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Monday, July 22, 2002

Now It's The Banks Turn To Feel The Heat

Most people are aware the the financial scandals in corporate America - like Enron, and now WorldCom - have hit investor confidence badly in the stock markets, but few are probably aware of the creeping knock-on impact of the financial losses and subsequent decline in share values on the insurance and banking sector. The European markets were full of tremors in the insurance sector toda, as, for example, Aegon, the Dutch insurance group, warned that its earnings in 2002 would be 30-35 per cent lower than expected. Aegon blamed the profits warning on further deterioration in the US credit markets and continuing defaults in its corporate bond portfolio which has E150m exposure to collapsed telecoms giant WorldCom. Even the most respected and most diversified groups have not been immune: France's AXA AND German rival Allianz are both down around 40 percent.

"This is a real crisis for insurers," said Carsten Zielke, head of insurance at WestLB Panmure. "I think there could be more insolvencies and a lot of mergers, if stock markets keep going down." The key problem is that falling equity markets have eroded the investment gains that European insurers have used in the past to smooth earnings and support policyholder pay-outs.

More importantly, they have stripped balance sheets of the hidden reserves insurers have used to maintain adequate levels of capital and meet solvency ratios. As a result, solvency margins - set by regulators to ensure companies can honour liabilities and write new business - are under pressure. If the market continues to fall, the fear is that some insurers may have to sell more equities to maintain solvency levels.
Source: Financial Times

Meanwhile the problems are now mounting in the banking sector. WorldCom's fallout has been global for the banks, with U.S. banks like J.P. Morgan topping the list of creditors with $17.2 billion in exposure, including assets held by the bank for its clients, according to information contained in the bankruptcy filing.

Shares in Europe's biggest listed WorldCom creditor Deutsche Bank have dropped around five percent to its lowest level in eight months on fears the bank may lose part of $1 billion in WorldCom exposure, while shares in Dutch bank ABN AMRO -- whose total exposure to WorldCom is put at $753.1 million -- were worse hit, falling some seven percent to their lowest level in almost four years. This situation has sharpened fears that the banking sector could be approaching a crisis that would force some into mergers or prompt others to make urgent calls on shareholders for more cash.

Analysts now say risks to banks' financial health posed by equity losses and WorldCom style corporate blowups have eclipsed many of investors' other concerns and now dominate the debate about banks' strategic direction. Investors used to believe that only the biggest "bulge bracket" investment banks would survive an industry shakeout. Now, banks who have shown themselves better protected from equity market losses are proving their worth. "The state of the balance sheet is much more pressing at this stage than the whole issue surrounding critical mass and economies of scale," said Richard Thomas at ABN AMRO. "In the investment banking world we are at a sort of crossroads where the big players are going to have to think long and hard about where they want to go and what they want to do because the models are not sustainable," he said.
Source: Reuters Yahoo News

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