The outlook for European banking stocks

Gildas Surry, portfolio manager at Axiom Alternative Investments, speaks to IGTV’s Victoria Scholar about the outlook for European banks.

Tighter regulations, depressed economic activity, record low interest rates and a slew of unprecedented settlements with regulators stymied the performance of the global banking sector in the years following 2008’s global financial crisis. A decade later and interest rates are finally starting to rise, reigniting investor interest in the banks, both in the US and in Europe. It has been a busy week for earnings in the UK banking sector with report cards from HSBC, Lloyds, Barclays and RBS.

How did the UK banks fare?

HSBC kicked off the reporting season, posting its first period of revenue growth in six years as, now former Chief Executive, Stuart Gulliver, delivered his final set of quarterly results before passing the baton to John Flint.

Shares in Lloyds jumped after the bank announced a share buyback programme of up to £1 billion and increased its full-year dividend by 20%. Investors shrugged off its miss on statutory pre-tax profit, which still hit a record high.

Barclays’ shares soared, despite disappointing profit and revenue. The market cheered its common equity tier 1 (CET1) ratio, measuring the strength of its capital position, which hit 13.3%, beating its own target of 13%. The bank also promised to restore its dividend this year, having cut the payout two years ago.

Finally, the market failed to get excited by RBS’s first annual profit in a decade, with shares slumping nearly 5% on the morning the results were released. Adjusted profit came in below expectations and the bank disappointed by failing to give an update on its settlement with the US Department of Justice around legacy mis-selling of mortgage-backed securities.

Stock picking among UK banks

Gildas Surry, portfolio manager at Axiom Alternative Investments, says equity investors had high expectations from the UK banks ahead of their fourth quarter (Q4) results, as rising rates spurs on net interest income. Surry said the week started badly when HSBC suspended its share buyback program. Overall, he is constructive on Lloyds, Barclays and RBS.

Political risk for the Italian banks

Italian voters prepare to cast their ballots in the upcoming election on 4 March. Former Prime Minister Silvio Berlusconi’s Forza Italia will face off against the populist Five Star Movement and the centre-left Democratic Party, led by Matteo Renzi. Opinion polls suggest a hung parliament, which is creating political and economic uncertainty.

Among the financials, Surry says the smaller Italian banks could be at risk around the election. He says Credito Valtellinese is one bank to watch out for, as well as Banco BPM, the product of the merger between Banco Popolare and Banca Poplare di Milano (BPM). However, he concludes that political risk has receded for the sector as a whole.

Axiom’s top European banking sector picks 

As a credit investor, Surry says he likes Lloyds and BNP Paribas, along with Rabobank’s insurance partner, Achmea, in the Netherlands.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.