European Megabanks Collapsing

European Megabanks Collapsing  Under a Mountain of Junk Bonds While the European Commission continues to highlight the Italian commercial banking sector, a much larger hole is growing in the high-yield assets (junk bonds) of European investment banks. It is estimated that due to the collapse of the oil and commodity bubbles, high-yield bonds are now worth only about 40-50% of their nominal value. Yields have climbed to about 17% – or the same level a distressed bank such as Monte dei Paschi di Siena would currently offer, if a market could be found for its bonds. Among the most exposed to the oil and gas markets are French banks. Jonathan Tyce of Bloomberg Intelligence puts the total exposure of the French banks at more than EU100 billion. Crédit Agricole, BNP Paribas, Société Générale, and Natixis are among the top seven European lenders with exposure to energy companies, according to analysts at Nomura, and among  the top five for metals and mining companies. One problem is that these same banks have not set aside any extra capital to cover losses and are not forthcoming on their exposure, the quality of their borrowers’ collateral, or any risks posed by the companies they lend to. In contrast, Italian banks have put up provisions for up to 40% of their bad loans, officially set at EU200 billion. Another danger point for energy loans is in the Netherlands, which is the center of the oil spot market. ING Bank alone, according to Bloomberg , has a EU29 billion energy loan portfolio, accounting for about 14% of its total lending to companies. On Feb. 4 ING issued a statement claiming that it expected to make provisions on EU3.8 billion of loans if oil prices remained at the current low levels. It said the other parts of the loan book are “somewhat exposed” to oil price risk. Crédit Suisse has indicated that its net loans to the oil and gas industry total $9.1 billion but also claims that there is nothing to worry about. As for Deutsche Bank, it refuses to disclose its exposure to the energy industry, saying only it was “underweight” relative to the sector. However, Paul Schulte, the Chief Executive of SGI Research, warned that the bank is holding a large book of commodity-related derivatives. Overall, it is well known that Deutsche Bank has the world’s largest portfolio of derivatives, with 64 trillion in notional value. Since the beginning of the year, Deutsche Bank shares col
lapsed by one third, while its losses in 2015 amounted to EU6.8 billion. Its convertible bonds are close to the default threshold, after which they will be bailed-in, i.e. converted into shares. “This has been brewing under everyone’s nose”, Schulte said, “because while people thought that the problem was periphery banks in Ireland or Spain, the actual problem is that Deutsche Bank, and the French banks with lots of toxic debt in commodities, are over-stretched; badly run; have no sense of risk management, and are organs of state capitalism.