May 14, 2022
  • May 14, 2022

Fed rate view clears outlook for European bank stocks

By on January 6, 2022 0

The headquarters of the European Central Bank (ECB) is seen at sunset in Frankfurt, Germany on January 5, 2022. REUTERS / Kai Pfaffenbach

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  • European bank stocks at their highest for more than three years
  • Bank shares jumped 70% in one year until November 2021
  • Equities benefit from a strong correlation between bond yields
  • Evaluated at 8.8x forward earnings, US banks at 12.9x

LONDON, Jan.6 (Reuters) – Shares of European banks rose again above a three-year high on Thursday, boosted by a signal from the US Federal Reserve that it may hike rates faster than expected, which lifted some of the gloom of December that hung over the sector.

European bank stocks benefited from a sharp rise in borrowing costs on Thursday after the minutes of a December Fed meeting released on Wednesday showed officials may be keen to raise interest rates earlier provided that. Read more

The European banking index (.SX7P) jumped 1% to its highest level since October 2018, significantly outperforming the pan-European index (.STOXX) which fell 1.3%.

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Bank profitability generally increases when central banks raise interest rates. But only a move by the European Central Bank (ECB), which is considered the last major central bank to raise interest rates, would generate a significant increase in profits for banks in the region, Max Anderl, portfolio manager at UBS Asset Management says of the reaction.

Anderl said the rally in early 2022 could still have legs, with banks likely to benefit from the “shift from growth to value rather than a real improvement in underlying fundamentals.”

Standard Chartered (STAN.L) climbed around 4% to its highest level in two months, Deutsche Bank (DBKGn.DE) rose 3% to a seven-month high, while Spain’s Caixabank (CABK .MC) gained 2.5% to its highest level since the end of October.

European bank stocks lost momentum in December after climbing 70% in one year until November 2021, more than double the 30% growth of the STOXX 600 index as banks reset their dividends and benefited from the rebound in European growth.

The best performing banks sectorally in Europe

And with a resurgence of COVID-19 cases, growth expectations for Europe’s financial sector in the last quarter of 2021 are the lowest of any STOXX 600 industry.

Refinitiv data showed the financial sector has the lowest expected year-over-year revenue growth rate at 3.5%, compared to the industry’s 64.2% growth rate. utilities and an estimated overall revenue growth rate of 17.2% for the STOXX 600.

Bank stocks are generally highly correlated with bond yields, and BofA analysts are banking on € 23 billion in revenue for European banks for a 100 basis point rise in yield curves. This would represent 4% of the industry’s estimated revenue for 2022 and 15% of pre-tax profit.

Another factor supporting European bank stocks is their relatively low valuation. The European banking sector is trading at 8.8 times forward earnings. This compares to 16.8 times for the benchmark STOXX 600 and 12.9 times for the US banking sector.

Barclays analysts said the outlook for banks to 2022 remains broadly positive as credit demand increases across Europe and stock valuations remain attractive.

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European vs American banks

Reporting by Joice Alves; Editing by Saikat Chatterjee and Alexander Smith

Our Standards: Thomson Reuters Trust Principles.