European bank shares have now regained almost all their precipitous losses of early 2020. They’ve been roughly flat over the past six months. But many equity analysts are still arguing for further gains. Does this mean the sector, still trading at a discount to book value of about 20% in late-September, is in a better position than it was before the pandemic?
Perhaps not. Much of the optimism, after all, is to do with dividend yields and share buybacks, after the European Central Bank confirmed in July that it was finally lifting its early-2020 dividend ban. There’s also a vast amount of relief, or complacency, about losses on loans to small businesses hooked on Covid-era state support measures.
Thanks to lower provisioning and better-than-expected revenues in areas such as wealth management – and, for some banks, capital markets activity – the sector’s results have now beaten analyst consensus for five consecutive quarters, according to Citi. Almost all banks are doing better than expected in terms of their financial results.
Analysts at Bank of America now call European banking “a confident and expansive sector”, with higher capital heralding higher revenue growth, as well as a capital-distribution bonanza.