European banks have been the underdogs of the investment world for the past
decade. Their lackluster performance and the turbulent financial landscape
have deterred many investors from considering them as viable assets. However,
recent developments and strategic changes within the banking sector suggest
that this wariness might be coming to an end.
Major European banks like Deutsche Bank and Société Générale have been through
challenging periods of restructuring. They have made tough decisions,
including job cuts and a refocus on core competencies. The results of these
efforts have been remarkable, with these institutions emerging stronger, more
efficient, and experiencing a restoration of profitability and revenue growth.
Take for example a look at Deutsche Bank's steady growth in YoY earnings per
share and revenue below.
Or KBC's earnings and revenue growth:
But, banks in Europe, it still feels like a risky landscape. Years of negative
interest rates have affected profitability. Moreover, limited shareholder
payments and constant restructuring efforts have left a lingering skepticism
among investors. And then consider, it's only been a couple of months since
the Credit Suisse disaster... However, the tide seems to be turning. European
banks now boast higher capital buffers than their US counterparts, providing a
sense of reassurance to investors. Additionally, the European Banking
Authority's stress tests have yielded encouraging results, indicating a
strengthened financial position for these institutions. With these safeguards
in place, investors can gain more confidence in the sector's potential for
growth and stability.
Another aspect that may turn the tables in favor of European banks is the rise
in interest rates. For years, low-interest rates have hindered banks' ability
to generate substantial income from their lending activities. As interest
rates have increased to fight off inflation, the banking sector could witness
a boost in profitability, improving the overall attractiveness of these
institutions as investment opportunities.
From a technical standpoint, there are promising indications that European
bank stocks are poised for a comeback. Take a look at chart below showing the
Stoxx 600 banks. After a decade-long base, the chart suggests a potential
upward trend in the near future if we can clear out the 25 level.
Individually, European banks have been, in the long-term, in downtrends for
multiple years. But consider the possibility that these downtrends will soon
turn around into new uptrends based on the information we have now. The charts
below are plotted on a monthly scale.
While European bank stocks have been entangled in a prolonged period of
uncertainty, recent developments are actually pointing towards a potential
comeback. The resilience demonstrated by European banks, combined with
improved regulatory oversight and higher interest rates, has created a much
more attractive landscape for investors. The possible technical signals
further validate this optimism, suggesting that the downtrends may be
reversing if we do get breaks above key levels. What are your thoughts on
European banks? Don't hesitate to reach out or comment below!