Chart of the Week
The banking sector has experienced significant growth in the stock market, with the Euro Stoxx Banks index up 39.46% YTD as of July 3, excluding the effect of reinvested dividends.
Despite this impressive performance, the sector’s valuation metrics remain very moderate. For example, the Price-to-Book ratio, which measures a company’s market value relative to its book value, is only slightly above 1 for banks within the Euro Stoxx Banks index. This ratio has not mirrored the sharp recovery in European banks’ profitability since 2015, even though the two indicators previously displayed a strong relationship.
OUR ANALYSIS
Over the past decade, the market has been extremely cautious toward the banking sector, even though banks have returned to solid profitability. However, Eurozone banks now have a much lower risk profile than in the past, thanks to more conservative management of balance sheet liquidity, strong capital buffers, and healthy balance sheets with historically low levels of non-performing loans. The long period of regulatory tightening and negative interest rates, which had a significant impact on bank profitability, is now behind us. This unlocks cash flow potential and paves the way for consolidation opportunities.
While the banking sector has begun to win back investor confidence, we believe it still has significant long-term catch-up potential.
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Written on July 4 2025. Opinions subject to change.
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