European Bank Stocks Cheapest on Record Still Can’t Find Takers
If you thought travel and leisure shares were heavily hit by the pandemic, take a look at European banks.
While every other sector index has bounced since lows hit in March, banks are hitting rock bottom again. Despite trading at their cheapest levels on record and buy recommendations from Bank of America Corp. to Oddo BHF strategists, lenders haven’t found much favor with investors. In a market that’s turning cautious again, the focus has moved to the industry’s large loan loss provisions, bleak earnings outlooks and prospects of long-term economic damage from the virus.
The Euro Stoxx Banks Index, a gauge of euro-area banking shares, last week sank to an all-time low. The broader Stoxx 600 Bank Index, which also include a number of U.K., Swiss, Nordic and Polish lenders, came very close to a record low. The latter is down 43% this year, Europe’s worst sector performance along with travel stocks.
The question is: how much downside is already priced in. Banks are cheaper than ever on paper, with the industry’s estimated price-to-book ratio at its lowest on record, after recently falling below levels seen during the global financial crisis. Nadege Dufosse, head of asset allocation at Candriam Investors said that “in Europe, banks and autos could be the most attractive value sectors to consider when normalization begins.”
A key factor is the amount of losses banks might endure because of the coronavirus crisis. And while such predictions will necessarily encompass a great deal of uncertainty, Barclays Plc analysts still say that there is quite a gap between loss expectations and what banks have actually put aside in the first quarter.
“This suggests that either there is a lot more to come, or the market and our scenario/stress tests vastly overestimate the final result,” analysts led by Amit Goel wrote. There is also a wide range of what individual bank stocks are pricing in already.
Bank of America Corp. strategist Sebastian Raedler said that while banks do not fully reflect the current weakness in euro-area growth momentum, there is potential for a short-term rally in the shares. “We stay overweight European banks,” the strategist wrote in a note on Friday. His projections for euro-area PMIs to recover and bund yields to rise translate into 30% or more upside for banking stocks until early in the fourth quarter.
The most recent uptick in the German 10-year bund yield had no effect on banks’ relative performance, as investors are waiting for a stronger move in the fixed income market.
Raedler highlighted that banks tend to benefit from falling U.S. high-yield credit spreads, and said that a gradual recovery in global growth momentum, the scope for higher oil prices and support from the U.S. Federal Reserve all point to a tightening in high-yield spreads in the next six months.
The BofA strategist isn’t alone in predicting upside for the beaten-down sector. Bottom-up analysts see shares in the Stoxx 600 Banks index rising 39% in the next 12 months, the highest among all sectors, according to the aggregate of price targets compiled by Bloomberg.
JPMorgan Chase & Co., like Barclays, advises selectivity in exposure to the sector, citing earnings and capital strength as the key screening criteria. Analysts led by Kian Abouhossein recommend KBC Group NV, BNP Paribas SA, Banco Bilbao Vizcaya Argentaria SA, UBS Group AG as shares that could do well even when tail risks materialize.
©2020 Bloomberg L.P.