Bank stocks – As per analysts, major economies will either remain stagnant or face a recession.
As a result, investors will break orthodoxy in 2023 by flocking to massive bank stocks.
Banks
From January and late February, the Stoxx Europe 600 Banks index, which comprises 42 major European banks, surged by 21%.
It surpassed its bigger benchmark index, the Euro Stoxx 600, to set a five-year high.
Yet, the KBW Bank, which monitors 24 of the top American banks, gained by 4% in 2023, outperforming the S&P 500.
Since their lows in October, the two bank-specific indexes have climbed.
The economy
Thus far, the economic picture is not looking good.
The largest economies in the world, the United States and the European Union, are predicted to grow somewhat faster than last year.
Nevertheless, output in the United Kingdom is expected to dip.
Former Treasury Secretary Lawrence Summers predicts that the United States will face a sharp recession at some point.
But, due to widespread economic weakness and unsustainable inflation, central banks were forced to raise interest rates.
In any event, it has helped banks generate bigger profits on consumer and business loans as more money is placed into savings accounts.
While interest rate hikes have kept major bank stocks steady, fund managers and analysts believe the 2008 financial crisis has also contributed to investor and analyst confidence in their ability to weather economic storms.
“Banks are, generally speaking, much stronger, more resilient, more capable to [withstand] a recession than in the past,” said Roberto Frazzitta, the global head of banking at Bain & Company.
Interest rate increases
While major countries’ interest rates climbed last year, governments made attempts to keep inflation in check.
The massive hikes followed a period of low borrowing costs that began in 2008.
The financial crisis wreaked havoc on the economy, prompting central banks to drop interest rates to historic lows in an effort to promote consumption and investment.
For more than a decade, central banks have done nothing.
In an environment where lower interest rates suggest decreased lender profitability, investors rarely bet on banks.
Capital Economics senior markets economist Thomas Matthews:
“[The] post-crisis period of very low interest rates was seen as very bad for bank profitability, it squeezed their margins.”
But, the rate-hike cycle beginning in 2022, as well as a few signs of weakening, have shifted investors’ perspectives.
On Tuesday, Fed Chair Jerome Powell warned that interest rates may rise quicker than planned.
Read also: Oil companies report massive revenues for 2022
Returning investors
Investors have been converted because of the higher likelihood of shareholder gains.
The average dividend yield for European bank shares is currently 7%, according to Ciaran Callaghan, Amundi’s director of European market research.
According to Refinitiv statistics, the S&P 500 dividend yield is 2.1%, while the Euro Stoxx 600 yield is 3.3%.
In addition, European bank stocks have increased in the recent six months.
According to Thomas Matthews, Capital Economics outperformed its American competitors because interest rates in countries that utilize euros are closer to zero than in the US, suggesting that increasing rates benefit investors more.
He also said that it may be due to Europe’s unexpected turn of events.
Wholesale natural gas prices in the region peaked in August of last year, but have subsequently dropped to pre-Ukraine war levels.
“Only a few months ago, people were talking about a very deep recession in Europe compared to the US,” said Matthrew.
“As those worries have unwound, European banks have done particularly well.”
Structural changes
The European economy is still struggling at the moment.
Bank stocks suffer as the economy slows because bank revenues are connected to borrowers’ ability to repay loans and fulfill consumers’ and businesses’ desire for further credit.
Banks, on the other hand, are better positioned than they were in 2008 to withstand loan defaults.
During the global financial crisis, authorities proactively established legislation requiring banks to have a sufficient capital buffer in the event of a loss.
Lenders must also have enough cash (or quickly convertible assets) to pay back depositors and other creditors.
Banks have undergone structural changes in the recent decade, according to Luc Plouvier, senior portfolio manager at Dutch asset management firm Van Lanschot Kempen.
“A lot of the regulation that’s been put in place [has] forced these banks to be more liquid, to have much more [of a] capital buffer, to take less risk,” he noted.
Image source: Market Screener
