Some of Europe’s largest banks have managed to break free from their sector’s dramatic share price spiral by wooing investors with expectation-beating profits and promises of returning cash to shareholders.
HSBC and French lenders Crédit Agricole and Société Générale were rewarded with more modest share price rises for topping earnings expectations and posting stronger capital than analysts had pencilled in.
After a wide-ranging sell-off at the start of the week, the strong results gave shares in European banks their first boost since Friday night’s publication of EU stress tests aimed at reassuring investors that the sector was sound.
The Euro Stoxx banks index, which broadly reflects the European banking sector, advanced 1.4 per cent on Wednesday. That followed sharp falls on Monday and Tuesday, when it fell 2.8 per cent and 4.9 per cent, respectively.
Monte dei Paschi, the troubled Italian lender that finished last in the EU stress tests and collapsed 16.1 per cent on Tuesday despite a private-sector rescue plan, rebounded 1.8 per cent on Wednesday.
European banks have become one of the biggest concerns among European investors and policymakers following June’s vote in Britain to leave the EU. The result sent shockwaves through European markets and exposed existing weaknesses in some eurozone banks, particularly in Italy, which has borne the brunt of the post-Brexit sell-off.
Ralph Hamers, ING chief executive, said he was more surprised by his bank’s share price drop in recent days than he was by the share price surge triggered by its quarterly results. He said he believed it was difficult for “healthy” EU banks to mark themselves out from the sector when investors turned hostile.
“The only way to do so is having patience,” Mr Hammers said. “Show that the strategy you go for . . . is successful. I’m confident that the investor base will be back [investing] in the industry, and also specifically in ING.”
Helmut Hipper, portfolio manager at Frankfurt-based Union Investment, said Wednesday’s uptick in share prices was “a rebound” after the brutal sell-off after the EU stress tests. But he said the “earnings power” of several banks in the sector remained weak. “A sustainable turnaround for European banks is not yet in sight,” Mr Hipper said.
Not all leading banks reporting on Wednesday provided good news. Britain’s HSBC and Standard Chartered had better than expected underlying profits but HSBC missed analysts’ top-line earnings forecasts and both pulled back from previous commitments on return on equity, blaming the faltering global economy.
“It is evident that we are entering a period of heightened uncertainty where economics risks being overshadowed by political and geopolitical events,” said Douglas Flint, HSBC chairman.
But markets took the news on the chin, and analysts said the old profit goals were long seen as unrealistic. HSBC’s shares rose 4,5 per cent — largely because of its announcement of a $2.5bn share buy-back and promises of more to come. Standard Chartered’s shares jumped more than 9 per cent in early trading before falling back.
Bill Winters, Standard Chartered chief executive, said most banks, especially in Europe, were “trading below their net asset value right now”. He added: “That’s a statement about a lack of confidence but also a very high level of uncertainty.”
Ronit Ghose, Citi’s global head of banks research, said the low interest rate environment continued to make the sector’s future prospects shaky. “European banking and global banking to an extent remains a very difficult industry,” Mr Ghose said.
Kinner Lakhani, an analyst at Deutsche Bank, said the results showed that higher volatility was helping some banks. “Against low expectations, the more diversified universal banking model is providing greater resilience in a challenging backdrop,” he added.
Despite the rebound elsewhere and more positive earnings, the broader concerns about the viability of banking business weighed on banks seen as the most vulnerable. In early trading on Wednesday, Deutsche Bank shares hit their lowest level on record, although they rebounded slightly.
UniCredit beat analysts' expectations, but a dark cloud still hung over the Italian bank which fell 2.3 per cent on Wednesday, adding to the 16 per cent drop it suffered in the aftermath of the stress test results, where it posted the sixth-worst result of the lenders tested.
“For UniCredit, the world did not change between Friday morning and Monday morning,” the bank’s new chief executive, Jean-Pierre Mustier, told analysts on Wednesday.
Additional reporting by Emma Dunkley
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