It has been a very difficult 15 years for the major banks in the euro zone.
The bad times were terrible – the 2008 financial crisis, the Greek debt crisis and now the COVID-19 pandemic. But even the good times were not so good, with creditors in the group of 27 countries facing a scenario of negative interest rates and stagnant local economies. From its 2007 high to its 2021 low, the Euro Stoxx SX7E bank index,
collapsed by 89%.
But suddenly, there is life in the group led by the French BNP Paribas BNP,
Banco Santander SAN of Spain,
ISP Intesa Sanpaolo from Italy,
and ING INGA from the Netherlands,
thanks to the increase in bond yields. France 10-year yield TMBMKFR-10Y,
now regularly flirts with positive territory, and Goldman Sachs expects yield from Germany’s reference bundle TMBMKDE-10Y,
which has been negative for almost two years, could reach zero by the end of the year. Just before the election in the United States, on October 29, the sector gained 71%.
It’s just bad news and more bad news for eurozone banks.
So the question is whether this leap is real or not. There were other occasions when the sector had major upward movements, mainly in 2009, before reverting downwards.
And there is a countervailing force. The increase in bond yields has drawn the ire of the European Central Bank, which, unlike the US Federal Reserve, believes that the measures could prevent an economic recovery. ECB President Christine Lagarde, chief economist Philip Lane and adviser Isabel Schnabel, all expressed concern about the increase.
The ECB meeting on Thursday gives Lagarde another opportunity to talk about increasing bond yields, if not announcing a stock. Analysts say the central bank still has more than enough firepower under existing authority to resume its bond-buying activity in the Pandemic Emergency Buying Program.
Current yields revolve around where the ECB has accelerated purchases in the past, notes Nick Kounis, head of financial markets research at Dutch bank ABN Amro. “We think that an increase in the pace of liquid asset purchases is the ECB’s first and most obvious point of call,” he said.
Therefore, an active ECB could hamper the nascent recovery in eurozone bank stocks.
“They are cheap, the question is whether the value of the style will continue to gain some control and will be helped by a cyclical recovery for European banks. A steeper curve would help, but on a hunch the ECB will come in this week to cover that, ”said Sebastien Galy, senior macro strategist at Nordea Asset Management.
The history of eurozone banks involves more than bond yields. Dividend payments are virtually banned by the ECB until the end of September, but analysts are now raising expectations for payments, according to data from Morgan Stanley.
And, as Galy mentioned, the assessment is not demanding. According to FactSet, eurozone banks are trading at 0.6 times the book value. Compare that to the USA, where SPDR S&P Bank ETF KBE,
has a price to book of 1.2.