defying market sentiment with unparalleled yields and fundamentals
European Banks 2023-2024:
In an environment of sticky inflation, recessionary fears and more recently geopolitical tensions, investors have turned away from risky assets to money market funds and other “recession-proof assets”. Additionally, we have seen outflows of £5.5bn in UK Funds in October highlighting very well the current investor mood.
True, 3% to 5% almost risk-free yields offered by government bonds may indeed seem appealing in this context but among all sectors that reported their Q3 2023 results, European Banks, offer a solid alternative with a combination of outstanding fundamentals and currently unparalleled yields across the capital structure.
Looking forward, Central Banks in US, EU and the UK, seem to have reached an inflection point in this rate cycle. Investors are expecting rate cuts or at least a status quo. Appealing yields on non-risky assets may substantially diminish sooner rather than later. In that context, asset rotation may become much more appealing for investors. We believe that whether rates will be cut or not, the combination of European banks’ fundamentals and valuations offers a unique risk/reward allocation for both equity and credit portfolios in 2024.
European Banks: one of the only sectors benefitting from upgrades on both credit and equity following Q3 2023 reporting
European banks are exhibiting the soundest metrics since the GFC, regulation has profoundly reduced the procyclicality of their business model leaving risky market shares to private credit lenders. The new rates cycle has helped restoring double digit returns on equity. Balance sheets are still run with precautionary provisions inherited from the COVID period.
Capital and Non-Performing Loans (NPLs)
Bank’s fundamentals have dramatically changed over the last decade. Capital has gone up and nonperforming loans have decreased to their lowest level since the GFC as shown below.
Below, you'll find further details in our document.