European bank stocks lead rally after a decade of deadline

FRANKFURT: This time, it may be more than just another false dawn for European bank stocks.

The worst performers among Europe’s equity markets in the past decade have had occasional hot streaks, but with this year’s re-emergence of inflation promising an end to an era of near-zero interest rates, the sector is among the biggest gainers in 2021.

The Stoxx 600 Banks Index is up 76% since a low in September, its steepest advance since the recovery from the financial crisis. Societe Generale SA, Banco Santander SA and Natwest Group Plc are among 11 lenders whose shares have more than doubled.

And yet, even after the surge, the gauge is still below pre-pandemic levels and the stocks remain relatively cheap.

Bond yields are rising, making it more profitable for banks to lend, and trading desks are profiting from buoyant financial markets that have been underpinned by the economic recovery from the pandemic.

“Obviously, financials clearly work in that kind of environment,” said Alan Custis, head of United Kingdom equities at Lazard Asset Management LLC.

“Financials still look very cheap relative to their pre-covid levels and on an absolute valuation standpoint, particularly here in the UK.”

Perhaps, the most positive indicator for bank stocks right now is inflation, both real and anticipated, which is pushing up longterm interest rates and boosting the margin that banks can make from lending.

Recently, a report showed that prices paid by United States consumers rose in May by more than expected and the European Central Bank (ECB) increased its inflation forecast.

Earnings also are supporting the rally, with bank profits for the first three months of the year beating expectations by 40%, data compiled by Bloomberg showed.

“The first-quarter earnings season was the most constructive in a very long time,” Goldman Sachs Group Inc analysts led by Jernej Omahen wrote in a note last week.

Banks have stopped increasing the amount they’re setting aside for bad loans, and some lenders even took the step of releasing some of those reserves.

Thriving investment banking businesses also have proved longer lasting than first anticipated, and lenders with asset management divisions are benefiting from recovering markets and record inflows.

That raises the prospect of juicier dividend payouts and share buybacks. A de facto ban on those shareholder returns, imposed by the ECB, is set to be lifted on Sept 30.