Strong beats and ambitious targets
- A strong set of results with an average PPOP beat of 5% and 2025/2026 consensus earnings up 3/4%
- Fees and Trading (+5% QoQ, +4% above consensus) drove top line beats.
- The NII outlook is still progressing, with an average revision of 1%.
- NII was strong in the UK and the Nordics (+1%-3% QoQ) but started to roll-over in the periphery (-1% QoQ).
- We have seen a material increase in medium term targets with several banks aiming for >15% RoTE in 2026/2027.
- Some RoTE targets are starting to look ambitious: BAMI >24%, BoI >17%, CBK >15%, Unicaja >14%.
An unexpected combination of multiple bullish catalysts
- US investors diversifying away from US names in response to the uncertainties of Donald Trump's policy.
- Hope for an end to the Ukrainian conflict and a display of European cohesion against the Trump administration.
Stabilization in manufacturing, better economic surprises in Europe vs. the RoW. - A massive increase in fiscal spending in Germany, which, by driving up long-term rates, has overshadowed the risks of a return to negative rates and steepened the yield curve.
The sector experienced one of the fastest re-ratings ever recorded in the first quarter of 2025
- Cheaper Eurozone names such as Societe Generale, Santander or BBVA benefited the most from the compression in risk premia. Higher quality names such as DNB, SEB, KBC or Credit Agricole underperformed.
- The price-to-book of the sector is now above 1.0x and has reached its highest post-GFC level, signalling that the market is confident that banks can sustainably earn their cost of capital.
- However, the sector is still trading on 8.5x P/E 2025E, a 35% discount to the wider market, so it is difficult to argue that it is expensive.
- No one knows whether this re-rating will continue, but in the meantime, the sector continues to offer a cash yield (dividends + share buybacks) of 9% per year over the next three years, along with prospects for revenue and earnings growth.
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