It’s been a pretty tough 15 years for major eurozone banks.
The bad times have been horrible: the financial crisis of 2008, the Greek debt and now the COVID-19 pandemic. But even the good times have not been so fantastic, as lenders from the grouping of 27 countries face a backdrop of negative interest rates and stagnant local economies. From the maximum of 2007 to the minimum of 2021, the banking index Euro Stoxx SX7E,
collapsed by 89%.
But suddenly there is life in the group led by the French BNP Paribas BNP,
Spanish SAN of the Banco Santander,
ISP Intesa Sanpaolo of Italy,
and ING INGA of the Netherlands,
thanks to the increase in bond yields. 10 years performance of France TMBMKFR-10Y,
now flirts regularly with positive territory, and Goldman Sachs expects German performance of TMBMKDE-10Y,
which has been negative for almost two years, could reach zero by the end of the year. Just before the US election on October 29, the sector gained 71%.
They have just been bad news and more bad news for eurozone banks.
So the question is whether this bounce is real or not. There have been other times when the sector has experienced large upward movements, especially in 2009, before reversing downwards.
And there is a compensatory force. Rising bond yields have angered the European Central Bank, which, unlike the US Federal Reserve, believes moves could hinder economic recovery. ECB President Christine Lagarde, chief economist Philip Lane and board member Isabel Schnabel have been alarmed by the rise.
Thursday’s ECB meeting gives Lagarde another opportunity to slow the rise in bond yields, if not announce an action. Analysts say the central bank still has more than enough firepower under existing authority to pick up its bond-buying activity under the Pandemic Emergency Purchase Program.
Current performance is around where the ECB has accelerated purchases in the past, notes Nick Kounis, head of financial markets research at Dutch bank ABN Amro. “We believe that one more step in the pace of net asset purchases is the first and most obvious point of call for the ECB,” he said.
Therefore, an active ECB could jeopardize the incipient recovery of euro area banking stocks.
“They are cheap, the question is whether the value of the style will continue to gain some influence and will be helped by a cyclical recovery for European banks. A sharper curve would help, but supposedly the ECB will intervene this week to end it.” said Sebastien Galy, senior macro strategist at Nordea Asset Management.
The banking history of the eurozone has more to do with bond yields. Dividend payments are virtually banned by the ECB until the end of September, but now analysts are raising payment expectations, according to Morgan Stanley data.
And, as Galy mentioned, valuation is not demanding. According to FactSet, eurozone banks are listed at 0.6 times the book value. Compare this to the United States, where the SPF S&P Bank ETF KBE,
has a booking price of 1.2.