European banks erase US$56b as Greece edges toward exit

[MILAN] European banks slumped the most since 2011, erasing more than 50 billion euros (US$56 billion) in market value, after Greece imposed capital controls and shut lenders.

The Stoxx 600 Banks Index fell as much as 4.4 per cent, the biggest intraday decline since November 2011, with all 46 members declining. The gauge was down 3.4 per cent at 12:55 pm Frankfurt time. Lenders in Italy, Portugal and Spain were among the biggest decliners, led by Banco Comercial Portugues.

Greece shut its banks and imposed capital controls to help avert the collapse of its financial system amid increasing concerns it will be forced out of the euro area. Banks will be closed at least until July 6, the day after Greeks vote in a referendum on proposals to restore bailout aid.

"In the short term we should see a very negative mood on markets," said Jacopo Ceccatelli, chief executive officer at Marzotto SIM SpA, a Milan-based brokerage. "Sovereign bonds, banks of peripheral countries, will be the most affected by uncertainty."

The European Central Bank froze the ceiling on Emergency Liquidity Assistance to Greek lenders at just below 89 billion euros, refusing for the first time this year to maintain a buffer as deposits decreased. Greece is the second euro-area country after Cyprus to impose capital controls.

Spain's Banco Popular Espanol SA fell 6.5 per cent and Banco de Sabadell SA decreased 5.4 per cent. Italy's Banca Monte dei Paschi di Siena SpA declined 7.2 per cent, while Intesa Sanpaolo SpA dropped 4.6 per cent and Banca Popolare di Milano Scarl fell 5.6 per cent. Banco Comercial slumped 9.1 per cent.

"We are witnessing the maximum level of concern about Greece today," said Dominic Rossi, global chief investment officer of equities at Fidelity Worldwide Investment, which oversees about US$284.7 billion in assets.

Greek bank bonds dropped to the lowest levels on record, with notes sold by Alpha Bank AE and Piraeus Bank SA falling by about 20 percentage points to less than 45 per cent of face value. A measure of financial debt risk across Europe surged by the most since the collapse of Lehman Brothers Holdings Inc.

The costs of insuring bank bonds in Europe from default rose, with the Markit iTraxx Europe Senior Financial Index of credit-default swaps on 30 European banks and insurers increasing by as much as 28 per cent to 98 basis points, the biggest increase since September 2008.

While the risk of contagion has eased since Greece triggered a sovereign debt crisis in 2009, when foreign banks had larger direct exposures to the country, lenders remain vulnerable to the threat of a euro breakup. Some also face swings in prices on their sovereign holdings.

Italian banks' stock of their country's sovereign debt stood at a near record high of 415.5 billion euros in April, Bank of Italy data show.

"The main impact on banks will be on their investment portfolios," Antonio Guglielmi, a London-based analyst at Mediobanca SpA, wrote in a note Monday.

Banks in the rest of Europe will also be affected through fixed-income trading, with Deutsche Bank AG and BNP Paribas SA among the largest bond traders exposed to losses, he wrote.

European banks' exposure to Greece is at about US$45 billion, Bank of America Corp said in a note dated June 19. HSBC Holdings Plc and Credit Agricole SA had the greatest exposure to Greece at the end of 2014, at 5 billion euros and about 4.2 billion euros respectively, according to Berenberg.

Greece leaving the euro region would be a "blip" for British banks, said Scott Vincent, managing partner of consultancy firm Parker Fitzgerald.

"The exposure to Greece is absolutely minimal," Mr Vincent said. "The banking sector is well-prepared for" Greece defaulting or leaving the currency region, he added.

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