European Bank Stocks Look Cheap Too

European Bank Stocks Look Cheap Too

over 3 years ago2 mins

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It’s not just American banks that look cheap at the price: with an index of big-name European bank stocks hitting its lowest level since the 1980s, investors could pick up a bargain bet on economic recovery 🤙

What does this mean?

America’s S&P 500 index may still be slightly up for 2020, but its banking stocks are down over 37%. Stress tests in June suggested big US banks could lose up to $700 billion in the wake of the coronacrisis, and the Federal Reserve on Wednesday extended a ban on them making stock buybacks until the end of the year, as well as capping dividend payouts.

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Investors have been harder still on European banks, long the Americans’ poor cousins. While the Stoxx Europe 600 (which includes UK shares) has itself fallen 13% this year, its banking stocks are 43% down – indeed, last week saw the Stoxx Europe 600 Banks index at its lowest since 1987.

Recent money laundering revelations may have helped share prices at the likes of HSBC sink to a quarter of levels seen within just the last five years. But many of these banks retain solid business models – and while earnings are expected to rebound in 2021, corresponding valuations are among their lowest in the last quarter-century 🤨

Why should I care?

There are risks for banks on both sides of the Atlantic. Low (or negative) interest rates intended to encourage borrowing and spending are squeezing banks’ profits – and look set to stay for the foreseeable, even if inflation starts to pick up. While borrowing defaults have yet to become widespread – and investors desperate for returns continue to express enthusiasm for even the lowest investment-grade corporate bonds – banks’ loan loss reserves have risen to their highest level since 2012, hurting their ability to make new loans.

But it’s not all bad. The six biggest US banks still made $13 billion in profit during the difficult second quarter, while global fees for banks advising on merger deals, refinancings, and IPOs in the first nine months of the year rose to a new record. Recent market volatility may also have boosted trading revenues around the world. And those hefty reserves could turn out not to be needed after all…

Looking at European banks in particular, investment research firm Leuthold Group points out that while earnings expectations for 2021 are lower than the last decade’s average, several stocks are at their cheapest in decades when factoring those in. Should the economic bounceback from coronavirus end up being stronger than thought, such valuations could look particularly low.

Select banks ranked according to valuation levels since 1995 (Source: Leuthold Group)
Select banks ranked according to valuation levels since 1995 (Source: Leuthold Group)
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