While it has been a rough start to 2016 for stocks across the world, and sectors, European banks have been among the biggest losers. Shares in the sector enjoyed a mild early week rally this week, but they’ve much ground to make up: The STOXX Europe 600 Banks Index is still down around 22 per cent since the start of the year, and around a third against six months ago. (The general Stoxx Europe 600 Index is down 11 per cent since the start of 2016.)

While banks in southern Europe (especially in Italy where the banking sector has entered full blown crisis mode) have been particularly hit, shares have taken a tumble across the region, including sector stalwarts such as HSBC (down 14 per cent since the start of the year), Standard Chartered (down around 20 per cent) and Deutsche Bank (down over 30 per cent).

Observers have struggled to pinpoint a primary cause for the cross-continent rout, and opinions on whether or when a bounce back is likely vary greatly.

In some cases, of course, the cause is clear: Italian banks, which have been among the worst performers, are burdened with some €350 billion of non-performing loans (around 17 per cent of all loans), in the context of tepid economic growth. While the attention last year was focused on the nation’s smaller banks (four were part of a €3.6 billion rescue late last year) it has since shifted to the country’s largest banks too, not helped by the European Central Bank’s request for information on bad loans from six banks, including UniCredit, (the country’s largest bank) and Monte dei Paschi die Siena last month, despite the government introducing legislation to offer state guarantees for certain non-performing loans.

Oil exposure

Individual banks have also been the subject of very specific concerns: Deutsche Bank shares have been buffeted over concerns about its capital position, and a lack of clarity about its balance sheet exposure to the oil sector.

After a fall of more than 10 per cent over a two-day period, CEO John Cryan was forced to offer reassurances to staff that the bank was “rock solid” (Last Friday, the bank announced a $5.4 billion bond buy back, following which its share price rebounded somewhat, though its stock still remains among the worst performers within the European banking industry this year).

However, for much of the rest of the sector, a medley of concerns seems to come into play.

In a note to investors earlier this month ING set out a list of ten downward drivers for the sector in Europe — ranging from fears about restructuring and litigation costs that the sector had come to face in recent years, to fears about the outcomes of Britain’s referendum on the EU, and a lack of market liquidity.

Analysts have also pointed to the trend of lacklustre earnings and activity — shares of UBS fell steeply in early February after reporting strong outflows of funds from its wealth management division — from clients in both emerging markets and Europe. Others have reported a steep rise in operating costs.

Rate cut effect

The sector has also been hit by concerns about the impact of a cut in interest rates by the European Central Bank even further (the deposit rate was cut to -0.3 per cent last year, and it is expected to follow the Swedish Riksbank, which cut its key interest rate from -0.35 to -0.5 per cent, down even further), a move that could penalise banks with high levels of liquidity (a low interest rate environment hits banks in a number of ways, in particular reducing their net interest margin).

Exposure to specific issues are also hitting home — fears about growth in Asia and China in particular have hit banks such as HSBC and Standard Chartered while others such as Societe Generale have been hit by fears about their exposure to the oil sector. Natixis estimates that banks’ exposure to the oil sector amounts to some $500 billion out of €3,000 billion of outstanding loans.

With the wide mix of issues — its perhaps unsurprising that views on a potential recovery vary greatly, though with many of the drag factors unlikely to change in the next few months many remain cautious about a major upswing.

Among the factors likely to hinder great change is the lack of major bold changes in model and revenue stream that have been implemented by the sector since the last crisis.

Barclays is a case in point: analysts (most recently at Bernstein Research) have criticised its failure to take radical action (selling, its Investment Bank, rather than merely tinkering with unprofitable divisions within it).

However, where there does appear to be greater consensus is on the difference between now and the protracted period of difficulty that followed the 2007 financial crisis — far stronger capital requirements mean that banks are by and large in a far stronger position to withstand upheavals and losses as a result of any exposure to the oil price compared to the past.

Still in a bad way

However, there are notable dissenters: In an interview with the BBC , John Vickers — a former Bank of England economist who led the government’s 2010 Independent Commission on Banking, which identified steps needed to ensure a stable financial system — expressed his concerns about whether the banks in the UK were sufficiently well capitalised to withstand major shocks to the global financial system, arguing that the commission’s proposals had been watered down by the Bank of England (a charge the central bank denies).

It’s a sign of the jitteriness of the markets that ECB head Mario Draghi — whose pledge to do “whatever it takes” to save the euro was credited with singlehandedly restoring confidence in the banking sector back in 2012 — had to offer the market an assurance this week that the situation was very different from the past.

He told the European Parliament that banks, both individually and as a system as a whole, were much better placed now.

Banking stocks soared predictably in the wake of his comments, though whether the confidence endures remains to be seen.

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