Blog Posts — April 1, 2020

When it comes to European Sectors, don’t bank on Banks!

by Diana R. Baechle, PhD

Banks in the Eurozone have suffered mightily from the impact of the coronavirus pandemic. Since the market peak of February 19, the EURO STOXX Banks index has recorded a staggering drop of 46%. In fact, banks in Europe were already facing hardships before the crisis, with negative interest rates, lethargic economic growth in Europe, and the official implementation of Brexit.

Most EURO STOXX sectors were still showing year-to-date gains as of February 19—but there were clear signs of trouble. Auto Parts (-6%), Oil and Gas (-5%), Basic Resources (-4%), and Travel & Leisure (-2%) were already in the red. By March 30, gains were wiped out for all EURO STOXX sectors, with large year-to-date losses.

As of Feb. 19, Banks was not among the best performing sectors in EURO STOXX, but the sector reported a modest positive cumulative year-to-date return (4%) by that date, placing the sector in the middle of the pack among its peers. By March 30, however, Banks was the worst performing sector in the Eurozone, as financial institutions prepared for decreased economic activity and the implementation of aid-measures for their customers (deferred mortgages, special loans, etc.).

Source: Qontigo

In fact, Banks was the biggest loser among all 18 sectors in the EURO STOXX index, with a cumulative year-to-date loss of 44%. And as travel bans and airport and border closures took effect in Europe and elsewhere, Travel & Leisure also emerged as a likely candidate for abysmal performance. Similarly, investors don’t expect auto-parts companies to thrive with a global recession looming. The result? Travel & Leisure and Auto Parts followed Banks as the next biggest losers, each reporting losses of -39%.

Despite experiencing a large drop after Feb. 19, Utilities recorded the smallest year-to-date loss. What helped Utilities was a 19% gain accumulated before Feb. 19, as investors flocked to this defensive sector in order to immunize their portfolios against volatility caused by the growing concerns about the coronavirus outbreak. Personal & Household Goods and Retail were the second and third sectors after Utilities, respectively, to report the lowest levels of losses. This came as no surprise, of course, as customers stockpiled provisions ahead of announced lockdowns and fears of shortages in supplies.

Source: Qontigo

Five banks were responsible for nearly 60% of the loss in the entire EURO STOXX Bank sector: BNP Paribas, Banco Santander, ING Groep, Intesa Sanpaolo and BBVA. Not too surprisingly, four of those five banks are located in Italy, Spain and France—the three countries with the highest COVID-19 death tolls in Europe so far. Even more striking is that only 10 European banks contributed over 80% to the year-to-date loss of the entire Banks sector.

Source: Qontigo

EURO STOXX Banks also reported a large active loss of 18% against the EURO STOXX index year to date. In comparison, banks in the STOXX Global 1800 index underperformed the broad index by 16 percentage points, with the STOXX Global 1800 Banks index recording a year-to-date return of -36%, compared with the STOXX Global 1800’s return of -20%. Note however that bank spreads have essentially moved in lockstep with the overall market. 

Style factors contributed the most (-12%) to the EURO STOXX Banks’ active year-to-date loss. Market Sensitivity and Value were the main detractors. The positive exposure of Banks to Market Sensitivity (that is, the sector’s high beta) and to Value resulted in contributions of -5% and -2%, respectively.

Source: Qontigo

Swings in EURO STOXX Banks’ daily returns mirrored those of the overall Euro Market, but most of the time they were even larger. The biggest one-day fall in Banks (-17%) was on March 12 and the largest one-day rise occurred only 12 days later, on March 24, when bank stocks rose 11%. This heightened volatility in bank stocks turned Banks into the second riskiest among the 18 sectors in EURO STOXX.

Source: Qontigo

Almost half of the sectors in EURO STOXX saw their risk triple since the beginning of the year, and Banks was among them. The worst performing sectors in the index were also the riskiest by March 30.

Travel & Leisure saw the largest increase in volatility year to date—more than 43 percentage points—while Banks and Insurance were next in line with volatility increases of more than 37 percentage points over the same period, as measured by Axioma’s European short-horizon fundamental model.

Banks started 2020 as the third-most-volatile sector, after Basic Resources and Auto Parts, and remained in the top three most volatile sectors throughout the year. Travel & Leisure risk shot up, particularly after the US administration’s ban on European travel on March 14, which propelled it to the top. Banks’ volatility of 59% was only 5 percentage points lower than that of Travel & Leisure’s 64%, as of March 30.

Source: Qontigo
Source: Qontigo

As individual European country governments, European Union legislative bodies and the European Central Bank prepare for more measures to combat the effects of the pandemic, and as European countries remain in lockdown, European Banks must brace for even more challenges ahead—and from a position of substantial weakness.