19/11/18

The Eurozone Banks' Trillion-Dollar Timebomb



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The Eurozone Banks' Trillion-Dollar Timebomb
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Authored by Daniel Lacalle via dlacalle.com,

Eurozone banks have fallen dramatically in the stock market despite the results of the stress tests carried out by the ECB. EU Banks Index is down 25% on the year despite year-long bullish recommendations from almost every broker. This should not surprise anyone because we have seen in the past that these tests are only a theoretical exercise. Moreover, stress tests' results are widely challenged, and rightly so, because the exercise starts with the most ridiculous premise in economics: Ceteris Paribus, or "all else remaining equal", which never happens. Every asset manager knows that risk builds slowly and happens fast.

Disappointing earnings, rising risk in the eurozone as well as in their diversification markets such as emerging economies, weak net income margins and low return on tangible equity are factors that have contributed to the weak performance of European banks. Investors are rightly suspicious about consensus estimates for 2019 with expectations of double-digit EPS growth rates. Those growth rates look impossible in the current macroeconomic scenario.

Eurozone banks have done a good job of ....

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