The accepted wisdom that European banking is an unmitigated basket case has become even more entrenched over the past year. While most banks in the region traded well below book value a year ago, since then their shares have fallen by about a third, and despite a brief rally early in early 2019, they have since fallen back to roughly the level of late 2018.
It is easy to see why.
Negative central bank interest rates bring the fundamentals of banking into question and erode the time value of money. The likelihood of higher base rates in Europe has become more remote while money-laundering scandals and fines have hit even the well-performing Nordic exceptions.
No wonder there is an increasing tendency to paint all European banks with the same brush – unless there is a big and blindingly obvious reason to do otherwise (such as Asia, for HSBC).
Sentiment will always move markets, but in Europe’s case perceptions rather than fundamentals are more influential because of the underdevelopment of its capital markets. This is a problem for bank business models, as it makes their balance sheets less dynamic, and it makes European issuers more reliant on American equity investors, who are more likely to look at the continent as a whole.