Will Europe's Bailout Lead To The Next Banking Crisis?

Written by Rebecca Lipman

Did the European Central Bank's cheap loan bailout back in December set EU banks on a course to become insolvent "zombies banks?" Economists warn that due to the central bank's cheap financing, the countries' banks now face less incentive to clean out bad loans and correct their financial issues. "It's a huge bet," said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva, to CNBC. "If the crisis ends up well, the ECB will have pulled off a miracle. If things go wrong, then commercial banks will be in a much worse situation than they were before."

Buying More Risky Assets
Cash in the banks has increased the sentiment of the euro zone, reports CNBC, "but it is not yet clear how banks are using the money, and whether they will spend it wisely."

The fact is the government has no control over how the money is managed. "Some banks, no one knows how many, are bound to use it to cover up past mismanagement and books full of bad assets," says Wyplosz.

Wyplosz suggests banks have become incentivized to buy up risky assets, like government bonds from troubled economies such as Spain or Italy. They can then use those bonds as collateral to borrow money from the ECB at a benchmark interest rate of 1% for three years.

"Banks could borrow as much as they wanted provided they posted collateral. They jumped at the opportunity: 523 banks borrowed 489 billion euros, or $647 billion."

CNBC adds "borrowing from the central bank at 1% and using the money to buy bonds paying many percentage points more is a nice trade for the banks, as long as the issuers remain solvent."

Interactive Chart: Press Play to compare changes in market cap over the last two years for the stocks mentioned below.

Business Section: Investing Ideas
Banks have seen deadlines to get their act together extended by quite a bit, so the pressure to correct their problems is not as great as before. But as detailed above, the temptation to use the rescue money towards risky assets may do more harm than good down the road (for some banks). Some believe the coming months and years will help to weed out the weak banks, and leverage the stronger and cleverer ones.

So we were wondering, which European financial stocks are in a good position to succeed?

For ideas, we started with a universe of European financial banking companies. We then screened these stocks for those on winning streaks over the last month, with a high persistence of days in which the stock beat the S&P 500 and a low persistence of days in which the stock underperformed the index.

Do you think these stocks will continue to win? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Banco Bilbao Vizcaya Argentaria, S.A. (Nasdaq: BBVA): Engages in the retail banking, asset management, private banking, and wholesale banking businesses in Spain and internationally. Country: Spain. The stock's average daily alpha vs. the S&P500 index stands at 0.75% (measured close to close, over the last month). During this period, the longest winning streak lasted six days (i.e. the stock's daily returns outperformed the S&P 500 for six consecutive days). The longest losing streak lasted two days (i.e. a win streak/losing streak ratio of 3).

2. Deutsche Bank AG (NYSE: DB): Provides investment, financial, and related products and services. Country: Germany. The stock's average daily alpha vs. the S&P500 index stands at 1.1% (measured close to close, over the last month). During this period, the longest winning streak lasted five days (i.e. the stock's daily returns outperformed the S&P 500 for five consecutive days). The longest losing streak lasted one day (i.e. a win streak/losing streak ratio of 5).

3. National Bank of Greece SA (NYSE: NBG): Provides diversified financial services primarily in Greece. Country: Greece. The stock's average daily alpha vs. the S&P500 index stands at 4.15% (measured close to close, over the last month). During this period, the longest winning streak lasted seven days (i.e. the stock's daily returns outperformed the S&P 500 for seven consecutive days). The longest losing streak lasted two days (i.e. a win streak/losing streak ratio of 3.5).

4. Banco Santander, S.A. (NYSE: STD): Provides a range of banking and financial products. Country: Spain. The stock's average daily alpha vs. the S&P500 index stands at 0.81% (measured close to close, over the last month). During this period, the longest winning streak lasted seven days (i.e. the stock's daily returns outperformed the S&P 500 for seven consecutive days). The longest losing streak lasted two days (i.e. a win streak/losing streak ratio of 3.5).

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Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Price data sourced from Yahoo! Finance. All other data sourced from Finviz.