European Banks earnings expectations are being revised higher for the 18th quarter in a row
- No bank missed on the bottom-line.
- P&L strength was broad-based, driven by commissions, NII, provisions and costs.
- Year-to-date, 2 year forward EPS expectations are up by c. 15%.
Despite a strong performance on the 2024 stock market (+27.21% vs 9.29% for the STOXX Europe 600), political and macro volatility have weighed on the sector
- Weak PMIs, tariffs threats, political instability in France and Germany, etc. have undermined appetite for European risk.
- The valuation gap with US banks has reached an all-time high: the KBW trades at c.13.5x earnings, close to its post-GFC highs, while the SX7P trades at c. 6.5x, close to its post-GFC lows.
- The discount to the broader European market has widened to c. 50%.
- Multiples are back at the lows of the year.
We think bank shares will perform well in 2025
- On the earnings front, NII sensitivity to interest rates has been significantly reduced, commissions will be supported by better flows, costs will be kept in check with digitization and M&A, and provisions may benefit from overlay releases
- 80%+ payouts will be supported by SRTs, lower capital headwinds, large buffers to minima.
- All-in-all, we expect the sector ROE to stay in the 11.5%-12% band, with an average Basel IV CET1 of 14%.
- Even if multiples stay unchanged at 6.5x, the total return should be around 15%.
- Rerating is subject to the market clearing (geo)political uncertainties and getting confidence on the policy landing rate.
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