European and US banks: Inflexion point in their relative performance
Fecha: marzo 2023
Marta Alberni, Ángel Berges, María Rodríguez,
SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 2 (March 2023)
In the context of extraordinary market volatility, triggered by the war in Ukraine and its consequences in terms of exacerbating the energy crisis and inflationary pressures, we have seen significant shifts in relative valuations across different asset classes and/or sectors, some of which breaking from patterns that had become entrenched for many years. After years of US outperformance, last year marked an inflexion point in the relative performances of the European and US banks in terms of both their market values and earnings, particularly in the second half. The search for a factor that explains the banks’ outperformance relative to other sectors and within the banking sector the European sector’s outperformance relative to that of the US yields one obvious answer: the recent trend in interest rates against the backdrop of monetary policy tightening. The scant sensitivity of the US banks to the increase in dollar rates contrasts sharply with the high correlation observed in Europe and Spain, largely explaining the stock market performances of the European and Spanish banking sectors relative to the remaining sectors and by comparison with the US banks. But there are also structural factors underpinning EU banks’ outperformance. Indeed, the improvement registered in the Spanish and European banks’ ROEs is being driven by a more stable provisioning profile. There is still a profitability and valuation gap between the two systems but the distance has narrowed considerably by comparison with that prevailing systematically for nearly a decade.