Chart of the Week
After 13 years of underperformance, marked by the financial crisis of 2008 and the eurozone debt crisis (2010-2012), European banks are posting solid performances for the third year running. The EuroStoxx Banks index (SX7E) has soared 33% since the end of 2022, reaching its highest level in almost five years. Nevertheless, despite the recent rise, since 2007 European banks have posted a total return (performance with dividend reinvested) of -71% (as at 13/03/2024), compared with +99% for the Eurostoxx index.
OUR ANALYSIS
The recent turnaround in the European banking sector was driven by a combination of low multiples and excellent earnings momentum. Earnings were driven primarily by (i) the sharp rate hike launched by the ECB in 2022, (ii) excellent cost control, (iii) stable credit losses (cost of risk) due to falling unemployment, wage growth and low corporate insolvencies, despite recent crises (Covid-19, the invasion of Ukraine and the energy crisis), and (iv) a notable rebound in equity markets. In addition, banks in peripheral countries such as Ireland, Italy and Spain have contributed significantly to the sector’s growth, thanks to their policy of lending at variable rates indexed to short-term rates.
However, the banking sector remains cyclical, and its results remain exposed to a potential deterioration in employment, consumption, investment and capital markets. Moreover, the peak in net interest is not far off for many European banks, and some will even see their net interest fall as early as this year.
That said, the end of negative interest rates has enabled the banking function to be restored on a lasting basis, opening up a new era of profitability for European banks, which are still undervalued in the medium term. Current multiples remain discounted, thanks to earnings growth outstripping share price growth. Despite forecasts of lower interest rates in the second half of the year, these should remain sufficiently high to support European banks’ margins.
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Written on March 15, 2024. This is not an investment advice. Opinions subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/germany-no-sign-of-a-manufacturing-recovery/
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