Euro zone banks’ periphery premium is here to stay

National Bank of Greece

13/06/2024 09:51

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Liam Proud
       LONDON, June 13 (Reuters Breakingviews) - Banks in the
euro zone periphery are once again at the centre of investors’
attention – but for a new reason. Lenders in Ireland, Italy,
Greece and Spain on average trade at a roughly 30% valuation
premium to those in so-called core countries like Germany,
France and the Netherlands. The gap looks set to persist.
    The core-periphery distinction describes the difference
between a relatively cohesive central group of countries, led by
Germany and France, and historically more volatile economies
around the bloc’s edges. Many in the second group had to bail
out their banking systems during the euro zone crisis of the
2010s. It’s surprising then that major lenders in those
countries now leave French, German and Dutch lenders in the
dust. On average, big banks in Ireland, Italy, Greece and Spain
are worth 90% of forecast tangible book value in 12 months’ time
compared with 70% for core-country banks, according to
Breakingviews calculations using LSEG data.
    Of the 23 major euro zone lenders that Breakingviews
studied, nine of 10 highest-valued are based in the periphery,
led by Madrid-based Bankinter  BKT.MC  and Italy’s 65 billion
euro Intesa Sanpaolo  ISP.MI . The National Bank of Greece
 NBGr.AT , Dublin’s AIB Group  AIBG.I  and Bank of Ireland
 BIRG.I  trade at roughly 90% or more of forecast tangible book.
Paris-based BNP Paribas  BNPP.PA , at 65%, is behind two of the
four big Greek banks – even though European supervisors have
only just allowed Hellenic lenders to start paying dividends
again.
    The value gap partly reflects changing economic fortunes.
Greece and Spain, for example, will grow at around 2% this year
according to the International Monetary Fund, compared with 0.2%
for Germany and 0.7% for France. President Emmanuel Macron’s
decision on Sunday to call a snap election, a reaction to
surging far-right support in France, underscores that political
risks are increasingly present in the euro zone core.
    Historic banking cleanups in the periphery also help.
Governments helped lenders get rid of toxic assets. Greek banks’
non-performing loans to households fell from almost 50% of
relevant exposures in 2017 to less than 10% in 2023, European
Central Bank data shows. Past purges afforded some lenders a
clean slate. Bank of Ireland and National Bank of Greece have
emerged as relatively straightforward groups focused on key
domestic businesses, and are forecast to generate 15% returns on
tangible equity this year, using Visible Alpha consensus data.
    Compare that with analysts’ 5% ROTE forecast for Deutsche
Bank  DBKGn.DE  and 6% for Société Générale  SOGN.PA . German
and French domestic lending may just be lower-returning
businesses – a product of competition and regulation
respectively. The core banks are also more biased towards
investment banking, which tends to get a lower stock-market
multiple. The problem for their shareholders is that there seems
little reason for the periphery premium to disappear.
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    CONTEXT NEWS
    Shares in Société Générale fell 7.5% on June 10 after French
President Emmanuel Macron called a snap parliamentary election.
Local rival BNP Paribas fell 4.8% on the same day, while Crédit
Agricole was down 3.6%.
    Macron on June 9 called snap legislative elections after his
party was trounced in elections for the European Parliament by
Marine Le Pen’s far-right National Rally.
    Macron said the EU result was grim for his government, and
one he could not ignore. In an address to the nation, he said
lower house elections would be called for June 30, with a
second-round vote on July 7.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: Price-to-tangible-book value of banks in core vs.
periphery    https://reut.rs/4bX7lJu
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by George Hay, Oliver Taslic and Streisand Neto)
 ((For previous columns by the author, Reuters customers can
click on  PROUD/ 
liam.proud@thomsonreuters.com))