After being heavily attacked by the markets this year, many are promising a rebound in the financial sector thanks to the hike in key rates. Too simplistic reasoning?
The signal from Frankfurt pushed up the prices of the main listed banks of the Old Continent. In a few sessions, the recovery by the European Central Bank (ECB) of its key rates of 75 basis points erased months of stock market losses for most of them. Bnp Paribas
And General Company
all three gained around 10% in just a few sessions. The rebound was even higher than 14% for the Italian Intesa Sanpaolo
and about 13% for KBC
Bel 20 member.
Faced with this new momentum, investors have an interest in reviewing their copy on bank stocks? For Frank Vrankenchief strategist Edmond de Rothschild, “European banks always have a rating that is low“. If this point can make them attractive, the short-term trend has faded. The area
rest down by more than 8% this year in the Stoxx 600 index.
What makes investors happy
The renewed interest of the markets for banks is now explained by the recent decisions of the ECB on interest rates all in positive territory. He who defines the interests they receive in exchange for their deposits day by day at the central bank, the deposit rateis now at 0.75%after staying negative for more than eight years. The banks are happy about it, as few of them could pass these negative rates on their clients, if not on large fortunes. This was the case, for example, in Belgium with ING Where is it Belfio until September 1st
While of further rate hikes are expected in the coming months to combat uncontrolled inflation, Bank of America analysts estimate that with nearly 8 trillion deposits with the ECB, European banks “should reach 88 billion euros in net profitwith an increase in the effective rate to 2.5% “by the second quarter of 2023. A real boon, which should also benefit shareholders. Several financial institutions have already announced this which would accelerate the redistribution of profits.
UBS, the Swiss exception?
This is the case for example by UBS
who on Tuesday announced a 10% increase in its dividend subject to acceptance by the general meeting to be held in 2023. Is buybacks of own shareswhich allow the value of securities to be increased by reducing their number, should now reach $ 5 billion in total for 2022while since the beginning of the year 4.1 billion has already been assigned to shareholders.
“The short-term rate remains below the long-term rate. The money available to banks can therefore be re-channeled through long-term loans, with a margin.”
The case of UBS is instead particularbecause the group has canceled its $ 1.4 billion acquisition of WealthFront earlier this monthan asset manager specializing in algorithmic trading, which freed up significant cash. Since January, the world number 1 in wealth management dropped only 3% on the Zurich Stock Exchange.
But the European financial institutions do another advantage over their American equivalents. The yield curve is not inverted here, notes Frank Vranken. “The short-term rate remains below the long-term rate. The money available to banks can then be re-channeled through long-term loans, with a margin. “US banks like JPMorgan
o Bank of America
are also closely linked to the financial marketsand so at risk when these are at half-auction, like this year.
Future trajectories that vary
“Banks will have to set aside a lot of reserves to potentially respond to a loan default.”
Another factor also continues to weigh on prices: the prospect of a recession. “Banks will have to set aside a lot of reserves to respond, if necessary, to the non-repayment of the loans“, observes Frank Vranken. The most at risk are for example those who lend to industry, while many companies are now limiting production due to rising energy costs. “UBS should do better because a large part of its income is tied to private banking. “
The broad diversification of the assets of Belgian banks, sensitive to the macroeconomic context, limits Frank Vranken’s optimism about them. In the industry as a whole, he continues to see opportunities. “In the next future, it all obviously depends on the severity of a recession. But for those who can afford to have a long-term view, this is clear European banks are very cheap and there is potential. “