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Bank Stocks in Europe Zoom Higher, Rewarding Bargain Hunters
European bank shares have recouped pandemic losses, generating big gains for investors who swooped in last year
July 7, 2021 5:30 am ET
European banks are among the stock market’s top performers, making winners out of the investors who backed them when many wouldn’t touch them during the pandemic.
This year, the Euro Stoxx Banks index is up 26%—compared with a 14% rise for the broader benchmark—and has recently regained all the ground it lost during the pandemic. Some individual stocks have done even better. Spain’s Banco de Sabadell SA, which was hammered during the pandemic’s shutdowns, is up 60% in 2021, while French banking giant Société Générale SA is up nearly 50%.
“European banks have really surprised on the upside,” said Tom Kinmonth, a fixed-income strategist at Dutch bank ABN AMRO. He said a big reason was that loans in the region hadn’t turned sour in droves as was feared.
The rebound began in November, after news of successful vaccine developments started emerging. An improvement in the region’s economic outlook and the easing of a dividend ban for banks gave a further boost.
Tom O’Hara, a Janus Henderson portfolio manager, said price moves were also being driven by international investors dipping back into the sector after years away. These investors are looking to diversify from U.S. and technology stocks and prepare for rising inflation, which would trigger interest-rate increases that could be good for banks.
As more global funds rotate into European stocks, “a huge amount more of assets could shift,” Mr. O’Hara said. His funds have invested in banks including Spain’s Banco Santander SA, which is up over 25% this year, and Nordic lender Nordea Bank ABP, up over 40%.
Another investor that has increased its bet on the sector is California-based Capital Group Cos. In February last year, it disclosed a 3.1% stake in Deutsche Bank AG , which has since increased to 4.8%, according to FactSet. Shares of Deutsche Bank have risen over 35% since March 2020.
Capital Group also boosted its stake in another German lender, Commerzbank AG , to 5.3%, up from the 4.8% reported in February 2020. The bank’s shares are up 12% since then. Capital Group also had a 7.2% stake in Société Générale, as of December. Many of its purchases were made in the second half of 2020, according to FactSet.
A spokeswoman for Capital Group, which has over $2.3 trillion in assets under management, declined to comment.
Deutsche Bank shares are trading above pre-pandemic levels. After years of heavy losses, Chief Executive Christian Sewing launched an overhaul in 2019 focused on cost cutting. A leaner bank and a boom in market activity helped the bank post its strongest quarter in seven years earlier in 2021. Low bad-debt charges also helped.
In large part, European bank stocks have risen a lot this year because they fell so much in 2020. And while the gains have been impressive, the rise is in line with the S&P 500 banks index in the U.S. In a one-year time frame, U.S. banks, which are much more profitable, have performed better.
Investors, regulators and banks themselves were expecting a spike in nonperforming loans to hit European lenders badly during the pandemic-fueled recession, the deepest and fastest the continent has seen in peacetime. Even before Covid-19, European banks were struggling to make money, dragged down by negative interest rates and a pile of bad debt accumulated from the previous financial crisis.
However, the spike in bad loans hasn’t come. Generous state support for companies and consumers helped them to weather the crisis. Households are also gaining from ultralow mortgage rates and record house prices. Given a bigger chunk of banks’ loan portfolios are mortgages, that bodes well for the lenders even after governments start lifting aid, Mr. Kinmonth said.
The pandemic has also forced some banks to make changes investors have wanted for years, including slashing jobs and shutting branches.
Commerzbank has vowed to cut a third of its domestic staff and almost half of its bricks-and-mortar presence. Société Générale plans to merge its two French retail networks to cut costs. Banks are also passing negative rates to customers by, for instance, charging for deposits.
“Banks have started doing something to address the issue of profitability, which has always been their weakest spot,” said Filippo Alloatti, senior credit analyst at Federated Hermes.
—Margot Patrick contributed to this article.
Write to Patricia Kowsmann at [email protected]
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Appeared in the July 8, 2021, print edition as ‘European Bank Stocks Rebound.’
