Banks Since the Great Recession

Banks accounted for 20% of the European market cap on the eve of the Global Financial Crisis. It took 14 years of slippage to see this figure seemingly bottom out at 7.5%. Banks are defined as 40 European banks, a stable lot, compared with 550 large issuers with a combined market cap of €11Tn.

Banks lose their lustre

Banks accounting for 20% of the European market cap were a reflection of both their ability to ransom their clients and rely on fragile balance sheets to this effect. Shareholders were pleased with the kind of exceptional returns that were destined to end in tears. 

Another way to quantify the same issue is to consider the P/Book: ridiculous returns on thin equity warranted 1.76x in 2006 whilst today the sector is happy to trade at a 0.7x glass ceiling.

Banks P/Book (pink) vs. market (blue)

Now, what about Banks’ earnings?

Banks’ earnings currently account for c.14% of total earnings. This figure used to be 25% or so. But the 14% is way above their percentage of market cap (8%). Below we show the relative erosion of Banks’ earnings next to the expansion of ‘Techs’ in a European context. This is fragile stuff as there are infinite ways to skin the Tech cat. But the conclusion is that what Europe has lost from Banks is hardly made good by the ‘new’ growth sectors. Note that, in 2022, European Banks are likely to post the same earnings as in 2006 (c. €120bn give or take €4bn). If they were to post 2007 ROEs in 2022, their combined earnings would be €250bn. 

Then comes the issue of how much of these earnings reaches investors’ pockets. The following chart shows that, when it is in decent and steady shape, the sector forks out €50bn a year although this figure does not amount to much more than 15% of total dividends. Oils and Miners fall into the same order of magnitude in €bn. These figures do not allow for buy-backs.

Any conclusions?

Earnings and share price rebounds for the banks on the back of rising rates may not last if and when the next step is higher loan losses owing to a recession. A contraction that is not too deep is unlikely to inflict any real damage on the dividend-paying capabilities of Banks while their poor ROEs are above all a reflection of their high level of loss-absorbing capital. Ergo dividends may well be safe. 

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