財經觀察 1527 --- Is it really different this time?

Is it really different this time?

Posted by Paul Murphy on Nov 17 09:13. Comment.

Simon Samuels of Citigroup advises nervous types watching Europe’s banks to look away now. Here’s a graph showing how the sector reacted to some past crises - compared with current forecasts on how European banks are likely to fair currently. More…

Simon Samuels of Citigroup advises nervous types watching Europe’s banks to look away now. Here’s a graph showing how the sector reacted to some past crises - compared with current forecasts on how European banks are likely to fair currently.

Samuels and his team have analysed the performance of US banks in the 1930s, Japanese banks in the 1990s, the Swedish sector during their early 1990s crisis and, finally, Hong Kong banks over the deflationary 1997-2002 period. The conclusion is grim.

Earnings (of course) collapse, driven in part by soaring bad debts. However, these periods also suffer massive shrinkage in loan books and (more modest) shrinkage in deposits and total balance sheets. Pre provision operating profit also tumbles, in part reflecting this balance sheet shrinkage. Applying even the least damaging of these episodes (Hong Kong 1997-2002) to the current sector would see loan books halve and earnings, equity and operating profit all fall c40% from current forecasts.

Could this happen now? Says Samuels:

To be clear, none of our economists forecast depression or deflation in Europe, but as recent IMF analysis demonstrates, recessions preceded by financial crisis tend to be long and deep. We might find ourselves rereading this report in a few years time and thinking that we were way too bearish to even raise this spectre. Or we might not.

Related link:What If…? Applying Previous Crises to Today’s European Bank Sector - Citi research