Europe | Monetary Policy & Inflation
European Banks to Outperform Into the Tightening
- By Henry Occleston
- 6 min read
Summary
- European banks verge on a new paradigm of higher growth and profitability after post-GFC underperformance.
- The Eurozone GDP and labour market have returned to pre-Covid strength, and loan demand should be strong ahead.
- With healthy capital levels and a solid deposit base, European banks are positioned to meet this demand.
- The ECB’s policy path paves the way for bear-steepening rates curves ahead. This will support bank lending margins.
- The fallout from Russia and Ukraine will hit names idiosyncratically. The risks to the overall sector look relatively contained.
Market Implications
- On a price basis, European banks have room to catch up with the rest of European equities.
- Post-GFC highs in RoE allow for a far higher dividend yield than broad European equities can deliver.
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Are there any countries in the EU/Europe where you expect banks to outperform in particular? Or is the sector quite strong as a whole?
Hi Erin,
That’s a good question. Since Austrian, Italian and French banks are most exposed to Russia, so far that’s where the most weakness has generally been. So if there was to be a quick resolution to the crisis, then that could be seen as an area of outperformance. For now, however, this seems some way off, and it seems unlikely that, regardless of the resolution, EU/Russia relations will return to where they were pre-invasion.
More broadly, Southern European banks (Italy and Spain) have tended to suffer from worries around widening sovereign spreads (i.e. the underperformance of Italian, Spanish bonds vs German). With sovereign spreads looking relatively well anchored (supported by potential future EU joint spending), you could expect the moves there to be relatively higher beta, and therefore outperformance in these regions into the broader sector’s recovery.