Three years ago, the onset of rate hikes was only just beginning to be felt as that was when inflation began to reawaken after a long period of time due to bottlenecks in supply chains, which were failing to compensate for an explosion in demand after more than a month of pandemic-shocked growth.
Central bankers waited several months until they were sure that, on the one hand, the economy was recovering from the crisis. shock caused by Covid and, on the other hand, that the very strong increase in prices would last over time and was not temporary. It was therefore only from the following summer that interest rates began to increase. However, the Euribor, an indicator always ahead of these movements, began to rebound during the first quarter of 2022.
Since then, a cycle of rate hikes has begun. They automatically increased the profitability of banking activitycausing the profits and margins of these entities to soar and creating a sweet moment that was reflected in their stock market performance. Over the past 36 months, the Ibex Banks Index revalued by 68% while the ibex itself 27% were ratedIn other words, there was a difference of more than 40 points during this period.
And despite this, contrary to the simplest logic, the discount of the banks compared to the Spanish index remains in line with the average of these years, which was 40%. And at the same time, analysts have raised their earnings expectations as the ECB raises rates and the recession scenario recedes.
The sector has achieved record profits in 2023 and, although this year the European Central Bank has already started to reverse its path and normalize rates (it is expected to reduce the price of money by another 75 to 100 basis points before the end of the year), analysts still believe that Spanish banks can stretch the gum still a little while before profits start to contract.
So, in the case of Bouquetin, over the last three years, the average profit multiplier paid is 11.6 timesnow even lower, at 10.8 times. This price drop is precisely the fault of the banks, which are now trading at a PER (times the profit included in the share price) of 6.4 times0.2 times below its average of the last three years despite the strong rebound it is accumulating on hardwoods.
Good results
Once the first half results season was over, the banking entities performed these reviews brilliantly in front of the market, with figures that exceeded expectations. Its improvements in efficiency and other aspects of the business served as coat before the beginning of the era of cold which is coming now and where interest margins will logically fall due to the start of ECB budget cuts.
On the other hand, evidence that earnings were not the catalyst for these stock market declines is that at the same time as corporate earnings were occurring, analysts were upgrading their valuations of these companies’ stocks. On average, They increased them by 3% during the month of July, which leaves the Spanish sector with its highest valuation since the calculation of this indicator, in 2016, which leaves it with a potential of more than 22%..
“With interest margin growth guides for 2024 in the low single digits and mid single digits across the board, we consider that the evolution of credit will be key to see if its evolution can lead to thinking about improving these guides, or contribute more visibility for 2025. An element that we consider could act as a catalyst for actions,” they explain in Renta 4.
“Over the past three years, European banks have outperformed the broader equity market,” Wellington Management points out. “After 15 years of deleveraging, de-risking and several crises, in my view, it is now more robust than ever, achieving profitability double that of 2019, healthy balance sheets and ample capital and liquidity reserves,” they add. “In recent years, they have been motivated by high interest rates and generous capital remuneration policies,” they continue.
“Earnings per share revisions have been among the best of all sectors and the recent recovery in equity markets has further supported the momentum of banks’ commercial results thanks to their stock market activity,” they add. The manager concludes that “despite the general good tone, compared to European indices, the discounts on bank stock valuations have hardly diminished, currently standing at 40% compared to the Stoxx 600.”
By company, it is paradoxical that the three entities that receive a buy recommendation from the consensus are those that are trading precisely at a premium to their average PE of the last three years. This is Santander, which buys a 7% more expensive, CaixaBank, whose current profit multiplier is 2% above average since 2021 and, finally, Sabadell, concerned in this case by the buyout process opened for months, and which has now led to the purchase of a 16% more expensive than these last three courses. On the other hand, the one that offers a bigger discount is Unicaja, with a 5%.
