Bank NV.

Banks in Europe are better equipped to face a crisis since boosting capital and liquidity levels following the sovereign debt crisis in 2010. Funding costs are still below those at the start of last year despite last week's spike, Mr. Kinmonth said. But a global recession would translate into a pickup in defaults and souring loans, forcing banks to take losses and hurting already weak profitability.

Rattled markets, meanwhile, will hurt investment-banking activities and private-banking operations. Deutsche Bank, Barclays PLC and Swiss banks such as Credit Suisse AG and UBS Group AG would be particularly hit, RBC Capital Markets analysts said.

"The key question mark revolves around the depth and length of the [virus] containment measures, and the impact these will have on the economies, which would then in turn affect bank financials, starting from asset quality," said Marco Troiano, deputy head of the banks team at rating agency Scope Ratings.

Italian lenders are particularly vulnerable on that front. Some northern Italian towns were quarantined over a week ago as cases of the virus suddenly surged. Two regions most affected -- Lombardy, where Milan is the capital, and Veneto, home to Venice -- account for almost a third of the country's economic output and about 40% of Italy's exports.

Any sharper slowdown will affect people's ability to pay their debts. While bad loans from the past crisis have fallen in recent years, they still account for 7% of total in the system.

Jérôme Legras, head of research at Axiom Alternative Investments, said disruption for banks is more akin to the panic seen during after the Sept. 11, 2001, attacks in New York, rather than the sovereign-debt crisis that put European countries in a multiyear recession.

Still, he said he is being cautious on banks that have large international footprint, especially in Asia and lenders that are very sensitive to low rates, in case central banks decide to react.

The gloomy tone comes as many European banks reported disappointing results for last year, with most blaming low or negative interest rates that have eaten their profit margins to a point they can't cover their costs. One of the hopes for the sector has been consolidation, particularly after the European Central Bank, which supervises the continent's largest banks, showed willingness to ease the process, which isn't only risky but also expensive.

Last month [Feb. 18], Italy's Intesa Sanpaolo launched a EUR4.9 billion ($5.4 billion) takeover bid for a smaller rival UBI Banca SpA, with many expecting other deals to come. But the current market commotion will likely freeze any merger discussions, analysts say.

-- Pat Minczeski in London contributed to this article

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

(END) Dow Jones Newswires

March 02, 2020 09:29 ET (14:29 GMT)

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