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European bank shares rose to their highest levels in six years after lenders promised record returns to shareholders and profits rose thanks to higher interest rates.
The Stoxx Europe 600 banks index hit a six-year high on Thursday, the last trading day before Easter in most markets, and is up 34 percent over the past year. According to analysts at Barclays, banks on the continent are outperforming their US rivals for the first time in more than a decade in return on equity terms.
“The fundamentals of European banks look stronger than ever,” said Emmanuel Cao, the bank's head of European equity strategy.
The Stoxx rise coincides with strong fourth-quarter results for UniCredit, Santander and Lloyds Banking Group.
Shares in UBS, which last year took over collapsed rival Credit Suisse in a deal that wiped out $17 billion in debt, have performed particularly well, rising 46 percent over the past 12 months to their highest level since March. (March) 2008. Italian banks UniCredit and Intesa Sanpaolo reach 13- and nine-year highs, respectively.
Despite weak deal-making activity and lower demand for loans, 2023 was one of the most profitable years for European banks due to higher interest rates.
As a result, the average return on equity among European banks rose to 13 percent, Barclays analysts said.
However, if the European Central Bank and the Bank of England start cutting interest rates later this year, as expected, “net interest income” – the difference between the interest banks pay on deposits and receive on loans and the main source of their profits – is likely to fall. He is under pressure.
Rafael Cuena, head of French, Italian and Portuguese banks at Fitch Ratings, said the timing and pace of interest rate cuts will impact banks' performance in 2024. “The pressure on net interest margins could increase in 2025 as interest rates fall further.”
But he also noted that trading activity would increase and loan impairment charges would fall if economic growth prospects improved and that this would support banks' profitability.
Despite their strong recent performance, European banks remain undervalued compared to their counterparts in the United States, which have recorded faster and more profitable growth since the financial crisis.
As part of efforts to address this valuation gap and win back investors spooked by dividend bans and windfall taxes since the pandemic, European lenders have promised to return more than €120 billion to shareholders this year, through €74 billion in dividends and €47 billion in equity. . Buy back.
This represents a 54 percent increase on capital returns the previous year and far higher than every year since at least 2007, according to figures compiled by UBS.
One of the biggest distribution announcements this year was from UniCredit, whose shares have more than doubled over the past year. It has promised to pay €8.6 billion – its entire 2023 dividend – to investors.
Wells Fargo analyst Mike Mayo said it makes sense for banks with good levels of capital to return money to shareholders when profits are high.
“Do these banks have enough capital to face a severe adverse scenario? Only the answer to this question determines whether they should buy back shares or not,” he said.
