A disappointing decade for European bank stocks gives way to a rally
(Bloomberg) — After a dismal decade, European banking stocks are finally on a tear, and bulls say the stars are aligned for further gains.
Bloomberg’s Most Read
Lenders are the best performing industry group this year in the Stoxx Europe 600 index, up 10%, up nine straight days to start the year before falling on Friday. It was the longest winning streak since 2018 and so far the best January start ever.
The catalyst: Expectations of monetary policy tightening from the Federal Reserve and other central banks have caused bond yields to spike, helping banks lend more profitably. The recovery of the economy from the pandemic will also lead to increased borrowing by businesses and consumers.
“As equity investors need to know who benefits most from the central bank’s next steps, it seems logical to look at the banks,” said Andreas Meyer, CEO of Fountain Square Asset Management. “There’s still life in those old dogs.”
It’s been a long time coming. Bank stocks have underperformed the rest of the market for years due to low to negative bond yields, constant regulatory pressure, money laundering scandals and failed turnarounds. The Stoxx 600 Banks Index has fallen 45% in the decade to 2020, while the broader index has risen by the same amount.
Investors appeared to have lost interest in the sector, despite it trading at a record valuation.
The turnaround began last year, when European banks set aside less cash for bad loans and buoyant financial markets boosted trading profits. Today, interest rates are finally rising from the lowest levels they sank into since the 2008-2009 financial crisis.
All 38 stocks in the Stoxx Banks index have risen since the end of 2020. Among the notable outperformers, Societe Generale SA doubled, Spain’s Banco de Sabadell SA is up 87% and ING Groep NV is up 77%. %.
The yield on German 10-year bonds rose to almost zero, from minus 0.5% in August, helping bank stocks in 2021 to their best annual performance since 2009. Each 100 basis point increase in yields could add around 23 billion euros in the bank. profit, estimates the analyst of Bank of America Corp. Alastair Ryan.
“European banks are starting the year with attractive valuations, high payout yields from dividends and share buybacks as well as strong earnings momentum,” said Niall Gallagher, chief investment officer for European equities at GAM Investments. .
Visibility of shareholder returns has increased since the expiration of a dividend and share buyback ban by the European Central Bank and banks’ asset quality has remained strong despite the pandemic. Citigroup Inc. analyst Andrew Coombs estimates that banks could increase their return on capital this year to 81 billion euros, while Bank of America forecasts a total of 134 billion euros available for distribution until the end of 2023.
Read more: EU’s UniCredit and BNP Lead Banks forecast record $31 billion payout
Some investors are already reducing their bank holdings. Cerberus Capital Management last week sold about 450 million euros of shares in Deutsche Bank AG and Commerzbank AG, reducing stakes it had taken in 2017.
And on Friday, the United States reminded us that parts of the banking industry remain unpredictable. Citigroup Inc. and JPMorgan & Chase Co. both posted disappointing trading earnings as the favorable capital market conditions of the past two years appear to have faded.
An argument for continued optimism about the sector: banks’ excess capital and strong balance sheets could serve as a catalyst for the long-debated consolidation of Europe’s fragmented banking market. The best bet in this case would be to own shares of so-called national champions, as they will be the ultimate beneficiaries, said Manish Singh, chief investment officer of Crossbridge Capital.
“Merger activity may intensify,” he said, noting, for example, that French lender BNP Paribas SA will be sitting on a $16 billion “war chest” after selling off its subsidiary. American banking.
Bloomberg Businessweek’s Most Read
©2022 Bloomberg LP