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. “Revenue growth is back,” they recently proclaimed, saying €160 billion of capital could be put to work amid a recovering consumer loan market and mortgage boom.
Even the habitually bearish analysts at Berenberg argue investor consensus is not properly capturing the dividend and share buy-back plans of European banks over the next 12 months, especially when it concerns higher-capitalized banks. “We still think the sector has legs,” added a recent report from Morgan Stanley, pointing to revenues, capital distributions, and cost discipline.
Same old problems
However, one financials-focused City hedge fund that Euromoney speaks to says that, in contrast to a few months ago, his firm is now short or neutral on all big European banks, because the dividends rally has already played out. The sector still faces the same old problems as pre-Covid – or worse, as the demise of banks’ branch network advantage has accelerated, while negative interest rates are even more entrenched.
The dividend ban has helped Eurozone banks bolster their capital, while supervisors have shown a greater degree of flexibility in areas like credit-loss provisioning than before. But the ECB has made it clear banks must be careful when it comes to pay-outs, particularly in cases where large volumes of loans remain subject to moratoria, and for good reason.
Investors are worried there’ll be another dividend ban next time there’s a rumble of trouble – Covid having underlined how little regard the ECB has for bank investors
Bankers complain about how the opacity of individual banks’ effective capital requirements in Europe limits their freedom on what they can do with their capital, compared to US banks. One bank chief financial officer says investors are worried there’ll be another dividend ban next time there’s a rumble of trouble – Covid having underlined how little regard the ECB has for bank investors.
It’s not all the supervisors’ fault, though. Except for the highly idiosyncratic case of Banca Monte dei Paschi di Siena, consolidation has petered out and there was never an important deal in Germany, which arguably remains the sector’s least-attractive country.
Meanwhile, some worry that the relatively greater success during the pandemic of banks with bigger capital markets businesses will mean costs in those divisions start to creep up again, with half-completed investment bank restructuring plans getting diluted. That’s a concern at Deutsche Bank.
There are also questions, again, about why Barclays is trying to crack equity capital markets in continental Europe.
If António Horta-Osório’s arrival at Credit Suisse – after the Archegos collapse – were to lead to an exit from prime brokerage at the Swiss firm, that could be an important symbol for how European banks will really do more to recognise their limits and manage their risks in the 2020s. So far, however, that hasn’t happened.
