” The low interest rates are not responsible for all the evils that affect the financial sector “. This is in substance what was said by the president of the european central Bank (ECB) Mario Draghi in his last meeting . Of course, other factors – like the Brexit, or the chinese growth – there is also the outlook for the banks, but we should not under-estimate the impact of deposit rate negative (-0,4%) practiced by the european monetary institute. Still less than the negative rate of the Bank of Japan introduced in January last .
In fact, economists at Citi have made a comparison of the Trading prices of banks based in a country where there are no rates negative (United States, United Kingdom, Canada and Australia) and those where rates are negative have been established by the central banks (the euro area and Japan). The difference is obvious.
in cases where central banks do not practice the rate is negative, the Stock price of major banks yield slightly to the ground since the beginning of the year. Conversely, in the euro zone and Japan, the shares have lost about 25% of their value. For example, BNP Paribas has lost a little less than 10% since the beginning of the year. Société Générale has sold nearly 25%, and Deutsche Bank, 50%. For German, these losses are related to an internal situation difficult, well beyond the monetary policy of the ECB.
The side effects
This graph has been published in a note following the decision of the Bank of Japan to review its monetary policy . On Wednesday, she said she was going to try to control the yields of Treasury bills to bring them back around 0%, in order to relieve the financial groups. “The BoJ pointed out that, if the rate is negative have pulled down yields and the cost of funding, they have been accompanied by negative side-effects (in particular on the profitability of the banks), ” notes Citi in its note.
Since the beginning of the year, the banking institutions are battered by the markets. Following the results of the stress tests conducted by the european banking Authority, the bank stocks have been punished in the Stock market. But what worries investors is less the soundness of banks, that a gloomy outlook in terms of profitability.
winners and losers
The negative deposit interest rate of the ECB works as a tax on the deposits of all the institutions at the central bank. The bill for the banks is estimated at € 2.9 billion. In addition to the large asset purchase program (80 billion euros per month) pulls down all the rates. The German 10-year Bund fell into negative territory last June. Some companies, such as Henkel Germany and Sanofi in France will pay the same rate to be negative . This means that they will repay less than they borrowed.
The low interest rate environment is good news for the States who can fund themselves at very cheap. Other borrowers will also benefit from this context : the rate of real estate credit are never sunk as low . Instead, it is a liability to the investors, and financial institutions. The first to see the return of their savings melt away. The seconds are hit with the margins cropped on the traditional activity of credit to individuals and businesses.
note, however, that for the activities of banks, financing and investment, this situation has been beneficial, as bond prices rose (the rate decreased). The traders were thus able to sell to the ECB, securities at a high price. An example of this ? Goldman Sachs saw revenues from its Fixed income activity ” (interest rate, exchange rate) leap of 20% in the second quarter. This has not prevented the bank from Wall Street to record a decline in its overall activity .
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