European Banks Are Stronger Than Ever

By Badis Chibani, CFA

One yr after the 2023 mini-banking disaster, European banks’ fundamentals have improved, and their bonds have outperformed different sectors.

Who would have wager that after the Credit score Suisse collapse in March 2023, European banks would emerge as one of many area’s best-performing sectors?1 But, right here we’re. Following a tumultuous interval, European banks posted their greatest monetary leads to over a decade final yr. This was pushed by increased revenues from improved margins, due to a number of fee hikes that started within the second half of 2022. Essentially, the sector has transitioned from a part of low profitability and restricted capital distribution to boasting double-digit returns on fairness, massive capital ratios, the soundest asset high quality in its historical past, and important income distribution by means of dividend funds and share buybacks. Even within the first half of 2024, the sector remained strong. Whereas we count on a normalization of fundamentals in the long run, European banks are more likely to preserve their stable footing.

These enhancements in European banks’ fundamentals have resulted in robust market efficiency throughout each fairness and glued earnings. Within the bond market, all kinds of devices, from senior bonds to hybrid bonds (Further Tier 1 or AT1), have seen their secondary spreads tighten repeatedly since March 2023. European financial institution regulators have performed a vital position on this restoration, delivering robust and reassuring messages over the previous 16 months.

Different elements have additionally been useful to the asset class: Falling fairness danger premia and decrease charges volatility doubtless offered a supportive context for AT1 efficiency over the previous couple of months. The present market state of affairs has turn out to be so favorable for issuers that many banks are opting to exchange AT1s with new points and legal responsibility administration workouts, reasonably than ready till the decision date to enter the first market. We now have transitioned from a situation the place extension danger was a priority to at least one the place the market is open to just about any financial institution keen to concern. Given these developments, choice of AT1 bonds now requires a extra nuanced, bond-by-bond strategy, reasonably than a one-size-fits-all technique. In our view, traders have to be constructive of their choice course of, specializing in the particular attributes and situations of every bond.

In abstract, the European banking sector’s transformation over the previous yr has been nothing wanting outstanding. From the aftermath of the Credit score Suisse collapse to attaining stellar monetary efficiency, European banks have demonstrated resilience and flexibility. It’s clear that whereas some normalization of fundamentals is probably going, the sector stays on stable floor, providing what we imagine are promising alternatives for discerning traders.

Footnote: 1 In Fairness, Banking was most performing sector in STOXX 600 Europe YTD and since Credit score Suisse collapse. In Bonds, Bloomberg Euro-Combination Banking Index outperformed Bloomberg Euro-Combination Industrials Index on comparable timeframes.

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