Some Love for Banks May Help Europe Stocks Close Gap on U.S.

(Bloomberg) -- European banking stocks are beginning to look like a bargain. And that may be just the trigger the broader stock market needs to close the gap on the U.S.

Bank stocks in the region have fallen to the lowest versus the broader market in nearly a year even after a gain in bond yields this quarter. With the 10-year U.S. Treasury yield piercing 3 percent to much fanfare, before slipping back, the question for stock pickers now is whether it signals the time to switch to financial stocks from growth shares such as technology.

For Europe, this is especially relevant as it’s a market that -- unlike the U.S. -- is heavy on banks and light on growth stocks. Stronger conviction in the banking sector could support European stocks’ nascent catch-up with their U.S. peers seen since late March.

Some Love for Banks May Help Europe Stocks Close Gap on U.S.

While the recent dent in European economic data has shaken confidence that the European Central Bank will soon start to rein in monetary stimulus, analysts say the consensus is still for growth to pick up and funding conditions to tighten -- which should all be helpful for banks.

“As long as the recovering growth continues, there’s scope for banks to improve their earnings and they’re still trending fairly cheaply, so we think banks can be a reasonably good investment,” said Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management in London.

Part of the issue for banks is that the yield curve has flattened recently, which indicates narrower margins for banks. But with growth expected to remain solid this year, there’s still scope for the curve to modestly steepen, said Macklow-Smith.

There’s also a wide range among European banks, with return-on-equity ratios ranging from minus 5 percent (Barclays Plc) to 30 percent (FinecoBank). The macro picture can also vary, with the U.K., for instance, posting its slowest economic expansion in more than five years last quarter.

The earnings picture so far has been mixed. HSBC Holdings Plc, Europe’s biggest bank, reported profits that largely matched expectations on Friday, though shares fell in Hong Kong amid rising costs. Trading revenue at Societe Generale SA and BNP Paribas also disappointed, reports showed on Friday, while Credit Suisse Group AG and Banco Bilbao Vizcaya Argentaria SA gained after releasing earnings.

“Profitability is picking up kind of slowly and unevenly geographically,” said Will Hobbs, the head of investment strategy at Barclays’s wealth management unit in London, which has been recommending financial stocks to clients. “Loan growth should hopefully pick up and eventually the central bank should be a bit more helpful.”

©2018 Bloomberg L.P.