Are investors becoming too bearish on the banking sector, and European banks in particular?
Of course there are causes for concern. It looks as though the ultra-low and even negative interest rate environment many of them are facing is going to endure, and with fears about tepid global growth, and even more tepid demand, being volubly expressed, it doesn’t look like the healthiest environment for lending.
IG Markets’ strategist Evan Lucas points out that global big bank stocks have lost between 13% and 30% thanks to what he calls “systemic fears”. On one level, of course, why wouldn’t they? It was the banking sector that caused the last crisis. Obviously, as fears of the next one grow, investors are unlikely to linger.
However, Lucas writes, “the fear and pessimism baked into markets particularly in this space look, on paper anyway, as a value option not seen since 2011.”
He points out that despite the nervous glances, “European banks can more than handle coupon payments, funding is highly liquid, money markets haven’t shown any signs of distress.” Moreover, the emergency funding made available in 2012 via the European Central Bank’s targeted long-term repurchase operations, remains largely unused.
“Looking more broadly, banks are consistently delivering on ‘quality’,” Lucas goes on, while their asset values are yet to see the forecast upswing in bad and doubtful debts.
“Loan books remain very solid and, more importantly, deposits are increasing, which lowers reliance on wholesale funding.”
Moreover, he writes, “banks are ‘safer’ than ever; the Basel III requirements now see some of the highest levels of capital on balance sheets in the modern bank world.”
He notes that several European banks are trading on a 0.6 times price-to-book ratio, which he calls cheap both “historically and rationally.”
Perhaps JPMorgan chief executive Jamie Dimon is ahead of the field here. His personal $26.6 million buy of 500,000 shares in the bank saw its price rally sharply on Friday, and has netted him $2.2 million already. On paper anyway.
