Analysis: Boom in European bank earnings hints at a rally with legs

China Reinsurance (Group)

23/02/2023 06:00

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      Financials earnings growth rate surges almost 45%
    

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      STOXX banks climbs to 5-year high
    

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      UniCredit shares up a whopping 35% YTD 
    

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      HSBC, SocGen express caution
    

  
    By Joice Alves
       LONDON, Feb 23 (Reuters) - Europe's banks, which enjoyed
a stellar fourth-quarter that yielded a surge in earnings growth
to 15-year highs, are still looking cheap and could have more
room to rally.
    Economic data hasn't been as bad as many had feared. The
euro zone is expected to stagnate rather than contract, while 
cost of borrowing is still rising.
    STOXX 600 financials are expected to have had the highest
earnings growth rate of any sector in the last quarter of 2022,
and brokers and investors have taken note, responding with a
flurry of upgrades to the sector as well as inflows.
     The STOXX banks index  .SX7P  has climbed almost 20% so far
in 2023 to five-year highs, and along with auto, travel and
leisure stocks, is a contender for best-performing sector.
    Shares in UniCredit  CRDI.MI  are up a whopping 35% this
year, with the Italian lender galvanising investors by pledging
to return 5.25 billion euros ($5.58 billion) from its 2022
earnings after a record quarterly profit.
    The European Central Bank's campaign to raise interest rates
as it fights to bring inflation back to its 2% target has been a
boon for euro zone lenders.
    Some of the expectations for higher ECB rates have already
translated into higher stock prices, but analysts flagged shares
still look cheap compared to their historical average.
    "A lot of the good news of how yields have gone up and the
relief from no imminent recession is fully reflected in their
prices," said Hani Redha, global multi-asset portfolio manager
at PineBridge, which has $143.1 billion under management.
     But "this is a sector that has lagged for a long, long
time, particularly in Europe... they (banks) are not necessarily
that expensive on a secular basis," he added.
    European bank shares are trading at just 0.73 times their
price-to-book value, according to Refinitiv Datastream. This is
below their 20-year average of closer to 1.0 and much cheaper
than their U.S. peers, which are trading at around 1.1 times.
    With the ECB a bit behind the likes of the UK and U.S.
central banks, which started raising rates months earlier,
equity strategists said there is potential for further bank
earnings upgrades in the region. 
    In the meantime, euro zone lenders' earnings per share (EPS)
have surged to their highest since the global financial crisis
in 2008. 
    The bloc's biggest bank, BNP Paribas  BNPP.PA , raised its
2025 targets and announced buybacks, even if it missed
expectations in the fourth quarter. Credit Agricole  CAGR.PA ,
France's second-biggest listed bank, posted a
higher-than-expected profit, driven by lower provisions for bad
loans and a strong performance at its investment banking
division.
    EARNINGS BOOM
    Fourth-quarter earnings for STOXX 600 financials are
forecast to have surged by 44.7% year-on-year to 32.7 billion
euros, compared with a drop of 10% in the third quarter,
according to Refinitiv I/B/E/S data.
    This is the biggest increase for any sector, and across the
whole of the STOXX 600 the rate of growth is expected to come in
at 11.3%.
    Morgan Stanley estimates almost half of Europe's financials
will beat earnings-per-share estimates this earnings season.
    "In Europe, earnings upgrades are ongoing and we think there
is still some potential for further upgrades, especially if loan
loss provisions get revised down as the year progresses," says
Claudia Von Turk, Lombard Odier equity analyst. 
     In the United State, where the rate cycle is more advanced,
there's less potential for earnings upgrades at this point, she
said.
    But higher interest rates will eventually stop juicing
banks' income. 
    Europe's biggest bank, HSBC  HSBA.L , reported a 92% surge
in quarterly profit, but delivered a cautious outlook. 
    Similarly, Societe Generale  SOGN.PA , France's
third-biggest bank and Spain's Santander  SAN.MC , the
second-biggest lender in the euro zone, both handily beat
expectations but beefed up their buffers against more uncertain
economic conditions.  
    But for now, with the risk of a deep euro zone recession
receding and business activity improving as energy prices fall
and China re-opens, there is "still room for the banks to run,"
said Emmanuel Cau, Barclays head of equity strategy.
($1 = 0.9408 euros)
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Earnings euro zone banks    https://tmsnrt.rs/3kfzp5l
Banking on value    https://tmsnrt.rs/3ZvQE1l
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 (Reporting by Joice Alves and additional reporting by Samuel
Indyk in London; editing by Amanda Cooper and Sharon Singleton)
 ((Joice.Alves@thomsonreuters.com; Twitter @joiceal;))