An environment conciliatory because the current one does not reduce the spirit of investment in the banking sector, as had been a priori neglected. The process of lowering interest rates has already begun on both sides of the Atlantic and, although expectations regarding the next moves of central banks are more or less strong depending on macroeconomic data, the market continues to anticipate a lower interest rates. interest rate of 50 basis points (in addition to the two reductions of 25 already made in Europe) for the rest of the year on this continent. However, this context does not prevent the Stoxx Banks, the index which brings together the most representative banking entities of the Old Continent, from positioning itself as the most bullish segment of the year, with a revaluation of 20%.
The stock market growth which is reflected in the value of the shares of these companies leaves 54% of them contribute on or above, its book value at present. If we compare with the price/book value ratio that banks had at the start of the year, 25 of the 46 (54%) companies that make up the European index saw this ratio increase, compared to 37% which exceeded their price/value. in the books on January 1st. In this sense, the Italians BPER Banca, Banco Sabadell and Unicredit are in the lead, with increases of more than 60% in this interval.
Talking about the book value of a company, also called book value, is talking about the intrinsic value of the company’s shares. Theoretically, if this ratio is less than 1, it means that the company’s shares are trading at a low price or at a discount, since the value of these securities is less than what the bank claims they are worth. If it is the other way around, if the number is greater than 1, it means that the market is valuing the shares above the value of the entity according to its accounts.
“Before the financial crisis, banks traded at a premium to their book value due to their higher profitability (ROE of around 20%). After the massive capital increases, this profitability dropped significantly and they started trading at a discount. before the crisis, there was credit growth. Now we have a situation in which with stabilized capital, profitability is improving, we already have an ROE above 12% and in terms of credit it depends on the country but it remains low. rate, and waiting for the normalized curve, Banks should continue to improve their income statements. “Credit growth will be a key point to continue the re-rating of the sector”explains Ignacio Cantos, ATL analyst. The expert indicates that the analysis firm opts for Sabadell in Spain, “even if with the issuance of the takeover bid the history of value is harmed”, he adds. They also think Unicaja should start publishing well. In Europe, they choose ING and Unicredit.
For IG’s Sergio Ávila, the fact that 54% of European banks are trading above their book value in an environment of not very high interest rates reflects a positive market valuation. “This is due to several factors, including the improvement in capital, which has strengthened the balance sheets of the entities, and the restoration of profitability through effective cost management. The consolidation of the banking sector also generates synergies. However , The future of these banks will depend on the evolution of interest rates, economic growth and asset quality.. But even with rate cuts on the horizon, these are still levels that maintain profitability,” he indicates. In their case, they consider Santander and BBVA to be the most interesting currently on the Spanish market.
The “key” to earnings season
The earnings season for the third quarter of the year, which begins in Europe next week, will also cause bank stocks to move significantly. Since January 1 through today, 2024 earnings estimates have generally improved for this segment. In Spanish, more precisely, these net profit forecasts increase by almost 20% compared to what was expected at the start of the year, according to FactSet data. Bloomberg estimates 11.5% growth in net profits for the banking sector as a whole by 2024.
Javier Cabrera, market analyst, explains that the sector is already at the peak of its cycle, because “the ECB will probably have to accelerate the pace of rate cuts. In terms of results, the last quarter’ we expect will be weaker, but the numbers will remain good as rates remain at high levels. » According to him, the market will realize this “as soon as possible” and a short-term adjustment will occur. “What’s happening is that right now the market doesn’t really believe in rate cuts because there is some distrust in the inflation data. (…) We believe that in the medium term, rates can be maintained at higher levels than those of the previous decade, The banking sector could therefore continue to generate shareholder value. In this context, we believe that entities like Bankinter could do well,” adds Cabrera.
Regarding the results season which is about to begin, Filippo Maria Alloatti, Head of Finance for Credit at Federated Hermes Limited, says: “As we approach the halfway mark of third quarter results, European banks continue to generate profits that greatly benefit their shareholders. We anticipate a capital distribution estimated at €55 billion by 2024.”
The expert argues that the inevitable change in German monetary policy will affect sector valuations. “The Danish Commitment makes it possible to optimize the capital of banks which own insurance companies. It should therefore encourage banks to acquire insurance companies, thereby mitigating double accounting and facilitating capital consumption. Banks with their own insurance activities, such as Intesa San Paolo and UniCredit, which are CNP and Allianz share buybacks in joint ventures will result in a higher valuation of this component of the result. The same goes for wealth and asset management, with BNP Paribas setting a precedent with the acquisition of AXA Asset Management,” he concludes.
Three Spanish entities are currently trading at or above book value. One of them is Bankinter, which is the only one among the major Spanish banks not historically listed at a discount in this sense, it is one of them. NOW, its stock price not only matches the value of its assets, but exceeds it, with a price/book value of 1.017 times. CaixaBank stock trades at 1.04 times its book value. The entity, which has gained 43% on the stock market so far this year, managed to exceed its book value on the stock market last March for the first time in 2018. BBVA is the third. The Basque entity managed to reach its book value price in November 2023, which had not happened since 2017, with the exception of a few sessions.
