By Michael Msika, Bloomberg Markets Live commentator and reporter
After the U.S. Federal Reserve’s expected hawkish pivot last night, it’s now down to the European Central Bank and the Bank of England to address surging inflation. Their decisions will have a big impact on banking stocks, which have strongly outperformed in 2021.
Banks have gained almost 30% this year, vying with technology stocks as the top sector, amid strong results and as stickier-than-expected inflation has fueled rate-hike expectations. A hawkish tilt in monetary policy heading into 2022 is what the sector needs to keep its rally going.
“Banks are the key play on potentially rising yields and on the re-steepening of the yield curve next year,” say JPMorgan strategists led by Mislav Matejka.
Despite the rally this year, lenders are not expensive. With a blended forward P/E of 8.5 and a forward price-to-book of 0.6, the sector is still historically cheap, on an absolute and a relative basis. Its discount to the Stoxx 600 widened to 45% in terms of P/E, while the group’s dividend yield is almost twice that of the market.
“Banks still look very cheap,” Matejka says. “Their balance sheets are resilient this time around, with no need for dilution, dividends are returning to the sector with a healthy 5.6% yield, and earnings are moving higher,” he adds.
Analysts are mostly bullish on lenders, expecting 21% upside on average — almost double that forecast for the broader market. UBS analysts including Jason Napier are “strongly positive” on banks for 2022, saying they are more geared to higher rates than at any point in their history.
“We see bank rate gearing estimates as too low, aggregate capital and loan loss provisions built to excess, and capital generation from organic operations and M&A due to surprise positively,” Napier says. He likes U.K. banks for cheap rate gearing, while Barclays and BNP Paribas are his top European investment banking picks.
To be sure, the sector’s rosy year comes after a laggard performance in 2020, when only energy stocks had a worse return than banks. And risks including new virus developments and central bank surprises — like the BOE’s November shocker — remain.
Still, investors are bullish for now, with the Bank of America European fund manager survey in December showing banks as a consensus overweight among portfolio managers, along with tech.
About 78% of survey respondents see banks either as an attractive vehicle to position for higher rates or as a beneficiary of the last leg of the recovery. Still, after a 75% surge since the low in September 2020, investors have now halved their overweight stance to a net 27%, and the sector remains “over-owned,” BofA says.
