The banks of Europe—including the UK (no offense!)—are doing great. A few weeks ago, the FT commented that measured by the 47 banks included in the European Stoxx 600 index, the total return and net dividends have outperformed the top US tech stocks known as the Magnificent 7 since late 2021.
Granted, some of that can be ascribed to the timeframe in question, but a lot of it is due to good old-fashioned banking. These European banks have really gotten the most out of the higher-for-longer interest rates while mostly flying under the breaking-news radar.
Regardless of when you read this, it has probably already been a long week (or month), so just to recap what has created these tailwinds:
Rising and high interest rates tend to increase the banks’ margin between interest income from loans and interest expenses on deposits. That is true across the globe, though even more so in Europe where the deposit beta—how much a general rate increase carries through to deposit rates—is higher but stickier than in the US.
In contrast, tech stocks do not fare nearly as well through high rates because investment is drawn to assets with less risks and higher yields.
Also, European banks were hit hard by both the GFC and the stricter capital requirements that followed, so they started from a lower level.
The upside to European regulation, however, is that it is applied more evenly. Numbers from OECD in 2023 show that competition is more harmed by regulation in the US than in Europe.
And if you are considering putting all the money you are not spending on eggs into European banks, it might not be too late to get a discount. Since they are the lesser-known cousins of the banking world, their stocks have traded lower than their book value per share, making them a bargain by comparison.
A word of caution, though. As banks are often seen as the vehicles for growth, and Europe is not doing great in that department, change could be on the horizon.
An outright recession hurts everyone, including the banks. Eventually, interest rates will come down which could squeeze the net interest income. And in the UK, the government is talking about spurring growth through banks lending more, which some are concerned could (inadvertently) lower the credit quality of the loan portfolios.
Alas, worries are in full supply, and some of them might even come true.
*There is nothing more cringe than middle-aged folks trying to give with-it-ness, and I can assure you that several teenagers have gotten the ick from my habits and begged me to stop.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.