Since the beginning of the year, the European banking sector has confirmed the acceleration highlighted in recent years: the reference index has in fact recorded another performance of +32% compared to +8% of the Stoxx Europe 600. From the explosion of the Covid-19 pandemic (March 31 2020), the Stoxx Banks Europe index gained 284.5% compared to 93.6% of the Stoxx Europe 600. David Benamou, that of Axiom Alternative Investments, in a report on the topic.
Discount assessments
The assessments, however, have not changed, remaining well below their historical media and showing very significant discounts both with respect to the rest of the market (41%) and the US banking sector. Compared to the US credit institutions, in particular, the discount touches 50% even if the ROE (Return on Equity) of European banks has risen above that of US banks for the first time since 2010.
How do you explain this phenomenon? The European banking sector has recorded a spectacular growth of revenues and profits: from 2022 the profit per action has tripled, while multiples have not had time to adapt. And looking at the second part of the year, the fundamentals announce positive results. According to the latest data of the ECB, in fact, the volumes of the deposits continue to increase and the distribution between term deposits and visible deposits continues to improve. Furthermore, the remuneration of term deposits continues to descend. This leads us to predict an improvement of margins on deposits and therefore margins of net interest.
The outlook
ECB rates should stabilize between 1.5% and 2%, a very favorable interval for the volumes of loans and which facilitates the management of the costs of term deposits. This level also remains relatively accommodating and should reduce the risk of credit deterioration.
Finally, the amortization of the loan portfolios originating during the period of negative interest rates is starting to bear fruit: the percentage of low -margin loans is gradually decreasing, which will continue to improve the margins of net interest.
Even the activity on the markets seems to have benefited from the volumes of negotiations supported and volatility, which leads us to predict a high commissions income.
The profitability remains high
The sector should therefore record good results, with a ROE scheduled for 2025 greater than 11%. The sector is currently overcapotized (basic capital of more than 14.4%) and the dynamics of profits allows banks to offer high cash yields: expected dividends and the regaining of announced actions indicate a cumulative cash performance for 2025-2026 around 18%. To this can be added a further 6% cumulative growth of the tangible heritage (profits not distributed in dividends or regaining actions). It follows a total ROI of about 24% in the period 2025-2026.
The most favorable context
Finally, the banking sector should take advantage of a most favorable macroeconomic and political context for Europe, even after the entry into force of Basel IV. All bad news regarding regulation have already been obvious and there are good news on the horizon, first of all the progress on the union of the capital markets.
The investment thesis
The investment thesis for the European banking sector therefore remains very interesting. Despite this, as regards the positioning of the investors on the sector, there is an ironic paradox to be: on the basis of the surveys conducted among investors, the participants declare that they are overweight on European banks, while the public data on the wallets indicate that they are currently slightly underweight compared to their benchmark.
