Bank equities, CCAR and a CVA surprise

BANK EQUITIES are suffering from regulatory uncertainty

CCAR focus shifts from results to process

CVA decision could benefit regional banks

COMMENTARY: Point of low returns

No-one should have expected bank stocks to recover to pre-crisis valuations soon. But eight years on, bank shares are still showing high volatility, and with price-to-earnings and price-to-book ratios still low, there's a lack of confidence in future earnings growth, and even a fear of massive impending losses. This holds even at banks such as JP Morgan, which have delivered solid returns since the crisis but still face sudden sell-offs, of the kind that happened earlier this year after bad news from Deutsche Bank.

Banks and analysts alike ascribe this to continuing regulatory uncertainty – a category that includes a lot of potential bad news, from new and higher capital requirements to fines and penalties for wrongdoing – but also to a gloomy and uncertain macroeconomic outlook.

Bad news for bank shareholders – but for the rest of the world? Probably. There's a strong argument that the banking sector is still too large; it's certainly still at historically high levels as a share of GDP in several countries, and is unique in that it has made no productivity gains since 1880 in terms of the unit cost of intermediation. But changing that may be difficult. Costlier capital for banks means  the cost of intermediation will rise for everyone else as well. And a volatile equity market can harm credit markets too, making contagion more likely.

Another lesson of the crisis might explain much of the volatility. 2008's biggest shock for many was not that subprime mortgage-backed securities might be set for dramatic losses, but that the tight and largely opaque interconnections between institutions allowed the problem to spread and amplify at blinding speed. Banks and regulators may hope this has changed; investors may still fear it hasn't, and this will be reflected in volatile prices, where bad news for one bank is bad news for all.

QUOTE OF THE WEEK

"Nobody cares about [bank stock] fundamentals. All they care about is the monster under the bed" Richard Bove, equity research analyst at Rafferty Capital Markets in Florida.

STAT OF THE WEEK

The US Net Stable Funding Ratio requirement would increase hedging costs for end-users of uncleared derivatives by 10–15%, resulting in a total additional long-term funding requirement of $500 billion, industry lobbyists told Congress this week

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