Back to '80s: Virus hacks into recent euro zone bank rally

By Thyagaraju Adinarayan

LONDON (Reuters) - A meltdown in Europe's banking shares?

A quarter of their value has been wiped off in less than a month as rising coronavirus cases in Europe and the United States have darkened the outlook for the global economy, pushing central banks to cut interest rates further.

The U.S. Federal Reserve shocked financial markets on Tuesday with an out-of-cycle 50-basis-point rate cut, seen as the first of many to come from the rest of the world.

The European Central Bank's rates are already deep in negative territory and with fast-falling bond yields signalling at least another 10-basis-point cut, banks are feeling the heat. The Bank of England is also expected to cut rates later this month.

That's clearly set to further dent profit margins on loans.

The STOXX 600 banking index <.SX7P> has hit 2009 lows, while the euro zone one <.SX7E> has touched 2012 lows and are a few bad trading sessions away from testing lows last seen back in the 1980s.

Both indexes are trading in so-called 'bear market' territory, meaning more than a 20% drop from recent highs, and notably the moves have happened in less than a month.

"The new coronavirus has derailed the sector’s recent rebound and wiped out optimism about recent ECB measures, such as tiering and longer-term loans to stimulate lending," Christian Stocker, UniCredit's lead equity sector strategist, said in a note.

"To make matters worse, the ECB is now leaning towards further easing and rate cuts to counter the economic effects of the coronavirus outbreak."

1/ BANKS HAVE LOST 84% OF THEIR VALUE SINCE 2007

Though it still hasn't quite matched the bottom of the 2008 financial crisis, the index has lost 85% of its value since its peak in 2007.

Euro zone banks down 85% from 2007 peak: https://fingfx.thomsonreuters.com/gfx/buzzifr/15/8568/8568/Pasted%20Image.jpg

2/ EARNINGS EXPECTATIONS TRACK BUND YIELDS

Euro zone bank earnings versus bund yields: https://fingfx.thomsonreuters.com/gfx/buzzifr/15/8574/8574/Pasted%20Image.jpg

3/ U.S. BANKS NEARLY DOUBLE THE SIZE OF EURO ZONE PEERS

Europe half the size of U.S. banks: https://fingfx.thomsonreuters.com/gfx/buzzifr/15/8569/8569/Pasted%20Image.jpg

4/ JAPANIFICATION OF EUROPE OR EUROPIFICATION OF JAPAN?

The Japanification of European banks: https://fingfx.thomsonreuters.com/gfx/buzzifr/15/8577/8577/Pasted%20Image.jpg

(Reporting by Thyagaraju Adinarayan; editing by Jonathan Oatis)