Tuesday, January 18, 2022

The view of Fed rates sheds light on the outlook for European bank stocks

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* Securities of European banks are higher for more than three years

* Shares of banks increased by 70% until November 2021

* Securities benefit from a strong correlation of bond yields

* 8.8x forward yield, 12.9x price for U.S. banks

LONDON, Jan. 6 () – Shares of European banks rose to a three-year high on Thursday, boosted by a signal from the U.S. Federal Reserve that it could raise rates faster than expected, which eased the December darkness in the sector.

European bank stocks benefited from a sharp rise in borrowing costs on Thursday after minutes of the December Fed meeting released on Wednesday showed officials wanting to raise interest rates faster than expected.

The European Banks Index rose 1 percent, its highest level since October 2018, and significantly surpassed the pan-European index, which fell 1.3 percent.

When central banks raise interest rates, banks’ profitability usually increases. But the European Central Bank’s (ECB) move, seen as the last major central bank to raise interest rates, will only significantly increase the income of banks in the region, said Max Anderl, UBS Asset Management portfolio manager, in response.

Anderl said the rally in early 2022 could still have a foothold, as banks could benefit from a “transition from growth to value rather than a real improvement in fundamentals”.

Standard Chartered rose about 4% to a two-month high, Deutsche Bank rose 3% to a seven-month high, and Spain’s Caixabank rose 2.5% to its highest level since late October.

After rising 70 percent in the year to November 2021, European bank equities lost ground in December, more than double the 30 percent increase in the STOXX 600 index as banks restored dividends and rose from Europe’s growth rate.

And with the recovery of COVID-19 cases, growth expectations for the European financial sector in the last quarter of 2021 are the weakest of all STOXX 600 sectors.

Refinitive data showed that the financial sector had the lowest expected annual revenue of 3.5% against the utility growth rate of 64.2% and the overall growth rate of 17.2% for the STOXX 600 as a whole. has a growth rate.

Bank shares are generally strongly tied to bond yields, and BofA analysts expect earnings of 23 billion euros for European banks to move up 100 basis points on the yield curve. This represents 4 per cent of industrial revenue calculated for 2022 and 15 per cent of pre-tax profit.

Another factor supporting European bank stocks is their relatively low price. The European banking sector is trading at 8.8 times its forward earnings. This is 16.8 times more for the STOXX 600 benchmark and 12.9 times more for the U.S. banking sector.

Barclays analysts note that the banks ’forecast for 2022 remains generally positive as demand for credit across Europe continues to grow and stock valuations are still attractive.

Interview with Joyce Alves; The tour was edited by Chatterjee and Alexander Smith

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