European banking stocks surged to their highest level since 2015 on Friday, buoyed by first-quarter earnings that surpassed expectations and indicated that lenders were still enjoying favorable conditions.
The STOXX Europe 600 banks index reached 197.7, a peak not seen since October 2015, driven by a substantial 5.9% surge in NatWest’s shares following the release of its first-quarter results.
This year, the index has rallied by 16.7%, outstripping the 6.1% increase in the broader pan-European STOXX 600 and surpassing the performance of U.S. banking shares.
The resurgence of European bank stocks comes after a challenging period since March 2023 when they plummeted amid the U.S. banking crisis and the collapse of Credit Suisse.
This recent milestone marks a significant turnaround for a sector plagued by weak profitability, regulatory scandals, and increasing competition from Wall Street firms since the 2008 financial crisis.
The shift towards higher interest rates since 2022 has been instrumental, bolstering lenders’ profits and leading to substantial gains that have been passed on to shareholders, further fueling the rise in stock prices.
Russ Mould, investment director at AJ Bell, noted, “They (bank shares) were very cheap for a long time… They’re in a relatively sweet spot.”
Despite the recent gains, European banking shares are still far below their pre-crisis highs in 2007, necessitating a roughly 20% increase to return to late 2009 levels. Concerns about declining profits amid expectations of central bank rate reductions persist, but recent earnings reports suggest that many lenders are in relatively good health, with manageable bad loan provisions and healthy margins.
However, risks persist, particularly if economic conditions deteriorate rapidly, leading to an increase in bad loans. Intense competition among lenders for savings and mortgage products continues to exert pressure on margins.
Nevertheless, there are indications that investors who retreated from banks after dividend cuts during the pandemic may be returning, partly enticed by the anticipated record €120 billion of dividends and share buybacks expected from lenders this year.
Michael Christodoulou, an analyst at Berenberg, highlighted, “As the banks edge higher they are becoming again more important in the indexes so not being involved starts to become problematic for investors and funds performance.”