The widespread fear that the banking industry is on verge of a fresh crisis receded somewhat on Monday, when bank shares rallied and European Central Bank president Mario Draghi hinted that more stimulus is coming to boost sluggish euro zone growth and inflation.
The rally came in spite of more evidence that Chinese and Japanese growth rates are waning rapidly, leading some investors to bet that bank shares have bottomed out.
In European trading on Monday, bank shares, led by the Italian and Greek banks, continued a surge that began late last week. The reversal from the bank carnage of early last week came as investors took the view that the rout was overdone and was probably triggered by overwrought concerns that the spectre of negative interest rates would damage their profit model.
Their new-found confidence was bolstered somewhat by Mr. Draghi's comments, made before a European parliamentary committee on Monday afternoon, on the relative health of the European banks. He said "we have to acknowledge that the regulatory overhaul since the start of the crisis has laid the foundations for durably increasing the resilience not only of individual [bank] institutions but also of the financial system as a whole."
As inflation rates prove stubbornly low in spite of a €60-billion-a-month quantitative easing program, Mr. Draghi said the ECB is "ready to do its part" to provide more stimulus, but provided no details. The ECB has already pushed a key interest rate into negative territory.
Almost all banks made gains. The Italian banks, weighed down with non-performing loans that make up an astounding 18 per cent of their total lending, soared. Banca Monte dei Paschi di Siena, Italy's third-largest bank and the world's oldest lender, climbed more than 9 per cent. Still, it is down 74 per cent over a year as the Italian government struggles to devise a scheme to help relieve the banks of their dud loans without wiping out the savings of individual Italians under the European Union's new "bail-in" rules for failing banks.
The Italian bank shares received another boost after Reuters reported that the European Central bank might use its asset-purchase program to buy bundles of bad loans from the banks or accept them as collateral in exchange for cash. Mr. Draghi, however, denied that any such plan was underway.
German and British bank shares climbed less quickly, but investors welcomed any rise after the plunge of early last week. Deutsche Bank initially gained 2.5 per cent, taking the shares up 20 per cent – to €15.70 – over the 52-week low reached on Feb. 9, but ended the day flat. Deutsche Bank's sell-off since January has been so fast that its senior executives, and the German finance minister himself, were forced to defend the bank's health. Last Tuesday, co-chief executive John Cryan said the bank was "rock solid."
The European banks were no doubt propelled by the rising markets in Asia, where, perversely, grim economic data in China and Japan fuelled hopes among investors that more stimulus measures in those two countries was imminent.
In Tokyo, the Nikkei index shot up more than 7 per cent, after losing 11 per cent last week, in spite of new data showing that Japanese gross domestic product shrank 1.4 per cent at an annualized rate in the last quarter of 2015. The weakening yen helped to boost sentiment.
In China, markets finished down only marginally even though a sell-off had been expected, all the more so since Chinese exports, measured in dollars, fell 11 per cent in January while imports declined 16.6 per cent. But the renminbi climbed 1.2 per cent – its biggest one-day gain in more than a decade – after the People's Bank of China eased devaluation concerns.
Mike van Dulken, head of research at Accendo Markets, said "It would appear to be a case of bad news is good news again. The poor data from China (exports, imports) and Japan (GDP, industrial production) added to hopes of more central bank intervention and stimulus, which buoyed commodities prices. Add to this a continued waning of worries over the banking sector (despite many a headwind remaining) thanks to talks of the ECB buying bundles of bad loans from Italian banks and many are asking if we have found a bottom."