European banks: good buy or goodbye?

Payton Lee

Singapore Sales Trader

The first half of 2018 was all about the Trump administration's moves, but there remains a great deal of uncertainty in Europe, and this extends beyond the political tensions raised by Italy's new populist government.

Adding to the European factor, we have the ongoing Sino-US trade war weighing on markets this quarter. Britain’s exit from the EU will also have a significant impact on politics and the economy across Europe as a whole.

One of the biggest impacts will probably be felt in the financial industry, particularly in the investment banking sub-sector where London is a major hub.

In the UK financial services sector, the vote to leave the EU has fueled perceptions of uncertainty and depressed risk appetite. Lower risk appetite is likely, in turn, to lead to a squeeze in business investment and hiring, and a renewed focus on cash and cost control among corporates. Elevated uncertainty is likely to weigh on mergers and acquisitions, IPO activity, and inward investment.

Deutsche Bank lagged its European peers as the firm's Q1 results hit the company’s performance; shares at that point stood around €11.26.

Deutsche Bank shares now trade around the €10.88 level, with the downtrend visible on the chart below.

Enlarge
Source: Bloomberg, Saxo Bank

On its Q2 earnings released last week, Deutsche reported net income of €401 million ($469 million), a decline that was driven in part by weak trading results that nonetheless provided some relief for investors used to bad news from the Frankfurt-based lender.

Share prices have fallen 35% this year, but are now well of their 2018 lows.

Earlier this year, DBK also mentioned its plan to abandon a longstanding aim to be the top global securities firm, as well as a planned shift in focus for its corporate finance business to industries aligned with the firm's European clientele as well as consumer banking (including wealth management) in growing markets like Italy and Spain.

Following this strategic announcement, Deutsche has shifted the clearing of up to 50% of its euro-denominated derivatives trading from London to Frankfurt’s Eurex. The crucial shift is an important strategy for Deutsche, which has been trying to attract a bigger slice of the European derivatives clearing business since June 2016, when Britain voted to leave the EU.

The Bloomberg chart below shows the big European banks in comparison to the Europe 600 Banks ETF, while Deutsche is picking up since its dip in May.

Enlarge
Source: Bloomberg, Saxo Bank

Tough competition in the financial services market puts additional pressure on the bank's profitability. Overall, numerous factors have contributed to the leading role taken by the European financial services industry. With Brexit headlines resurfacing, this industry will probably be concentrating on its key strengths to improve business conditions.

Enlarge
Source: Bloomberg, Saxo Bank

If individual shares seem risky, investors may consider including exposure to European financials through exchange-traded funds. An interesting finding from Bloomberg shows that these funds (EUFN and SX7PEX) lured big pools of buyers since the end of June, a move that may have be driven by Deutsche’s relative optimism and growth during the period.

You can access both of our platforms from a single Saxo account.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.