European banks claim to receive windfall profits
2023.02.23 03:10
European banks claim to receive windfall profits
By Ray Johnson
Budrigannews.com – Europe’s banks, which had a great fourth quarter and saw earnings rise to 15-year highs, appear to be still cheap and may have more room to rise.
A lot of people had feared bad economic data. While borrowing costs continue to rise, it is anticipated that the euro zone will neither expand nor contract.
Brokers and investors have reacted with a flurry of upgrades and inflows to the financial sector, which is anticipated to have had the highest earnings growth rate of any sector in the final quarter of 2022.
Along with auto, travel, and leisure stocks, the STOXX banks index is a contender for the best-performing sector, having gained almost 20% thus far in 2023 to five-year highs.
UniCredit’s stock is up 35% this year because the Italian lender promised to return 5.25 billion euros ($5.58 billion) from its earnings in 2022 after a record quarterly profit.
Lenders in the euro area have benefited from the European Central Bank’s efforts to raise interest rates in its fight to bring inflation back to its target of 2%.
Although analysts pointed out that shares still appear to be cheap in comparison to their historical average, some of the expectations for higher ECB rates have already resulted in higher stock prices.
Hani Redha, PineBridge’s global multi-asset portfolio manager, stated, “A lot of the good news of how yields have gone up and the relief from no imminent recession is fully reflected in their prices.” PineBridge manages $143.1 billion.
However, he went on to say that “this is a sector that has lagged for a long, long time, especially in Europe… they (banks) are not necessarily that expensive on a secular basis.”
According to Refinitiv Datastream, the price-to-book value of European bank shares is just 0.73. This is much cheaper than their peers in the United States, which are trading at approximately 1.1 times, and it is below their 20-year average, which is closer to 1.0.
Equity strategists stated that there is the potential for further bank earnings upgrades in the region, despite the fact that the ECB is lagging behind the likes of the UK and US central banks, which began raising rates months earlier.
In the meantime, lenders in the euro zone have experienced their highest earnings per share (EPS) since the 2008 global financial crisis.
BNP Paribas (OTC:), the largest bank in the bloc, even though it fell short of expectations in the fourth quarter, it raised its targets for 2025 and announced buybacks. Agricole Credit (OTC:), The second-largest listed bank in France reported a profit that was higher than anticipated due to lower provisions for bad loans and strong performance at its investment banking division.
According to data from Refinitiv I/B/E/S, STOXX 600 financials’ fourth-quarter earnings are anticipated to have increased by 44.7% year-over-year to 32.7 billion euros, compared to a decrease of 10% in the third quarter.
This is the largest increase for any industry, and the STOXX 600’s overall rate of growth is anticipated to be 11.3%.
NYSE: Morgan Stanley estimates that this earnings season, nearly half of Europe’s financials will surpass estimates for earnings per share.
According to Claudia Von Turk, an equity analyst at Lombard Odier, “earnings upgrades are ongoing in Europe and we think there is still some potential for further upgrades, especially if loan loss provisions get revised down as the year progresses.”
She stated that there is less potential for earnings upgrades at this point in the United States, where the rate cycle is further along.
However, banks’ profits will eventually stop being juiced by higher interest rates.
HSBC, the largest bank in Europe, reported a 92% increase in quarterly profit, despite providing a cautious outlook.
The same goes for Societe Generale (OTC:), Spain’s Santander and France’s third-largest bank (BME:), the second-largest lender in the euro area, both met or exceeded expectations, but strengthened their safeguards against more uncertain economic conditions.
However, according to Emmanuel Cau, Barclays (LON:), there is “still room for the banks to run” for the time being, with the risk of a deep recession in the Eurozone decreasing and business activity improving as energy prices fall and China reopens. head of value methodology.
