INDEPENDENT EQUITY RESEARCH

David Grinsztajn
Senior Equity Analyst

EUROPEAN BANKS
Do Banks Have to Pay the Bill?

April 2020

The Covid-19 induced crisis is really unprecedented. Indeed, it does not follow the rationale of an economic crisis which consists in solving unbalances which have accumulated during a former period of economic expansion. In reality this crisis has been driven by the impossibility to produce and as a consequence to trade imposed by the management of a sanitary crisis.

Assessing the impact on the banking sector requires to answer three questions: not only what will be the amount of losses but also how they will be shared and what the crisis tells us about the evolution of our post-modern societies.

The direct economic impact will largely depend on the length of the sanitary crisis. We consider that the market prices in a disruption period lasting between 3 and 6 months. The problem is that the probability of a longer duration remains apparently elevated.

Contrary to 2008, this time economic agents are not responsible. The state is. Firstly, it is supposed to act as a reinsurer of last resort in the event of natural catastrophe. Secondly, the losses will be magnified by its unprecedented (and unfortunately unprepared) decision to limit human casualties at any price. This could raise strong issues when time will come to share the losses and translate into political instability and the return of the sovereign risk in some countries.

This crisis can be seen as the revealing sign of the anthropological break around the issue of death. As stated by several people before us, the technological breakthrough notably in terms of life expectancy, has made death unacceptable. In our view, the crisis perfectly illustrates that such a break comes at a heavy economic and freedom cost. As the Covid-19 outbreak not only crystallises these trends but could accelerate them, we believe that it could morph into a political crisis independently of the loss sharing issue.

AlphaValue’s banking sector analysts’ team carried out a study entitled “Covid-19 or the Prohibitive Cost of Eternity”, to enlighten investors on the situation of European banking stocks in the face of the covid-19 crisis.

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