According to the Nihon Keizai Shimbun on December 25, the outlook for European bank stocks is bleak. The European Central Bank's interest rate hike at the fastest rate in history has led to the first time in eight years that loans have changed from growth to decline, economic uncertainty has intensified, and the problem of bad debts and bad debts has begun to appear. Unhappy about earnings expectations beyond 2024, the ECB has become more vigilant about financial stability.
Analysts must be convinced of our ability to improve earnings. At a seminar on banking supervision held at the ECB headquarters in Frankfurt on the 1st, Deutsche Bank CEO Christian Zewyn emphasized. One of the topics of the day's meeting was the direction of European banks and how the market evaluates them.
The performance of European banks is improving. Six major banks, including Deutsche Bank, BNP Paribas and Unicredit, reported a net profit of about $16.6 billion in the third quarter of 2023, an increase of 35% over the same period last year. According to Frasers, this is the third-best performance since 2011.
Despite this, its share price has not performed well. Since the financial turmoil in the United States and Switzerland in March this year, although the Euro Stoxx Bank Stock Index returned to a high range on the 19th of this month, it is only about 10% compared with 2019 before the epidemic.
The European Central Bank has raised interest rates to 4 by September this year5%, tightening the currency at the fastest rate ever. Although the policy rate has reached its highest level since the inception of the euro in 1999, stock prices appear to be lacking momentum in contrast to the good performance from rising interest rates.
The European Central Bank, which is tasked with maintaining the stability of the financial system, has stepped up its vigilance. In fact, a risk analysis released in November noted that despite high levels of bank earnings, banks' share prices "are not significantly higher than they were before the pandemic" and that "banks are attractive due to their stable interest income, but lack growth opportunities".
Why do European banks get a bad rating?There are three major concerns about achieving long-term profit improvement.
The first is that the loan itself will be affected. Corporate credit defaults have been rising since Europe ended its negative interest rate policy and started raising interest rates. The delinquency rate of overdue loans is also increasing, and non-performing loans are on the rise.
This has led to a deterioration in banks' earnings expectations. According to the European Central Bank**, among the 10 major European countries, the return on net assets of banks in 8 countries, including Italy and Spain, will decline in 2024. France is not necessarily declining, but it is not growing.
This is followed by a significant reduction in lending. Eurozone bank lending to businesses fell 03%, the first time in eight years and three months has declined year-on-year again. Major countries such as Germany are facing the same trend. The eurozone faced two consecutive quarters of negative growth in the fourth quarter of this year, as well as the risk of falling into recession, with more and more companies going bankrupt and interest rate hikes causing them to borrow less.
Moreover, the interest rate hikes that favor banks may also be coming to an end. The short-term interest rate market has begun to adopt the expectations of a rate cut by the European Central Bank in the spring of 2024, and the rough calculation of the effect of interest rate hikes will disappear by about half, according to the London ** Exchange Group.
There is strong speculation that the ECB will cut interest rates before the Fed. Goldman Sachs' chief global** strategist, Peter Oppenheimer, raised his forecast for the Euro Stoxx 600 index, downgrading the investment rating on European bank stocks to "neutral".
In addition to cost-reduction initiatives such as mergers and branch closures, European banks must also address issues such as digitalization and decarbonization. The ECB's negative interest rate policy has been going on for eight years, but the historic rate hikes highlight the drawbacks of a lack of timely structural reforms. Are good results just a flash in the pan?The market's wake-up call is food for thought.