Irish bank shares continue to slide on back of stress tests

Irish bank share prices fell on Tuesday as the sector in Europe continued to suffer following the results last week of the European Banking Authority stress tests.

In light post-bank holiday trading, Bank of Ireland officially closed down more than 8.6 cent at 15.8 cents, recovering slightly in after-hours trading to 16.2 cent, down more than 6 per cent. Permanent TSB fell 2.8 per cent to €2.09.

AIB dropped more than 11 per cent to €6.50, though with more than 99 per cent owned by the State and just a sliver of its stock in free float, little attention is paid to its often volatile share price, which had risen sharply on Monday.

Bank of Ireland has fallen by almost 15 per cent since before the weekend, while PTSB is down 2.4 per cent over the same period. Following the tests, the two big banks insisted that they remained well-capitalised. However, they came under selling pressure yesterday in tandem with declines elsewhere, as investors reassessed the outlook for banking stocks.

European decline

European stocks slid for a second day as lenders deepened their declines, investors assessed mixed earnings, and crude prices weighed on oil companies.

The Euro Stoxx Banks Index, a broad measure of the continent’s lenders, weakened 4.9 per cent on Tuesday after a 2.8 per cent decline on Monday.

A loss of confidence in the ability of European banks to increase earnings against a backdrop of negative interest rates and a tepid economy has ravaged share prices – with the Euro Stoxx Banks index now down 34.6 per cent this year – and dented a European equity market that investors had held high hopes for in 2016.

Appetite for bank shares was eroded further on Tuesday by a number of pieces of news, including a disappointing set of results from Commerzbank, Germany's second-largest bank, which reported a 32 per cent drop in quarterly profits. Commerzbank shares closed down 9.2 per cent, hitting a record low earlier in the day.

The falls also came after the publication of the stress tests on Friday, which failed to convince European equity investors to back the continent’s banks.

Italy flashpoint

Although banks’ share prices have retreated across Europe, Italy has been a s flashpoint because of anxiety over whether its banks will need fresh capital to compensate for their non-performing loans.

Italian bank shares were sharply lower for a second day as investors speculated that lenders may need to write down the value of the loans on the same scale required by a rescue of Monte dei Paschi di Siena, Italy’s most troubled bank.

The shares of UniCredit, Italy’s largest lender by assets, were temporarily suspended after an opening slide of 5 per cent and were down 7.2 per cent lower in Milan. Banco Popolare weakened 10.3 per cent, while Monte dei Paschi fell 16.1 per cent.

Investors pointed to the details of Monte dei Paschi’s plan to sell non-performing loans, suggesting that if a similar pricing approach were used for other Italian banks it would force them to raise more capital.

Shares in Intesa Sanpaolo fell almost 4 per cent even though the bank reported expectation-beating quarterly profits and was one of the best performers in the weekend’s stress tests.

Intesa chief executive Carlos Messina told the Financial Times the fall in his bank's stock, and the falls in the share prices of European peers are "only an emotional reaction of the market".

Paul Markham, who manages $4 billion of global equities at Newton Investment Management, said investors were in the process of re-evaluating banks’ earnings power and valuations as a cluster of factors, including the requirement to hold more capital, upends the landscape for lenders.

“They look cheap relative to the market, but it feels as if we’re on a journey with these companies to what banks were 50 to 60 years ago,” when they were more like utilities, he said. “Then they might be a different investment case – high dividend paying stocks – but we’re not there yet.”

(Bloomberg/Financial Times )