LONDON- Storm clouds are brewing over European banking stocks as the boost from higher interest rates fades and recession risks rise, yet bank valuations are still weighed down by too much caution, investors said.
On the surface, Europe’s volatile bank shares have had a good year, up almost 16 percent in 2023 versus a 7 percent rally in the broader STOXX share index Still, some big investors in the sector are convinced it remains lowly valued.
Just before earnings season kicks off, European bank shares are sporting a dividend yield of almost 8 percent , making them cheaper on this basis than during the 2008 global financial crisis.
Banks’ extreme sensitivity to macro-economic conditions makes the sector an easy one to avoid. But the per-share cost of receiving banks’ dividends at current inflation-busting rates is probably too low, investors said.
“You’re being paid quite handsomely to wait for what’s coming in the economy over the next two years,” said Guy de Blonay, investment manager at Jupiter Asset Management, who is adding to his positions in European banks.
Sebastiano Pirro, chief investment officer at Algebris Investments, said European banking shares were too cheap considering these lenders hold chunkier capital buffers to cover future losses than regulators require.
“Despite (a) meaningful improvement in profitability, continued earnings upgrades and solid fundamentals, these stocks remain cheap,” he said.
As the European Central Bank pledges to keep interest rates around their current record high, threatening a vicious cycle of debt defaults and collapsing asset values, banking shares are still taking the hit of credit cycle fears, analysts and investors said.
European bank stocks are trading at around six times forecast earnings – less than half the level of the Stoxx 600 index overall indicating that investors fear lenders’ profits getting crushed by bad debts. – Reuters
