Fundamentals on the upside trend
- CET1 at one of its highest levels in European Banks history
- Return On Equity back > Cost of Equity
- Asset quality benefits from several tailwinds (precautionary provisions, COVID guarantees, potential rate cuts,…)
- Positive outlook for 2024 European financials rating trends, especially on banks in the periphery
Valuations & carry
- Generous spreads pick up on banks and especially AT1s (150-200bps) compared to corporates of the same rating bucket
- Rating upgrade should support spread tightening
- Legacy bonds should benefit from the recent EBA decisions
- Following a quasi 2023 “clean sheet” despite the CS event, AT1 calls does not raise any specific concern for Axiom
Falling rates: a risk for banks?
- Falling rates amidst uncertain geopolitical environment should not be a concern unless we go back to negative interest rates
- Unlike US or Japan, interest rate risk in EU banks is monitored by regulators and largely hedged by EU banks
- Increased transparency from IFRS 9 allows to better assess macro impact of scenario on banks’ P&L
- The sector’s 14 years turnaround combined with the strong profitability of the sector makes “weakest link syndrome” unlikely