Merrill e-mail sparks European bank fears
(Well - there goes the banking sector. I guess we
can forget about Germany now, along with Japan, as
well as Brazil as a source of demand for technology
goods or much else for that matter. Peter)
By Our Financial Staff - Financial Times October 4 2002
A damaging seven-line e-mail from Merrill Lynch, the investment bank, on Friday stoked fears of financial difficulties at Commerzbank, one of Europe's largest banks. The e-mail added to the market's already heightened sense of anxiety about the health of Europe's banking sector, with analysts anxious about the stress levels in the financial system.
"Again the market is flooded with rumours that Commerzbank, amongst all its other problems, has sustained large trading losses in credit derivatives," wrote Maria Anastase, a member of Merrill's corporate credit department.
The e-mail was sent to the Standard & Poor's credit rating agency, with Merrill asking for a comment "as to the validity of this and the likely impact to the bank's health".
It went on: "Apparently, a number of banks have begun to shut down credit lines." It is not known how, or whether, S&P replied to the e-mail.
Separately, the Fitch rating agency revised its outlook on the bank to negative from stable.
Details of Merrill's e-mail quickly filtered into the London and Frankfurt markets and Commerzbank's share price fell 6 per cent to €6.02. Credit default swaps on the bank traded above 200 basis points - a level that prices the German bank out of the market.
Guido Versondert, credit analyst at Barclays Capital, said: "Everyone is so on edge that they're prepared to believe the worst and . . . this is affecting equity and credit markets."
Speaking to the Financial Times, Mehmet Dalman, head of investment banking at Commerzbank and group board member, said: "I don't see why we should be going bust." He said the bank's credit derivatives business was profitable and that the bank had no plans to raise fresh capital in the markets.
Paul Roy, co-president of global markets and investment banking at Merrill, said the e-mail was not a piece of research but merely "part of the normal process of inquiry that any firm's credit department would make".
He added that Merrill continued to do business with Commerzbank as normal.
Concluding a brutal week for bank shares, others in the sector suffered from widespread investor fears about credit ratings, bad loans and the possibility that lower interest rates would erode profit margins.
US banks fell sharply after profit warnings on Wednesday from the Bank of New York and Comerica. For the week, Comerica was down 24 per cent and Bank of New York 22 per cent.
Deutsche Bank shares dropped 6.3 per cent to €42.17. French banks were similarly hit, and Credit Suisse dropped another 9.5 per cent to SFr9.54.
German insurer Allianz fell almost 8 per cent to €79.65 after JP Morgan cut its full-year forecasts for both dividend and net profits to zero because of a further rise in loan loss provisions at Dresdner Bank and lower revenues from investment bank, Dresdner Kleinwort Wasserstein.
Germans feel jitters in banking
Shareholders are increasingly worried about German banks, writes Lina Saigol
Financial Times October 6 2002 20:08
The Americans are trying to turn the Germans into the Japanese. It could read like a scene from a bad war movie, but in fact it is the theme of a Merrill Lynch research note.
Called "Turning Japanese", Merrill's research note, published last week by analyst Stuart Graham, says the weak banking sector coupled with the weak economy has created worrying parallels with the crisis- ridden banks of Japan.
"In particular, the rapidly eroding unrealised gains on the bank's equity holdings coupled with higher refinancing costs raise serious question marks about the banks' ability to withstand a protracted difficult economic environment," Mr Graham says.
His comments come at a time when shareholders are increasingly worried about the state of German banks. The chairman of HVB, Albrecht Schmidt, said recently that 2002 was proving to be the hardest year for the banks since the war.
Concerns grew on Friday after shares in Commerzbank, Germany's third- biggest bank, fell 6 per cent after Merrill Lynch asked the Standard & Poor's credit rating agency to comment on rumours that it had sustained large trading losses in credit derivatives, illustrating how jittery financial markets have become about the health of the German banking sector.
"The real danger is that in crisis times such as these, German banks' poor profitability can easily break a bank's neck," said a Frankfurt-based banking analyst. "If your return-on-equity ratio is only about 7 or 8 per cent in good years and around zero these days, then you don't have a buffer for anything exceptional - such as a trading loss," he added.
The return on equity ratios - a key measure of profitability - of German banks' has traditionally hovered around 8 per cent in good years, a far cry from their international peers at about 15-20 per cent.
But the situation has worsened dramatically in recent quarters as markets continue to collapse and Germany's banks have been hit by billions of losses due to corporate blow-ups such as Kirch, the media company, and Babcock-Borsig, the engineering company.
Like Japanese banks, the German financials are still tied together by a complex web of cross-shareholdings, all of which have plummeted in value recently due to the stock market downturn. The team at Merrill Lynch estimates that in the case of Commerzbank alone the shortfall could amount to €1.9bn ($1.86bn).
In order to reverse the trend of declining revenues, Germany's biggest banks, including Deutsche and Dresdner, which is owned by Allianz, have been cutting costs aggressively and most still have headcount under review. And Mehmet Dalman, chief executive of Commerzbank's investment bank, is slashing jobs.
Business units which have dragged down revenues, such as private equity, are also being restructured. Deutsche, for example, is expected to sell the bulk of its portfolio by the end of the year.
Two of Germany's banks - Schmidt Bank KGaA and Bankgesellschaft Berlin - have recently been saved from the edge of collapse by last-minute interventions.
But the German institutions are becoming increasingly reluctant to bail out those companies which need help - a point illustrated by the collapse of the Holzmann construction group earlier.
As relationships between banks and companies continue to be strained, Germany's banks are increasingly going to turn to each other for support, and the wave of banking consolidation in the region may finally take place.
Investment banks set to write off $130bn
By Lina Saigol in London
Financial Times October 6 2002
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Investment banks in Europe and North America are set to write off more than $130bn in loan losses this year, the highest level ever recorded.
The magnitude of the losses is set to trigger another wave of job cuts across the industry, as investment banks struggle to reduce costs and boost income amid persistently weak equity markets and the worst deal drought for seven years.
Simon Harris, head of corporate and commercial banking at Oliver, Wyman, the global financial consultancy that carried out the research, said the losses also underlined the crisis facing integrated investment banks.
These are under fire from US regulators and lawmakers for questionable practices over stock offerings and potential conflicts of interests involving analysts' research.
Mr Harris said, during the credit boom of the 1990s, firms with commercial banking arms such as Citigroup and JP Morgan Chase aggressively used their ability to offer credit to forge relationships with big companies and win lucrative investment banking mandates.
"As recent banks' earnings announcements demonstrate, this strategy is now coming home to roost," he said.
Rising credit losses and falling trading revenues are cited for plans by JP Morgan Chase, the US investment bank, to cut up to 4,000 more jobs in its wholesale banking operations.
Investors have been concerned about JP Morgan's involvement in the collapse of Enron and its susceptibility to the rising tide of problem corporate loans.
Last month, it said credit losses would reach $1.4bn in the third quarter, up from $302m in the previous quarter, reflecting "adverse developments" at telecommunications and cable companies. JP Morgan is now trying to scale back its loan book and has been reducing new loans and commitments.
In Europe, Dresdner Bank, a unit of Allianz, has also been hit by its corporate lending policy, incurring a loss of ?1bn in the second quarter due to loan losses and falling investment banking revenues. Dresdner is now reducing its corporate lending and equity trading operations in the US and Latin America.
"Banks cannot drive using the rear view mirror alone . . . Recent events are a painful lesson of the risk of lending decisions that are not taken purely on the creditworthiness of a company," Mr Harris said.
However, he dismissed fears of insolvencies, saying banks are better capitalised now than they were during previous recessions.
Nikkei ends at 19-yr low on bad-loan shakeup fears
By Risa Maeda / Reuters
TOKYO, Oct 7 - Tokyo stocks crumbled to a fresh 19-year low on Monday in their biggest one-day slide since June, as investors sold banks and debt-ridden borrowers, such as Daiei Inc, on fears of a wave of corporate failures.
The benchmark Nikkei 225-stock average finished down 3.76 percent at 8,688.00, its lowest close since June 16, 1983, and the biggest one-day fall since June 26.
The broader, capital-weighted TOPIX index of all first-section issues was down 3.49 percent at 860.47.
Monday's falls came as investors factored in a near-term scenario of big company failures and high unemployment if the government adopts a tougher stance on bad loans.
Toyota Motor and other blue-chip exporters also retreated after a slide in U.S. stocks and fears of a double-dip recession in Japan's biggest export market, which have grown in part due to a crippling port lockout on the U.S. west coast.
The lockout, which has virtually halted vital trans-Pacific shipping lanes as it stretches into a second week, comes as sentiment on Wall Street is already strained by worries over a U.S.-led war in Iraq.
"Sentiment is really shot right now," said Koichi Seki, equity manager at Chuo Securities.
"Investors are scared of the impact of rising bankruptcies. And on top of that, worries of a war in Iraq and a slowdown in the U.S. economy are really weighing." <snip> |
