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The fall in banks’ equity market valuation is clearly excessive – Natixis

While the COVID-19 crisis is weakening eurozone banks, there are many stabilising mechanisms such as funding at -1%, government aid to companies and households, corporate cash reserves or banks’ high capital level. The way eurozone banks’ share prices have reacted to the crisis seems very excessive and there is no reason to fear credit rationing, according to analysts at Natixis.

Key quotes

“The COVID-19 crisis has weakened banks by creating the prospect of persistently low long-term interest rates, flat yield curves for a long time to come and, therefore, a squeeze on banks’ profit margins. The rise in bankruptcies and unemployment raises fears of a sharp rise in the cost of risk and in non-performing loans.”

“There are actually a number of reassuring factors. Banks can obtain funding at -1% through TLTROs and therefore generate a positive carry on their assets, including on government bonds. Government aid (guaranteed loans, tax cuts, short-time working, etc.) is limiting the rise in bankruptcies and in unemployment. Many companies have not used the loans drawn down in 2020 and have kept them in cash, they will therefore be able to repay them easily. Banks had very high capital levels at the beginning of the crisis. The pessimism about euro-zone banks must therefore be put into perspective.”

 

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