- ING IM expects European banks to generate a low double digit RoE over the next two to three years
- In terms of valuation support, most of them still trade at a discount
ING Investment Management (ING IM) maintains its positive outlook for European banks with the sector set to stabilise through valuation support, improved profitability and a less volatile economy in the Eurozone.
Nicolas Simar, Head of the Equity Value Strategies at ING IM said: “In terms of valuation support, most of them still trade at a discount versus their tangible book value which remains too cheap to ignore. The sector has been de-rated significantly over the last 5 years due to balance sheet repair. We have come to the end of this phase as most of them are comfortable from the Basel 3 capital requirement and will be able to grow their loan book in the future.”
In terms of improved profitability, ING IM expects the banks’ Return on Equity (RoE) to improve in a recovering Eurozone area with the expectation of generating a low double digit RoE over the next two to three years. At the same time, the investment manager sees a declining Cost of Equity (CoE) due to a decreasing sovereign spreads, which is especially pertinent to southern Europe. Therefore, the discount to book value will disappear in the next few years.
Nicolas Simar continues: “As the economy stabilizes within the Eurozone, rising PMIs including the periphery over the last 6 months should progressively lead to a stabilization in Non Performing Loans (NPL) and declining provisions that will support earnings growth for the sector.”
ING IM believes that we are entering a new cycle for Eurozone banks after 5 years of deleveraging and balance sheet repairs. As most banks do comply with the capital requirements from Basel 3, the investment manager highlights they can now focus back on shareholders’ returns by increasing dividends from a very low payout level. This currently stands at around or below 30% versus the long term average between 40-45%.
Nicolas Simar concludes: “While European banks do not currently offer a high dividend yield, their ability to increase it over the next two to three years is substantial and will attract more interest from investors.”
“The credit growth remains supportive in the US market which is very close to turning the corner in Europe. While we do recognize the Eurozone periphery still shows credit growth contraction, the change in credit growth has turned the corner, boding well for Italian/Spanish banks profitability prospects.”