London
CNN
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Investors are continuing the tradition this year By piling in Big bank stocks As major economies are expected to slow or fall into recession.
The Stoxx Europe 600 Banks Index, a group of 42 major European banks, climbed 21% between the start of the year and late February – when it hit a five-year high – outperforming its broader benchmark index, the Euro Stoxx 600.
(XXXL). The KBW Bank Index, which tracks 24 major US banks, is up a more modest 4% so far this year, slightly ahead of the broader S&P 500.
(DVS).
Both bank-specific indices rose after hitting lows last fall.
The economic picture is much less rosy. The United States and the European Union are the largest economies There is hope to grow at a much slower rate this year than last, while UK output is likely to contract. A Sudden recession There is also a risk to the United States “at some stage,” former Treasury Secretary Larry Summers told CNN on Monday.
But coincides with widespread economic weakness High inflation, forcing central banks to raise interest rates. This has been a boon for banks, helping them make huge returns on loans to households and businesses, and savers depositing more of their money into savings accounts.
A rate hike has buoyed the stocks of big banks, but it also boosted confidence in their ability to weather economic storms more than 15 years after 2008. Global financial crisis Almost wiped them out, fund managers and analysts told CNN.
“Banks, generally speaking, are much stronger, more resilient, more capable [withstand a] recessions,” compared to the past, said Roberto Frazita, global head of banking at consultancy Bain & Co.
Interest rates in major economies Started climbing Last year as policymakers began their campaigns against rising inflation.
The steep rate hikes followed a long period of ultra-low borrowing costs that began in 2008. As the financial crisis ravaged the economy, central banks cut interest rates to unprecedented lows to stimulate spending and investment. And, for more than a decade, they barely budged.
Banks are a less attractive bet for investors in that environment because low interest rates often provide lower returns for lenders.
“[The] The post-crisis period of very low interest rates was seen as very bad for bank profitability, squeezing their margins,” said Thomas Matthews, senior market economist at Capital Economics.
But the rate hiking cycle that was going on last year, and shows Some signs of abatementhas changed the calculus of investors. Fed Chair Jerome Powell said Tuesday that interest rates will rise more than people expect.
High potential returns for shareholders are drawing investors back into the sector. For example, the average dividend yield for bank stocks in Europe — the amount a company pays out to its shareholders each year as a proportion of its share price — is now about 7%, said Ciaran Callaghan, head of European equity research at Amundi. , a French asset management firm.
By comparison, the dividend yield for the S&P 500 is currently 2.1%, and for the Euro Stoxx 600 At 3.3%, according to Refinitiv data.
European bank stocks have risen particularly sharply over the past six months.
Matthews at Capital Economics attributed its underperformance relative to U.S. peers in part to the fact that interest rates in countries using the euro are still close to zero relative to the United States, meaning investors are shielded from rising rates. To get more profit.
It could also be put down to Europe’s remarkable reversal of fortunes, he said.
Wholesale natural gas prices in the region, which hit record highs in August, have rebounded. Ukraine levels seen before the warAnd a severe energy shortage has been avoided this winter.
“Just a few months ago people were talking about a much deeper recession in Europe than in the US,” Matthews said. “As those concerns have dissipated, European banks have performed particularly well.”
But European economies are still weak. When economic activity slows, bank stocks are usually among the hardest hit. That’s because banks’ earnings are tied, to varying degrees, to borrowers’ ability to repay their loans, as well as consumers’ and businesses’ appetite for more credit.
This time, however – unlike in 2008 – banks are in a much better position to face defaults on loans.
after the Global financial crisis, regulators took action, requiring lenders to, among other measures, have a larger capital cushion against future losses. Capital is made up of a bank’s own funds, not borrowed money such as customer deposits.
Lenders must also hold sufficient cash, or assets that can be quickly converted into cash, to repay depositors and other creditors.
Luc Pluvier, a senior portfolio manager at Van Lancechot Kempen, a Dutch wealth management firm, noted that there has been a “structural change” in banks over the past decade.
“Many rules that have been implemented [has] These forced banks to do more, to be more liquid [of a] Capital buffer, to take less risk,” he said.
Joost de Graaf, co-head of European credit at the Van Lanscott campaign, agreed.
“There are no hidden skeletons [banks’] Balance sheets as far as we know.
— Julia Horowitz contributed reporting.
