European Bank Stocks Surge to Highest Levels Since 2015 Following Strong Earnings Report

European Bank Stocks Hit 2015 Highs Post Stellar Earnings. Following robust financial performances, European bank shares soar to their highest levels since 2015. Investor confidence surges as earnings reports exceed expectations, signaling a potential turnaround for the banking sector. Amidst economic recovery optimism, analysts speculate on sustained growth and market resilience

European banking stocks reached their highest level since 2015 on Friday, buoyed by better-than-expected first-quarter earnings that indicated lenders were still performing well.

The STOXX Europe 600 banks index touched 197.7, a level not seen since October 2015. This surge was supported by a 5.9% increase in NatWest's shares after the British bank reported strong first-quarter results.

So far this year, the index has gained 16.7%, surpassing the 6.1% rise in the broader pan-European STOXX 600 index and outperforming banking shares in the United States.

European bank stocks have experienced a remarkable recovery since their decline in March 2023, triggered by the U.S. banking crisis and the collapse of Credit Suisse.

The milestone reached on Friday signifies a notable turnaround for a sector that has faced challenges since the 2008 global financial crisis, including weak profitability, regulatory scandals, and the dominance of Wall Street firms in investment banking.

The shift to higher interest rates since 2022 has been a significant catalyst, bolstering lenders' profitability and resulting in substantial returns for shareholders. This has contributed to further gains in stock prices for European banks.

Russ Mould, investment director at AJ Bell, noted, "Bank shares were very cheap for a long time. What we're now getting from the banks is less bad news, or maybe even slightly better news, in that we haven't had that recession, we may be getting interest rate cuts, and net margins are more plump than they were on their loan book."

He emphasized, "They're in a relatively sweet spot."

European banking shares are still significantly below their pre-crisis highs of 2007, when the index traded above 530. To reach late 2009 levels, they would need to increase by approximately 20%.

Concerns have arisen about potential profit impacts amid expectations of central bank rate reductions. However, recent earnings reports indicate that many lenders are in relatively good financial health, with limited provisioning for bad loans and still healthy margins, despite some decline.

NatWest's earnings surpassed expectations on Friday, following Deutsche Bank's forecast-beating results, which caused its shares to surge more than 8% on Thursday. Barclays also showed a relatively strong performance. BNP Paribas, the euro zone's largest lender, reported a decrease in revenues but a significant reduction in costs.

Despite these positive indicators, risks persist, particularly if economies experience rapid weakening, leading to an increase in bad loans. Competition among lenders for savings and mortgage products remains intense, putting pressure on margins.

Nevertheless, there are signs that investors who abandoned banks after they suspended dividends during the pandemic may be returning. This could be partially attributed to an expected record payout of 120 billion euros in dividends and share buybacks by lenders this year.

Michael Christodoulou, an analyst at Berenberg, highlighted, "As the banks edge higher, they are once again becoming more prominent in the indexes. Therefore, not being involved starts to become problematic for investors and funds performance."

Source: Reuters‍