Why The Cost Of Hedging European Banks Stocks Has Soared
By Sofia Horta E Costa
Anyone wondering why it costs so much to protect against losses in European bank stocks in the options market saw the reason on Monday.
Shares of Deutsche Bank AG slid 4.6 percent to 30.13 euros, the biggest drop in 15 months, as the lender lowered a profitability target and set a plan to cut costs, in a sign that the industry may be poised for declines. That?s even after first-quarter earnings exceeded analyst estimates and the Frankfurt-based company posted near-record revenue. It had rallied 26 percent this year through Friday.
Around Europe, investors are paying the most in more than two years to hedge against threats to an industry where equity prices have doubled even as concerns mount about fines and tighter regulations. Banco Bilbao Vizcaya Argentaria SA and BNP Paribas SA report results this week. Lenders of the Euro Stoxx 50 Index dropped the most in more than a week on Tuesday.
?There is a mistrust that the regulators will continue to increase the capital requirements and hold back dividend distribution, coupled with outstanding fines for past misbehavior,? said Kevin Lilley, who helps manage about $23 billion as head of European equities at Old Mutual Global Investors U.K. in London.
The options market is implying a 2.3 percent gain or drop in BBVA shares after the earnings report, while BNP?s implied move is 3 percent. Those are more than the average moves following the past eight releases. The most-owned options on the two companies are all bearish. Ignacio Moreno of Citigroup Inc. says the European economic recovery will take some time to bear fruit, pushing investors to protect gains.