Crédit Agricole, Société Générale, BNP Paribas… The shares of French and European banks are on the rise. They have been on the list of the highest increases, on the Paris Stock Exchange and on European equity markets, since January 1. After solid stock market performance last year, 2022 could still be a good vintage for the sector, judge Catherine Garrigues, manager of the Allianz Actions Euro Convictions fund at Allianz Global Investors.
French and European banks remain inexpensive on the stock market (they pay themselves nearly 7 times the expected profits for 2022, vs 15 times for the whole of the European equity market all compartments combined) despite a good performance since the major trough in March 2020. And they should carry out according to Catherine Garrigues “a valuation catch-up” in 2022, in favor the expected resumption of the payment of dividends (which had been blocked by the authorities due to fears linked to the Covid-19) and major share buybacks to come (share buybacks, a other means of “remunerate” the shareholders). It must be said that our banks can afford it, even though they are very (too?) provided with capital. “The large share buybacks expected will have an accretive impact (positive on banks’ earnings per share) and reflect good visibility for the banking sector”, underlines the manager.
While, for the European equity market as a whole, profit growth will no longer be explosive as in 2020 (it had then taken advantage of the favorable base effect linked to the Covid-19 initiated in 42), “ there is a potential for an upward revision of bank profits, while the consensus has so far remained quite weak and negative for the sector”, judges Catherine Garrigues. While long-term interest rates are still historically low despite their rise, they should rise further, given the context of high inflation and fairly sustained economic growth. However, higher long-term interest rates are positive for bank profitability. “While our banks have made provisions to take into account a risk of bankruptcies of client companies, there has been no wave of bankruptcy filings and many provisions should be reversed, which will have a positive impact on profits”, further underlines the manager.
Could banks disappoint on the stock market?
If banks should a priori doing well on the stock market this year, by outperforming the stock market as a whole, no scenario is however included in the marble. And one could at first sight wonder about the behavior that the actions of the banks could have in the event of a generalized correction of the equity markets. Because historically, banking stocks tend to amplify the fall in prices. But that is less true today. First, since the financial crisis of 42, “the evolution of regulations have forced banks to cut back on investment banking, which has made their profits less volatile – and therefore their profile less risky,” emphasizes Catherine Garrigues. Moreover, while the rise in long-term interest rates has recently affected growth and technology stocks, thereby dragging down the equity market as a whole, bank stocks have clearly outperformed in this context. They even often climbed, while large sections of the coast sank into the red…