04 February 2017

Financial Times: TCW dumps ‘excessively risky’ eurozone bank debt

TCW, the US asset manager that runs the world’s largest actively managed bond fund, has eliminated its exposure to eurozone bank debt over fears these lenders are “excessively risky”. The company began to reduce its exposure following the UK’s vote to leave the EU.

Mr Rivelle said his biggest concern was the number of toxic loans held by eurozone lenders, which amount to more than €1tn. Last month Andrea Enria, chairman of the European Banking Authority, said the scale of the region’s bad-debt problem had become “urgent and actionable”, and called for the creation of a “bad bank” to help lenders deal with the issue.

Mr Rivelle, who was previously a bond fund manager at Pimco, the Californian asset manager, said: “The [eurozone] banking system [has] a bad combination of negative rates, slow growth and lots of problem non-performing loans. It is inherently prone to a potential crisis should global economic conditions, or European economic conditions, worsen. [These are] the preconditions of a potential banking crisis.”

He added that there is a 50 per cent likelihood of another global recession within the next two years, removing any incentive to invest in the eurozone banking sector within that timeframe. The forthcoming French presidential elections in April, which could see Eurosceptic candidate Marine Le Pen come to power, and the problems facing the Italian banking system, are additional risks for eurozone banks this year.

Other asset managers acknowledged that political risks in Europe this year, including the French elections and German elections in September, could intensify pressure on eurozone banks.

Iain Stealey, fixed income portfolio manager at JPMorgan Asset Management, the US investment house that oversees $1.8tn of assets, said: “The main [concern] in the eurozone is political risk. We’ve got the French elections in April and May, and the German elections [in September]. At the moment, the market is a little bit risky. [The French elections] could be a risk to eurozone bank debt.”

Amundi, Europe’s largest listed fund house, is considering reducing its exposure to French banks ahead of the presidential election, according to Hervé Boiral, head of European credit at the asset manager.

However, several asset managers highlighted reasons for optimism about Europe’s banking sector, including the likelihood that the European Central Bank will begin to scale back its bond-buying programme at the end of 2017, and potentially raise interest rates next year. The central bank’s record-low interest rate policy has hurt banks’ profitability as they have earned less money against customers’ deposits.

Full article on Financial Times (subscription required)

© Financial Times