To find out how the U.S. financial crisis is beginning to play out in foreign markets, we spoke late last week with Zacks senior analyst
Ann Heffron, CFA recently about how banks around the world under her coverage are currently being affected.
To what extent do you feel the U.S. economic slowdown has affected foreign banks in Europe at this time?
The US economic slowdown has hurt European banks immensely, for a couple of reasons. First, many European banks conduct a significant portion of their business in the US. Second, the slowdown in the US is spreading to Europe and the UK, and these countries are experiencing the same types of problems as in the US.
For example, Britain, Ireland, and Spain are witnessing a substantial contraction in their housing markets, which has pushed both sales and pricing into negative territory. This is particularly problematic for Spain and Ireland, where residential investment accounts for 9% and 12% of their economies, respectively, compared to 5% in Britain and 4% in the United States. This is now spreading to other parts of the economy, with the result that GDP is expected to slow.
The European Commission (EC) recently announced that Germany, Spain, and the UK economies would fall into recession this year. The German economy, the largest in euro zone, contracted 0.5% in the second quarter and the EC forecast negative growth of 0.2% for the third quarter. Spain is forecast to record negative growths of 0.1% and 0.3% in the third and fourth quarters, respectively. The UK economy is also expected to experience contractions of 0.2% each in the third and fourth quarters of 2008.
From a broader perspective, the EC forecast gross domestic product growth of 1.3% for this year in the Euro Zone, down from 1.7% previously when the EC saw no risk of recession in Europe. The EC forecast growth of 1.4% for the broader EU, which includes Britain, Sweden, Denmark and several countries in the formerly communist eastern Europe, down from 2.0% before.
This has been reflected in stock prices. For non-US banks in the Zacks universe, the median price decline year to date is 26.7% compared to a 14.9% decrease for the S&P 500. For European and UK banks only in the Zacks universe, the price drop is even worse at 38.0%.
Asia of course is boasting continually strong economic growth. Of the Asian banks under your coverage, which are benefiting most from this?
While it is true that certain Asian economies continue to grow at a reasonable pace, they are still experiencing slowdowns relative to recent growth in their economies. Others are not growing at all. For example, the Reserve Bank of India, expects GDP growth in India to fall to around 8% in fiscal 2009 (ending March) from 9% in fiscal 2008.
