FRANKFURT: This time, it may be more than another false dawn for European banking stocks.
Underperformers among European stock markets over the past decade have seen occasional heat streaks, but with the re-emergence of inflation this year promising the end of an era of near-zero interest rates, the sector is among the biggest winners in 2021.
The Stoxx 600 Banks Index is up 76% from a low in September, its biggest gain since the recovery from the financial crisis. Societe Generale SA, Banco Santander SA and Natwest Group Plc are among the 11 lenders whose shares have more than doubled.
And yet, even after the outbreak, the gauge is still below pre-pandemic levels and stocks remain relatively cheap.
Bond yields are rising, making lending more profitable for banks, and trading desks are benefiting from vibrant financial markets that have been supported by the economic recovery from the pandemic.
“Obviously, financials clearly work in this kind of environment,” said Alan Custis, head of UK equities at Lazard Asset Management LLC.
“Financials still appear to be very cheap compared to their pre-Covid levels and from an absolute point of view, particularly here in the UK.”
Perhaps the most positive indicator for bank stocks right now is inflation, both real and expected, which pushes up long-term interest rates and increases the margin banks can draw on loans. .
Recently, a report showed that the prices paid by American consumers rose more than expected in May and the European Central Bank (ECB) raised its inflation forecast.
Profits are also supporting the recovery, with bank profits for the first three months of the year beating expectations by 40%, according to data compiled by Bloomberg.
“The first quarter earnings season has been the most constructive in a very long time,” analysts at Goldman Sachs Group Inc led by Jernej Omahen wrote in a note last week.
Banks have stopped increasing the amount they set aside for bad debt, and some lenders have even made the decision to release some of those reserves.
The booming investment banking business has also proven to be more sustainable than expected, and lenders with asset management divisions are benefiting from recovering markets and record inflows.
This raises the prospect of juicier dividend payouts and share buybacks. A de facto ban on such returns to shareholders, imposed by the ECB, is expected to be lifted on September 30. – Bloomberg