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Zombie banks: an overview of Europe's largest banks

Zombie banks Dwain Ross ★★★★★


Modern banks use a number of techniques to hide their true financial results, such as manipulating accounts, spreading loss-making positions across several branches and cashing in when reporting derivatives. This allows banks to prove to themselves that everything is fine, even when they are incurring terrible losses. We have seen this before, and we know it happened in 2006-2008.

It is technically and theoretically impossible to assess the true state of large financial structures through public reporting. Even the most easily accessible regulatory structures can be fooled by skillful manipulation and falsification of information. Net profit alone is an a priori indicator on paper and is not linked to cash flow or the ability to repay existing debts.

However, there are benchmarks that can reveal the limits of profitability. These are the sequence of losses, the size of losses as a percentage of total assets, operating profit and, above all, shareholders' equity.

The red line represents three consecutive quarters of losses, an annual loss rate of around 0.5%, a loss of equity of 15% and a loss of profit of 20%. Reaching these thresholds generally leads to a forced restructuring of assets, a necessary rescue and an overhaul of the bank's management system.

Here is a brief summary of a major Western European bank.

The figures are for profit after tax for the year. Only a complete picture is available for 2015, as it is not possible to obtain such a long series quarter by quarter and because the frequency of publication of results varies (some are quarterly, but most are half-yearly). Banks in Greece, Portugal, Cyprus and Ireland are not included in the analysis, as they do not affect the overall asset size of Western European banks. ING's data are not comparable.

In fact, there are at least four financial structures that are in a zombie situation: Royal Bank of Scotland Group (which is doing extremely badly, no bank in the world is doing as badly as RBS it is an official disaster), Barclays, Lloyds Banking Group and Unicredit. Deutsche Bank and the Spanish banks are in serious trouble. British banks survive because of good relations with the Federal Reserve, the European Central Bank and the Bank of England. If non-market support mechanisms are removed, they will all fail.

The Scandinavian banks in particular HSBC, BNP Paribas, Nordea, DNB, Svenska Handelsbanken and Swedbank are in a stable position. I won't go into details yet, as each bank has its particularities, but the banks that are in a more difficult position have achieved these conditions mainly through the asset market and not through their loan portfolios. We will take a closer look at the banks in the future, as it is very interesting to see the dynamics of ratios and balance sheet changes in the context of money market changes (negative interest rates).

For now, however, it is clear that US banks are more resilient than their European counterparts.

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