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Analysis boom in European bank earnings suggests rally with legs

By Joice Alves

LONDON (Reuters) – Europe’s banks, which enjoyed an excellent fourth quarter that saw earnings growth surge to 15-year highs, still look cheap and may have more room for a rally.

The economic data was not as bad as many had feared. The eurozone is expected to stagnate rather than contract while borrowing costs continue to rise.

STOXX 600 financials are expected to have the highest earnings growth rate of any sector in the final quarter of 2022 and brokers and investors have taken note and responded with a series of sector upgrades and inflows.

The STOXX banking index is up almost 20% so far in 2023 to a five-year high and is a contender for the best-performing sector along with auto, travel and leisure stocks.

UniCredit’s shares are up a whopping 35% this year, with the Italian lender mobilizing investors with a pledge to repay 5.25 billion euros ($5.58 billion) of its 2022 earnings after a record quarterly profit.

The European Central Bank’s campaign to raise interest rates while struggling to bring inflation back to its 2% target has been a boon for euro-zone lenders.

Some of the expectations for higher ECB rates have already translated into higher stock prices, but analyst-flag stocks still look cheap compared to their historical averages.

“A lot of the good news about how yields have risen and the relief that a recession is not imminent is fully reflected in their prices,” said Hani Redha, global multi-asset portfolio manager at PineBridge, which reported 143.1 Billions of dollars under management.

But “this is a sector that has been lagging behind for a long, long time, particularly in Europe…they (banks) aren’t necessarily that expensive on a secular basis,” he added.

European bank stocks are trading at just 0.73 times price-to-book, according to Refinitiv Datastream. This is below their 20-year moving average of closer to 1.0 and much cheaper than their US counterparts, which trade at around 1.1 times.

GRAPHIC: Set to Value https://www.reuters.com/graphics/GLOBAL-MARKETS/znpnbxewzpl/chart.png

As the ECB lags somewhat behind central banks like the UK and US, which started raising interest rates months earlier, equity strategists said there was potential for more bank earnings hikes in the region.

Meanwhile, eurozone lenders’ earnings per share (EPS) have risen to their highest level since the global financial crisis of 2008.

The bloc’s largest bank, BNP Paribas, raised its 2025 targets and announced buybacks, even as it missed expectations in the fourth quarter. Credit Agricole, France’s second-biggest listed bank, reported better-than-expected profit on lower provisions for bad loans and a strong performance in its investment banking unit.

PROFIT BOOM

According to data from Refinitiv I/B/E/S, earnings for the STOXX 600 Financials are expected to have risen 44.7% year over year to €32.7 billion in the fourth quarter, compared with a 10% decline in the third quarter.

This is the largest increase of any sector and the STOXX 600 as a whole is expected to grow by 11.3%.

Morgan Stanley estimates that nearly half of European financials will beat earnings per share estimates this earnings season.

“In Europe, earnings increases continue and we believe there is still some potential for more increases, particularly if loan loss provisions are revised downwards later in the year,” said Claudia Von Turk, equity analyst at Lombard Odier.

In the United States, where the interest rate cycle is more advanced, there is currently less potential for earnings hikes, she said.

But higher interest rates will eventually freeze bank revenues.

Europe’s largest bank, HSBC, reported a 92% increase in quarterly profit but issued a cautious outlook.

Societe Generale, France’s third-biggest bank, and Spain’s Santander, the second-biggest lender in the eurozone, both beat expectations but bolstered their buffers against more uncertain economic conditions.

But for now, as the risk of a deep recession in the eurozone recedes and business activity improves as energy prices fall and China reopens, “there is still room for banks,” said Emmanuel Cau, Barclays’ head of equity strategy.

GRAPH: Eurozone Bank Earnings https://fingfx.thomsonreuters.com/gfx/mkt/gdpzqmrlavw/Earnings%20euro%20zone%20banks.png

($1 = 0.9408 euros)

(Reporting by Joice Alves and additional reporting by Samuel Indyk in London; Editing by Amanda Cooper and Sharon Singleton)

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