European Banks earnings expectations are being revised higher for the 17th quarter in a row
- Net interest margin and costs expectations have stabilized. Volumes and fees are driving upgrades
- The UK and Eastern and Southern Europe have had the most positive revisions
- Société Générale has suffered from weak retail revenues, while Commerzbank was penalized by wage negotiations
Multiples remain stuck at c. 7x earnings
- H1 rerating was partly reversed during the summer. The sector is trading just below 7x vs. 7.5x in May
- The discount to the broader market remains very high at 45%, vs. pre-Covid levels of 25%-30%
- The sector is trading at a ~70% gap to its fair value (Gordon-Shapiro DDM)
- This persistent gap could be explained by “peak earnings” sentiment and fears of external interventions (special taxes, restrictions on distributions, etc.)
The carry is there, but the bull case needs a catalyst
- Banks are still the leading sector in terms of distribution with a total cash yield
of c. 11% - Economic growth rebound following rate cuts could be a strong catalyst for
European Banks stock rerating : steeper curves driving further NII growth, higher volume and fee growth expectations, lower political risk - In the meantime, we are paid to wait with a c. 15% carry (of which 11% in cash and 4% in book value accretion)
Financial credit highlights
- Financial credit has benefited from upgrades and spreads tightening
- Though current spreads are towards the lower end of their historic range, the average credit quality is at its highest
- The CMDI package could impact senior spreads
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