EU banks underperformed the broad market slightly in November for the first time over the last three months. But it was just the second time of underperformance over the last 5 months or the 8th time over 28 months. The SX7P index ended the month in the red, for the third time over the last 13 months.
EXECUTIVE SUMMARY
EU banks underperformed the broad market slightly in November for the first time over the last three months. But it was just the second time of underperformance over the last 5 months or the 8th time over 28 months. The SX7P index ended the month in the red, for the third time over the last 13 months. The index decreased by 0.5% MoM in November vs +1.0% MoM of the STOXX 600 index. The absolute November 2024 performance was -0.1 std from the mean monthly performance, and it was in the bottom 38% of absolute performance in the index history. The relative November 2024 performance was -1.5% MoM. It is -0.3 std from the mean, and it is in the bottom 31% of relative performance in the SX7P index history. So, EU banks outperformed the broad market by 37.7% over the last 28 months, but just by 8.3% since February 2022 due to their significant drop in March 2023. Despite stronger dynamics in 2022/23 years, the SX7P index underperformed the broad market significantly in each of 2018-2020 years. Regardless of still relatively weak economic projections, the start of the rate cut cycle and roughly flat EPS estimates qtd, more than 55% banks from our sample ended the month in the green, driven by stronger 3Q24 earnings. Moreover, all members of our sample except for BNP FP remained positive on a yoy basis as of the end of November. In turn, the news headliners of recent months, Commerzbank and Unicredit, were the worst performers in November, decreasing by 11.1% MoM and 10.6% MoM, respectively. But the variability of monthly price changes decreased slightly in November, for the second consecutive time over the last three months, even despite a pretty news-packed month. Thus, the difference of price changes between the best and the worst performers was 23% in November and vs 27.2% in October and 29.6% in 2Q24. In turn, the correlation among EU banks between price changes ytd and EPS FY24E changes ytd decreased slightly again in November, -4% MoM to just 20%, still remaining much lower vs US banks.
Despite noticeable outperformance in recent years, EU banks continue trading with a significant discount both to historical averages and to the broad market as EPS estimates growth also remains quite high. Thus, median P/E 24E of our group of banks decreased from 7.4x (as of November 1, 2024) to 7.1x (as of November 29). In turn, median P/E 25E went down from 7.2x (as of November 1, 2024) to 6.9x (as of November 29). But both ratios are not very far from levels of the end of 2022. Hence, EU banks are still trading at -1.38/1.35 std on P/E CY and at -1.05/-1.02 std on P/E NY (on the basis of samples from 2006 and 2010 years) relative to historical averages. As for valuation relative to the STOXX 600 index, the banks are currently trading at -1.39 std from the sample mean (2010-current moment) for P/E CY and -1.36 std for P/E NY. Moreover, the discount to US banks also remains much wider than on average, at -1.4/-1.0 std for P/E CY/NY as of November 29. Median P/B of our group of banks also decreased slightly during the last month, falling from 0.85x as of November 1, 2024 to 0.82x as of November 29. The ROE figures of 2H23-3Q24 were the highest since the pre-GFC era, and they would remain quite high vs average ROE of the post-GFC times in the nearest years, albeit a few percent below current levels. As for individual names, multipliers are still quite different, but the dispersion across banks has decreased recently. Nonetheless, RBI’s P/E estimates for the nearest years remain just around 3-4x at the moment while UBS’s ratios are ranging from 16.9x for 2024 year to 9.2x for 2026 year, comparing to industry’s average ratio for the nearest three years of 7.2x.
The EU economy experienced weaker growth momentum amid rising uncertainty. Indeed, the composite PMI of the EU economy remained below the threshold of 50 pts for the third consecutive time in November. Moreover, both key components were weaker than expected in the last month. Thus, the EU manufacturing PMI decreased by 0.8 pts MoM to 45.2 pts in November 2024 vs the consensus of 46.0 pts, the 29th consecutive month under 50 pts. In turn, the EU services PMI went down by 2.4 pts MoM to 49.2 pts in November vs the consensus of 51.6 pts. Also, EU consumer confidence decreased by 1.2 pts MoM to -13.7 pts in November vs the consensus of -12.5 pts. Hence, we expect that EU GDP growth will decelerate slightly in 4Q24, but it will still remain positive. At least, we believe that recent weakness of soft macro data mainly related to higher uncertainty as a result of possible economic implications of Trump’s election victory in the United States as well as political tensions in France and Germany. But the fact remains that the ongoing uncertainty sooner or later will impact negatively on hard data. The good news is that inflation continues moving in the right direction, and, according to the last ECB’s minutes, it was even lower than expected in recent months. Thus, core CPI was flat MoM at 2.7% yoy in October, remaining at the lowest level over the last 35 months. So, the ECB has some room for maneuver to stimulate economy through further monetary easing. Not surprisingly, it is expected that the rate will be cut again at the December meeting with non-zero risk of a 50-bps cut at once, at least under current forecasts. Moreover, according to the most recent market expectations, the ECB will cut rates by 25 bps 5 more times in 2025. Hence, the rate is implied around 1.6% at the end of 2025 vs 3.0%, which was forecasted at the end of May.
Short-term outlooks were improved slightly after better 3Q24 earnings, but longer-term forecasts continue deteriorating. The 3Q24 earnings season was quite strong for EU banks, even despite it was the first quarter of weaker NII in a long time. The latter even decreased sequentially but near-term NII outlooks were better than expected regardless of significant decline of rate expectations in 2H24. Thus, more than 78% of banks from our sample beat revenue expectations in 3Q24. The median surprise was 1.9% vs 2.1% in 2Q24. Given NII headwinds, the key driver of higher revenue was fee income, which increased by 7.7% yoy in 3Q24 vs +8.5% in 2Q24. In turn, more than 93% of banks from our sample exceeded EPS estimates in 3Q24. The median surprise was 11.1% vs 7.7% in 2Q24. Lower OpEx and credit costs were the rest of drivers of better net income in 3Q24. So, 3Q24 was the 15th consecutive quarter of positive revenue growth on yoy a basis, but median growth of our sample of banks was just +2.0% vs +3.3% yoy in 2Q24, the slowest growth rate over the last 3.5 years. Revenue growth will continue decelerating in the near quarters, and we expect that revenue of EU banks will even decrease in 2025, for the first time in 5 years, driven by lower NII. Moreover, given recent decline of interest rate expectations, NII risks tilted rather to the downside. Nonetheless, despite still elevated wage inflation, OpEx was lower than expected and well controlled. So, operating leverage of EU banks was again positive in 3Q24 after the first negative gauge over 14 quarters in 2Q24. But it looks like nothing more than a happy coincidence, and we expect that it will be negative most of the next year. So, earnings momentum, which was the key driver of EU banks outperformance in the last 4 years, will continue deteriorating in the nearest quarters, even despite FY25 EPS estimates improved slightly in November, driven by stronger 3Q24 earnings. Moreover, earnings visibility of EU banks is still uncertain, and the situation did not improve at all in November. Given risks of EU economic growth still tilted to the downside, the fundamentals will continue to deteriorate rather than vice versa. Under such circumstances, further re-rating of EU banks looks unlikely. On the other hand, EU banks remain cheap with high internal capital generation, which implies that expected double-digit total yield is sustainable even in case of economic deterioration, which in turn implies limited risks of significant sell-offs, at least all other things being equal. So, we still remain neutral on EU banks, given lack of drivers in the near term.
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