It has been a difficult 15 years for the top banks in the euro area.
The bad times were terrible – the financial crisis of 2008, the debt crisis in Greece and now, the COVID-19 pandemic. But the good times were not so great either, with creditors from the group of 27 nations facing a context of negative interest rates and stagnant local economies. From the 2007 high to the lowest in 2021, the Euro Stoxx SX7E bank index,
collapsed by 89%.
But suddenly there is life in the group led by BNP Paribas BNP from France,
Spain Banco Santander SAN,
Italian ISP Intesa Sanpaolo,
and ING INGA from the Netherlands,
due to rising bond yields. 10-year yield of France TMBMKFR-10Y,
now flirts regularly with positive territory, and Goldman Sachs expects Germany’s TMBMKDE-10Y yield,
which has been negative for almost two years could reach zero by the end of the year. Since the US elections on October 29, the sector has won 71%.
There has just been bad news and more bad news for eurozone banks.
So the question is whether this leap is real or not. There have been other times when the sector has seen large upward movements, especially in 2009, before reversing less.
And there is a compensatory force. Rising bond yields have angered the European Central Bank, which, unlike the US Federal Reserve, believes the moves could hinder economic recovery. ECB President Christine Lagarde, chief economist Philip Lane and board member Isabel Schnabel have expressed alarm at the increase.
Thursday’s ECB meeting gives Lagarde another opportunity to reduce bond yields, if not take action. Analysts say the central bank still has more than enough firepower under existing authority to take over its bond-buying program under the Pandemic Emergency Procurement Program.
The current yield is around where the ECB has accelerated acquisitions in the past, notes Nick Kounis, head of financial markets research at Dutch bank ABN Amro. “We believe that a step in the pace of net asset acquisitions is the first and most obvious point of appeal for the ECB,” he said.
So an active ECB could jeopardize the newborn recovery of euro area bank stocks.
“They are cheap, the question is whether the value of the style will continue to gain some grip and will be helped by a cyclical recovery for European banks. A steeper curve would help, but we assume that the ECB will enter this week to limit this, “said Sebastien Galy, senior macro strategist at Nordea Asset Management.
The story of the euro area bank has more than bond yields. Dividend payments are virtually banned by the ECB until the end of September, but analysts are now raising expectations for payments, according to data from Morgan Stanley.
And, as Galy mentioned, the assessment is not demanding. According to FactSet, euro area banks trade at an accounting value of 0.6 times. Compare this to the US, where SPDR S&P Bank ETF KBE,
has a booking price of 1.2.