European bank stocks lead rally after a decade of disappointment

Bloomberg

This time, it may be more than just another false dawn for European bank stocks.
The worst performers among Europe’s equity markets in 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.
Perhaps the most positive indicator for bank stocks right now is inflation, both real and anticipated, which is pushing up long-term interest rates and boosting the margin that banks can make from lending. A report showed that prices paid by US consumers rise in May by more than expected.
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 shows. “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 ECB, is set to be lifted on September 30. “After the elimination of the restrictions, the banks would return to their shareholder remuneration policies, offering dividend yields that are estimated to be around 5-6%,” said Cristina Benito, head
of equities for discretionary portfolios at Mapfre AM.
Mergers and acquisitions, or at least speculation about them, may help to underpin bank stocks, too. Europe’s fragmented banking landscape is often named as one reason for the sector’s low profitability in contrast to the US, where banks have been thriving over the past decade. Cross-border deals are still difficult but some domestic consolidation is taking shape in Southern Europe.