Europe’s banks focus after taking a beating from Greek exposure

By Bryan McManus ,AFP

PARIS — European banks paid a heavy price for their Greek exposure in 2011 but for some at least the worst of the debt problems appear over, leaving them better placed to cope now with a eurozone recession. Nearly all took large charges to cover a historic Greek government bond write-down worth some 107 billion euros (US$172 billion) included in a second massive debt bailout just agreed for Athens. At the same time, they have had to prepare for tougher capital rules which require the banks to increase readily available reserves to ensure they can survive any new financial crisis. Then there were the accidents — British banks took a huge hit after running foul of the regulators on sales of Payment Protection Insurance (PPI) while public opinion bashed all lenders as more interested in huge bonus payouts than in providing credit to get business going again. Governments too got frustrated at the banks’ reluctance to lend despite massive liquidity provided by the European Central Bank and with the eurozone forecast to be in mild recession this year, that pressure will likely grow. Despite the drawbacks, bank shares have attracted increasing attention in recent months as investors buy into a sector which has been in the doldrums since the height of the global financial crisis in 2008. Some analysts believe the stocks are so beaten down that they are cheap enough now to be worth the risk.

“Banks have enjoyed a very strong start to the year (with large share price gains) as the European banking sector is benefiting from the huge boost of liquidity from the ECB,” said Simon Denham, head of Capital Spreads trading group in London. “Their balance sheets are being restored and the threat of a new credit crunch (has been) recently averted,” Denham said, referring to the ECB action. Deutsche Bank, the biggest in European powerhouse Germany, did better than most of its peers, even if it failed to meet its 2011 profit targets as the second half of the year deteriorated. “Following the favorable development of the markets in the first six months, we had to face extremely adverse external circumstances in the second half of 2011,” Chief Executive Josef Ackermann said.