I – A must-have market segment
Within the universe of listed European equities, banks represent:
- 8.5% of market capitalization,
- 17% of profits,
- 20% of distributions (sum of dividends and share buybacks),
- 25% of trading volumes on stock markets.
A largely normalized post-financial-crisis world:
- Significantly reduced dilution risk after a 3-fold increase in own funds since 2008,
- Reduced earnings volatility due to a sharp improvement in the balance sheet’s quality (nonperforming loans, counterparty risk, customer profiles, transparency, standardization of controls across Europe),
- Normalization of the interest-rate environment that is positive for the sector in both the short and long term,
- Stabilization of regulations,
- Increasing barriers to entry (cost of capital and MREL, IT systems/information management, scale effects).
II - Record yields as we wait for sentiment to return to the sector
An exceptional integrated yield cushion supported by sustainably higher profitability and a strong equity surplus:
- Record price/earnings ratio of 17% (risk premium of 14% above 5-year risk-free rates, compared with 5% for the rest of the European equity market): at unchanged price/book value, shareholder returns are expected to reach 17% per annum,
- Exceptional distributions: a payout ratio via dividends and share buybacks of over 60%, generating a cash yield of 11%,
- Possibility of increasing the payout rate in 2024 as excess capital accumulates,
- In the short term, the sector is still benefiting from analyst upgrades (upgrade vs. downgrade ratio of 1.4x), while the rest of the market is tending towards downgrades (ratio of 0.8x).
We expect the current record results to be maintained or even improved as:
- The increase in the cost of deposits will be offset in aggregate by higher yields on assets and hedges, despite the inverted yield curve,
- Wage pressures remain moderate, while regulatory and IT costs are expected to decrease slightly,
- Prudence provisions will largely offset the increase in defaults should the expected decline in the job market materialize,
- The negative impact of monetary easing would be partly offset by a rebound in management and capital market fees.
Below, you'll find further details in our document.