European Banks Continue To Hold The Market Hostage

Eurozone concerns continue to keep investors on the edge with the rising yield figures for debt issued by Spain and Italy triggering another sell-off in bank stock this Wednesday. Investors were also taken aback by an unexpected decline in pending home sales figures for the month of April. ^[1] The fact that opinion polls conducted in Greece still point to an uncertain outcome from the elections due in June did not help investment sentiment either. ^[2] Shares of RBS (NYSE:RBS) shed nearly 5% in value over trading, followed by a decline of about 4% in the share price for each of Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and BNY Mellon (NYSE:BK).

See our full analysis for RBS | Morgan Stanley | Bank of New York Mellon | Citigroup

The crumbling economies of peripheral European nations have held global markets hostage for well over a month now – reminiscent of conditions that were prevalent towards the latter half of 2011. Stock markets continue to react sharply to news about further deterioration of the debt situation in the Eurozone. While concerns about Greece exiting from the euro are at a high, the frantic measures by the Spanish government to prop-up its banking industry while facing steep costs of raising funds have added to investor woes around the world. Spain’s significantly larger economy compared to Greece would make it that much more difficult country for the EU to bail-out in case it collapses.

The spiraling cost of debt for Spain and Italy became evident on Wednesday when yields on government issued notes witnessed a hike – with investors shunning these securities and turning to U.S. Treasury notes. This also led to U.S. Treasury yields reaching an all-time low.

More bad news came investors’ way with the release of the U.S. pending home sales report. The report indicated a 5.5% decline in the number of contracts signed in April to purchase previously owned U.S. homes. This dented beliefs that the country’s housing market is past its lows and will show a month-on-month recovery.

The decline in RBS’s share price in largely justified, given the banking group’s sizable retail operations in Italy and Spain. Also, Morgan Stanley and Citigroup suffered a loss in share value from their trading exposure to debt issued by the affected countries.

However, we think the drop in BNY Mellon’s share price has more to do with an over-arching fear for all bank shares than a sound underlying factor. This is because the bank’s annual report suggests that it has an exposure of just around $200 million in Italy and Spain, and the fact that it is primarily a custodian bank would affect it much less than the other named competitors in case the debt situation in these countries deteriorates.

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1. Pending home sales post surprise fall in April, Reuters, May 30 2012 [↩]
2. Greek Polls Deliver Mixed Results Ahead Of Crucial Vote, The Wall Street Journal, May 30 2012 [↩]