Since 1st of January 2025, the banking sector has continued its momentum from previous years, posting another spectacular performance of +32% for the European banking index, compared with +8% for the STOXX Europe 600.
Since COVID (31st of March 2020), the STOXX Banks Europe index has gained 284.5%, compared with 93.6% for the STOXX Europe 600.
However, valuations have not changed, remaining well below their historical average and showing very significant discounts compared to the rest of the market (41%) and the US banking sector (nearly 50%, even though the ROE of European banks has risen above that of US banks for the first time since 2010).
How can this be explained?
The sector has seen spectacular growth in revenues and profits: since 2022, earnings per share have tripled, while multiples have not had time to adjust.
The second half of the year has just ended. What can we expect?
[Translate to English:] Les données fondamentales du secteur bancaire européen nous font anticiper de bons résultats.
According to the latest ECB data, deposit volumes continue to rise and the split between term deposits and sight deposits continues to improve. Remuneration on term deposits continues to fall. This leads us to expect an improvement in deposit margins and therefore in net interest margins.
Furthermore, at its last meeting, the ECB indicated that there was no longer any urgency to lower rates further. They should stabilise between 1.5% and 2%, which is a very favourable range for lending volumes and facilitates the management of term deposit costs. This level also remains relatively accommodative and should reduce the risk of credit deterioration.
Finally, the amortisation of loan portfolios originated during the era of negative interest rates is beginning to have an effect: the proportion of low-margin loans is gradually declining, which will continue to improve net interest margins.
Market activities also appear to have benefited from sustained trading volumes and volatility, leading us to anticipate high commission income.
M&A activity, however, remains sluggish.
The sector should therefore deliver good results, with a return on equity that we expect to exceed 11%.
What is the current investor positioning in the European banking sector?
There is an amusing paradox: when we look at investor surveys, participants say they are overweight in the European banking sector, while public portfolio data indicate that they are currently slightly underweight relative to their benchmarks. In a more favourable macroeconomic and political environment for Europe, the European banking sector should benefit.
Basel IV came into force at the beginning of the year. Are there any regulatory risks on the horizon?
No, all the bad regulatory news are already priced in and there are good news ahead: the implementation of certain measures has been postponed and may not come into force, the capital markets union seems to be progressing, etc.
What returns can we expect from the European banking sector today?
The sector is currently overcapitalised (core capital >14.4%) and the profit momentum is enabling banks to offer high cash returns. Anticipated dividends and announced share buybacks point to a return of 11-12% for 2025 and 2026.
The investment thesis for the European banking sector therefore remains very attractive!