Jay Powell’s talk of an earlier than planned rate tightening pleased European banks. While they were not in a great shape the week before, they bounced from 22/07 on the idea that any prospect of a steeper rate curve is God sent.
Banks (pink) bounce
Obviously, a Fed rate rise may not be quickly replicated across the pond, but the sector is hardly driven by the idiosyncrasies of its European members. The money is entirely on banks supposedly recovering ‘proper’ lending margins through a ‘proper’ rate curve even if that concept is a fragile one across the universe. A BCP’s Mozambican business is unlikely to share the same operating constraints as say a Swedbank.
The small fry, BCP and Sabadell, led on a 1-week performance (+16% and +12%) but the heavy artillery was not far off with Unicredit up 8% and BNP Paribas up 7%. As of the 29/09 close, 29 banks out of the 39 under AlphaValue’s coverage were on a strong share price momentum. The only bank not playing ball is Standard Chartered.
From a P/Book perspective the sector remains good value at 0.66x for 2021 and marginally below for 2022 (see chart). Expensive territories start at 0.75x, so that leaves a 14% headroom.
Banks still cheap on P/Book
As the pandemic risks have been moved away from banks’ balance sheets to fall into the public domain through central banks’ actions, Banks have recovered their dividend-paying capability which is transcribed by a rising yield at c. 5% even though stock prices have been going up. This paradox is only explained by the fact that forced dividend cuts in 2020 lowered massively the starting point.
Banks 2021 and 2022 dividends
Another way to point out this paradox is to look at the banks’ historical pay-out capability. Banks are the largest dividend contributors in AlphaValue’s coverage. Still, banks 2022 dividends to be paid in 2023 (€47bn) would not even recover the … 2007 high at €55bn.
Banks’ dividend recovery: stopped by COVID-19/Central Banks injunctions
The background of banks’ valuations is thus such that betting on further positive sentiment in a rate-rise scenario does not seem too risky. Clearly, it is a case of buying a sector ETF. For single stocks, consider Barclays, SocGen, ABN, and Santander as sentiment is bound to improve as well for the Spanish/world giant. Risk takers will want to go with BCP.
Acess to AlphaValue’s banks reports: click here