Why A 100bps ECB Rate Cut Would Crush European Banks

Last week, when observing the ongoing drop  in both Wells Fargo's Net Interest Margin...

... as well as the broad decline in Net Interest Income across all US banks as rates continue to drop...

... we warned that this is an early warning of just how the upcoming Fed rate cuts will cripple US banks.

But if US banks are about to get hit, then European banks, which are already in purgatory courtesy of five years of negative rates coupled with both public and private QE, may enter the 9th circle of hell as soon as Thursday, when the ECB previews what may be a 20bps rate cut in September with or without more QE.

While the disastrous performance of European bank stocks since the financial crisis has been extensively discussed, with the European banking sector trading on the edge of support, beyond which nothing good awaits...

... it would be ironic if it is none other than the ECB which tips European bank stocks to new all time lows.

The reason for that is that, as Goldman recently calculated, further rate cuts are "a very uncomfortable prospect" for the sector, and an indicative -20bps rate cut could lead to an aggregate €5.6bn (-6%) profit cut for the 32 Euro banks under Goldman coverage, with 12 banks facing an >10% EPS cut, and 5 banks >20%. Worse, if Draghi were "forced" to cut rates further still, by say -100bp, one quarter of European banks would turn loss making or break-even, and 75% would not meet their cost of capital, according to Goldman calculations.

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