On May 2, European Central Bank head Mario Draghi announced a 25 basis point cut in the bank’s interest rate, from 0.75% to 0.5%. This marks the first cut in the interest rate since July 2012 amidst the news of slow economic activity in the first quarter. This was a cut that many saw coming, as the ECB looks to stimulate lending to businesses among Europe’s major banks in an effort to get the economy going at a stronger clip.
As expected, the Euro dipped on the news by roughly 1% against the dollar, closing at $1.30 at the end of the European trading day, which is normal whenever a central bank announces easier lending practices. Part of the downturn also comes as Draghi suggested the possibility of negative interest rates, should the situation in Europe fail to improve.
However, the negative interest rates emergency plan comes with the potential charging of fees for banks in future dealings with the ECB, in addition to the authority’s plans to adopt a supervisory role of all banks with over €30 billion in assets by 2014. This would encompass many national banks throughout the zone, especially the ones that are often considered to be the face of that nation’s banking industry, like Germany’s Deutsche Bank AG (USA) (NYSE:DB) and Spain’s Banco Santander, S.A. (ADR) (NYSE:SAN). While these banks have earned their place as the “national champion” banks through strong financial performance, it also means that they have governments in Berlin and Madrid that will make sure that they aren’t crippled by the ECB’s new powers of supervision and fee assessment, especially when re-capitalization and liquidity are two huge concerns for the continent.
Deutsche Bank AG (USA) (NYSE:DB) has the benefit of being in a country that has more or less avoided the financial problems that plagued the rest of the Eurozone (though Germany did suffer a dip in manufacturing last quarter). It has held firm throughout the crisis, and was one of the few banks to openly call for the ECB’s interest rate cut, hoping, as Draghi hopes, that it will help improve the economic climate throughout Europe.
This was an interesting position for the bank to take because the last time the ECB announced a rate cut in July 2012, Deutsche Bank AG (USA) (NYSE:DB)’s share price dropped by 23% on the New York Stock Exchange in one month, but recovered by September. The bank has also completed a capitalization strengthening program before Draghi’s new rate cut. On April 30, the bank released a statement saying that they had sold 90 million new shares at €32.90 per share as part of a program to strengthen equity capitalization. This is important because according to the ECB’s supervision plans, the German bank would easily be part of that scheme (with assets over €2 trillion). Therefore, any plans now to put the bank on solid footing, and away from the need for cheap loans, are probably good moves for the bank to make.
Like Deutsche Bank AG (USA) (NYSE:DB), Banco Santander, S.A. (ADR) (NYSE:SAN) is the Spanish “national champion” bank, and one of the best performing banks in Europe in terms of market capitalization at over €1.25 trillion in assets. Unlike its German brother, though, Banco Santander, S.A. (ADR) (NYSE:SAN) is in one of the nations that is the reason for the Eurozone’s shaky foundations. With the Spanish economy shrinking once again in the first quarter of 2013, and unemployment hitting 24%, it is a tough time to be in Spain. For Santander, it has been inescapable in terms of its own financial forecasts. As Spanish sovereign debt took another ratings hit, SantandeBanco Santander, S.A. (ADR) (NYSE:SAN) has as well, though the company is quick to point out that it has outperformed Spanish sovereign debt on the bond markets throughout this ordeal. This will be tested once again, as its earnings report showed a 26% decrease in profits compared to a year ago, at €1.2 billion for the quarter, though it tripled up on its €423 million fourth quarter in 2012. According to Emilio Botin, chairman of the bank, Banco Santander, S.A. (ADR) (NYSE:SAN) will be prepared for any downturns in the economy after setting aside over €60 billion for bad loans, and adding €20 billion in capital.
If there is a country to watch this year in Europe, it’s probably Spain, which has been looking a lot like how Greece looked in 2011. Banco Santander, S.A. (ADR) (NYSE:SAN)’s fate will be tied, at least in part, to what Madrid does in terms of austerity measures or securing cheaper ECB loans. Thanks to its size, only 25% of Santander’s 2013 profits came from continental Europe, while over half were in Latin America, owing to the global nature of the bank, though investors may be hesitant to get involved in anything Spanish if its unemployment and economic woes continue. Under the new leadership of chief executive Javier Marin, the bank appears to have taken considerable steps to avoid ECB loans however possible, especially as it will be under closer watch by the ECB, like Deutsche Bank AG (USA) (NYSE:DB).
The ECB admitted that the economy is still sluggish, and banks are now coming to grips with the potential of a more powerful central bank on the continent as it makes moves to re-capitalize and hold strong through the storm. The crisis though is far from over, and given the emergency plans already in the offering should things get ugly, more intervention may happen, and the “national champion” banks of Germany and Spain may have another battle ahead. Or see their crowns taken from them.
The article A New Look at Europe’s Banking Landscape originally appeared on Fool.com and is written by John McKenna.
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