With the European debt crisis causing uncertainty in the market, one has to wonder if Europe will see many of their top banks fail much like America saw a few of its top banks fail in 2008. When I read articles like this one showing how Apple’s (AAPL) market cap is higher than the market caps of the top 32 European banks, it makes me wonder what the future of European banking is going to look like. When looking at the financial statements of Deutsche Bank (DB), Credit Suisse (CS), and Barclays (BCS), the major problem that I see is how highly levered all of these banks are compared to their American based counterparts. Although these banks have a heavy presence throughout the world and not just Europe so not all of their assets are exposed to the European debt crisis, it seems very hard to believe that these three banks will be able to stay above water and avoid bankruptcy without some kind of major outside help.
When looking at total debt to equity of Deutsche Bank, Credit Suisse, and Barclays, they have ratios of 2311 percent, 1140 percent, and 1605 percent, respectively. With the effects thatsde a European debt crisis would have on world markets, these banks are at a high risk of not being able to afford their interest payments and having their stock prices near absolute zero. With Bank of America (BAC), Citi (C), and JP Morgan Chase (JPM) struggling with total debt to equity ratios between 355 percent and 433 percent, it is hard to imagine that banks with much higher multiples of leverage will be able to stay above ground.
Investors have appropriately responded to the risky positions of Deutsche, Credit Suisse, and Barclays and their stocks’ performance has been horrendous over the past couple of months. In the last three months, Deutsche Bank’s stock has dropped 44.0 percent, Credit Suisse stock has dropped 43.5 percent, and Barclays stock has decreased 44.6 percent. Although the debt crisis will likely be solved and everything should return back to normal eventually, if any highly levered European bank goes down, stockholders will most likely not receive anything in the purchase or liquidation of these banks’ assets. Holding stocks with a high potential to reach absolute zero is extremely risky, and is a bad idea to hold in a market as volatile as it is today.