Since this year, the US banking sector has continued to be the beneficiary of the Fed's expectation of tightening monetary policy. At the other end of Atlantic China Welding Consumables Inc(600558) , their European counterparts also benefited from this expectation. Since the end of last year, European banking stocks, which have been in a downturn for 10 years, have changed their fatigue and have ranked first in the industry sectors of the Stoxx Europe 600 index so far this year.
Analysts expect that European bank stocks are expected to continue to rise as the Federal Reserve and some other major global central banks tighten monetary policies and continue to push up bond yields, as well as the valuation of European bank stocks remains attractive.
this year has increased by about 10%
So far this year, the EU Stoxx 600 banks index has risen by about 10%, becoming the best performing sector in the European Stoxx 600 index. Before the decline on Friday, the index rose for nine consecutive days, recording the longest consecutive rise since 2018, setting the best annual start in the history of European banking stocks.
Meanwhile, since the end of 2020, all 38 stocks covered by the Stoxx 600 bank index have recorded gains. Among the best performing stocks, the shares of France Industrial Bank Co.Ltd(601166) (Societe Generale SA) nearly doubled, the shares of Spain's Banco de Sabadell SA rose 87%, and the shares of ing groep NV also rose 77%. This situation has not been seen for a long time. European banking stocks have been underperforming for many years due to the low negative bond yields in the eurozone, continued regulatory pressure, money laundering scandals and other factors. The Stoxx 600 bank index has fallen by 45% in the decade to 2020, while the European Stoxx 600 index has increased by about 45% in the same period.
Analysts pointed out that the biggest catalyst behind the beautiful start of European banking stocks this year is the market's expectation that the Federal Reserve and other central banks around the world will tighten monetary policy. Under this expectation, investors threw out bonds on a large scale, causing global bond yields to soar. At the same time, the recovery of the European economy from the covid-19 epidemic will also increase the borrowing of enterprises and consumers. These are good for the banking industry.
Andreas Meyer, chief executive of fountain square asset management, said: "with the Federal Reserve's interest rate hike imminent, stock investors must find out who will benefit the most from the upcoming austerity measures. It seems logical for them to choose banks. Those old banks still have vitality."
Myers also said that the operating environment of European banks has also changed since last year. For example, European banks cut their bad debt provision rate last year, and active financial markets also boosted their trading profits.
will the rally continue?
Analysts expect that the rise in bond yields of major countries will continue to support the good performance of European bank stocks.
In August last year, the yield of 10-year German government bonds rose from - 0.5% to close to 0. Since then, European bank stocks began to go well and walked out of the best annual trend since 2009 in 2021.
In a survey of investors conducted by the financial times last November, half of the respondents said they had increased their holdings of European bank shares, the highest proportion since the relevant record was set in 2003. After entering this year, as the bond market further bet on the aggressive interest rate increase of the Federal Reserve, the yields of national bonds led by US Treasury bonds rebounded rapidly, driving the yield of 10-year German treasury bonds to become positive for the first time in nearly three years on Wednesday (January 19). This trend is expected to continue.
Bank stocks are usually closely related to bond yields. Alastair Ryan, an analyst at Bank of America, estimates that for every 100 basis points increase in the yield of 10-year German bonds, the profit of European banks will increase by about 23 billion euros, that is, 4% of the estimated revenue of European banks in 2022 and 15% of the pre tax profit.
Analysts believe that another factor supporting European bank stocks is their relatively low valuations. Despite the recent rise, the valuation of the European banking sector is still cheap, with a forward P / E ratio of only 8.8 times, less than 10 times. In contrast, the forward P / E ratio of the Stoxx 600 index is 16.8 times, that is, the trading price of bank stocks is 40% lower than the market, close to an all-time low. In contrast, the forward P / E ratio of American peers reached 12.9 times.
The recent research report of Barclays pointed out that the overall outlook of European banks in 2022 is still optimistic because the credit demand of the whole Europe is rising and the stock valuation is still attractive. Niall Gallagher, European equity investment director of GAM investments, also said: "the valuation of European bank stocks at the beginning of this year is still very attractive, the distribution income of stock dividends and stock repurchase is high, and the profit momentum is strong."
Andrew Coombs, an analyst at Citigroup, said that shareholder returns on European bank shares had improved since the expiration of the ECB's dividend and repurchase ban. At present, the forward dividend yield of the banking sector is up to 5%, the second highest among all sectors. Moreover, despite the outbreak, the asset quality of European banks remains stable. He estimated that the return on capital of European banks could increase to 81 billion euros this year. Bank of America predicts that by the end of 2023, the total amount of funds that European banks can distribute to shareholders will reach 134 billion euros.
In addition, the potential integration prospect of European banks is also conducive to European bank stocks. Manish Singh, chief investment officer of crossbridge capital, said that European banks have a lot of excess capital and a stable balance sheet, which may become a catalyst for the integration of European banking industry. In this prospect of integration, he suggested that investors "had better choose the stocks of large banks in European countries, such as Bank of France and Pakistan, because these large banks are the ultimate beneficiaries of mergers and acquisitions".
