It’s been a pretty difficult 15 years for the leading banks in the eurozone.
The bad times have been terrible – the 2008 financial crisis, the Greek debt crisis, and now the COVID-19 pandemic. But even the good times weren’t so good as lenders in the 27-nation group were faced with negative interest rates and stagnating local economies. From its high in 2007 to its low in 2021, the Euro Stoxx banking index has
SX7E, -1.38%
collapsed by 89%.
But suddenly there is life in the group led by France’s BNP Paribas
BNP, -1.24%,
Spain’s Banco Santander
SAN, -2.65%,
Italy’s Intesa Sanpaolo
ISP, + 0.07%
and the Dutch ING
INGA, -0.59%,
thanks to the rise in bond yields. France’s 10 year return
TMBMKFR-10Y, -0.056%
Now he’s regularly flirting with positive territory, and Goldman Sachs is expecting the German benchmark Bund yield
TMBMKDE-10Y, -0.298%
that has been negative for almost two years could reach zero by the end of the year. Since just before the US election on October 29th, the sector has gained 71%.
It was all bad news and more bad news for banks in the euro zone.
So the question is whether or not this jump is real. There have been other times when the sector has seen big moves up, especially in 2009 before moving back down again.
And there is an opposing force. The rise in bond yields has drawn the ire of the European Central Bank, which, unlike the US Federal Reserve, believes the measures could hinder economic recovery. ECB President Christine Lagarde, Chief Economist Philip Lane and Board Member Isabel Schnabel have all expressed concern about the rise.
Thursday’s ECB meeting gives Lagarde another opportunity to talk, if not announce, action on the rise in bond yields. According to analysts, the central bank still has more than enough firepower to resume its bond-buying activities under the Pandemic Emergency Purchase Program.
The current rate of return is where the ECB has accelerated purchases in the past, notes Nick Kounis, head of financial market research at Dutch bank ABN Amro. “We believe that accelerating the purchase of net asset values is the first and most obvious stop for the ECB,” he said.
An active ECB could therefore jeopardize the emerging recovery in euro area banking stocks.
“They are cheap, the question is whether the style value will continue to get under control and will be supported by a cyclical recovery of the European banks. A steeper curve would help, but the ECB will take a decision this week to limit that, ”said Sebastien Galy, senior macro strategist at Nordea Asset Management.
There is more to the eurozone banking history than bond yields. Dividend payments will be virtually banned by the ECB until the end of September, but analysts are now raising expectations for payouts, according to Morgan Stanley.
And as Galy mentioned, the evaluation is not demanding. According to FactSet, banks in the euro zone trade at 0.6 times book value. Compare that to the US, where the SPDR S&P Bank ETF
CFU, -1.54%
has a book price of 1.2.
