It has been a pretty tough 15 years for the main banks in the eurozone.
The bad times have been dire: the 2008 financial crisis, the Greek debt crisis, and now the COVID-19 pandemic. But even the good times haven’t been so good, with lenders in the 27-nation group facing a backdrop of negative interest rates and stagnant local economies. From its 2007 high to 2021 low, the Euro Stoxx SX7E banking index,
collapsed by 89%.
But suddenly there is life in the group led by the French BNP Paribas BNP,
Santander SAN Bank of Spain,
ISP Intesa Sanpaolo from Italy,
and ING INGA from the Netherlands,
thanks to increased bond yields. France’s 10-year yield TMBMKFR-10Y,
now regularly flirts with positive territory, with Goldman Sachs expecting the performance of Germany’s benchmark TMBMKDE-10Y package,
which has been negative for almost two years, could reach zero by the end of the year. Since shortly before the US elections, on October 29, the sector has gained 71%.
So the question is whether this rebound is real or not. There have been other occasions when the sector has seen big bullish movements, especially in 2009, before moving back down.
And there is a compensatory force. Rising bond yields have drawn the ire of the European Central Bank, which, unlike the US Federal Reserve, believes the measures could impede economic recovery. ECB President Christine Lagarde, chief economist Philip Lane and board member Isabel Schnabel have expressed alarm at the increase.
Thursday’s ECB meeting gives Lagarde another chance to speak out against rising bond yields, if not announcing stocks. Analysts say the central bank still has more than enough firepower under the existing authority to resume its bond buying activity under the Pandemic Emergency Purchase Program.
Current performance is around where the ECB has accelerated purchases in the past, says Nick Kounis, head of financial markets research at Dutch bank ABN Amro. “We believe that one more step in the pace of net asset purchases is the first and most obvious call point for the ECB,” he said.
Therefore, an active ECB could jeopardize the incipient recovery of euro area banking stocks.
“They are cheap, the question is whether the style value will continue to hold on a bit and will be helped by a cyclical recovery of European banks. A steeper curve would help, but I suppose the ECB will step in this week to limit this, ”said Sebastien Galy, senior macroeconomic strategist at Nordea Asset Management.
There is more to the eurozone banking history than bond yields. Dividend payments are practically prohibited by the ECB until the end of September, but analysts are now raising expectations for payments, according to data from Morgan Stanley.
And, as Galy mentioned, the valuation is not demanding. According to FactSet, banks in the eurozone trade at 0.6 times book value. Compare that to the US, where SPDR S&P Bank’s KBE ETF,
It has a reserve price of 1.2.