Date
24 May 2017
US banks did better than their European counterparts on the stock market over the past year, but still underperformed the S&P500 index.
US banks did better than their European counterparts on the stock market over the past year, but still underperformed the S&P500 index.

Bank stocks: Why it may be better to avoid them

Among the top 15 banks globally by market capitalization, six are from the US, four from China, two from Australia and two from Canada. Europe has only one bank on the list — HSBC Holdings (00005.HK), while Japan has none. That in some way tells us how difficult it is to run a banking business in Europe and Japan.

In a recent stress test done by the European Banking Authority, Monte dei Paschi de Siena from Italy was deemed to be the only lender that has to raise capital in order to meet the requirements. However, the report does not give a lot of details on the health status of other European banks.

In fact, the test excluded lenders from Greece and Portugal, two of the weakest economies in the region.

Over the past one year, several European banks have lost 70-80 percent of their market value. Their US counterparts did a bit better. Still, the Financial Select Sector SPDR Fund, an exchange traded fund that tracks the US financial sector lost 6 percent, substantially underperforming the S&P index.

Given the tight interest rate spread and stringent regulatory environment, banks will be hard pressed to boost the return on capital, typically a key determinant of their share price performance.

Amid this situation, bank shares are likely to keep trailing the broader market.

This article appeared in the Hong Kong Economic Journal on Aug 2.

Translation by Raymond Tsoi

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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