(Repeats story run on Thursday.)
* Weaker bank profits seen negative for European equities
* European equity rally still lags US stock markets
* US banks benefit after cleaning up their balance sheets
By Sudip Kar-Gupta
LONDON, Aug 15 (Reuters) – Muted earnings at Europe’s
heavyweight banks are weighing on the region’s broader equity
rally and could hobble Europe’s attempt to match Wall Street and
set record highs.
Banking shares are the region’s biggest sector, accounting
for 22 percent of the STOXX Europe 600.
The STOXX Europe 600 Banking Index is up 12 percent
this year on signs the euro zone economy will gradually recover
from the sovereign debt crisis and thanks to accommodative
central bank policy. Yet it lags a 27 percent gain in the S&P;
500 Diversified Financials Index, covering major Wall
Street banks.
That chimes with broader market trends, with Wall Street
setting record highs while Europe’s markets are still a third
below their all-time peaks, despite an 8 percent gain this year
for the FTSEurofirst 300 index.
A look at banks’ second-quarter earnings portrays a similar
European underperformance, which shows no sign of ending.
Although 82 percent of Europe’s banks beat or met analyst
expectations with second-quarter results, those wins came from a
very low base. Earnings were up just 3.7 percent year-on-year
against a 28.9 percent rise reported by U.S. lenders, according
to Thomson Reuters StarMine data.
That trend is expected to continue, with analysts still
downgrading forecasts for European banks, while the earnings
momentum for U.S. peers has been positive since early 2013, as
Wall Street analysts raise estimates, according to Datastream.
Adrian van den Bok, chief trader and deputy chief investment
officer at SteppenWolf Capital LLC, said the risk of European
banks having to raise capital to pass regulatory tests and
lingering concerns over their exposure to euro zone sovereign
bonds could be a further drag.
“European banks are still going through a re-capitalisation,
and until uncertainty surrounding the European sovereigns
dissipates, why should European equities outperform?” he said.
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Banks’ earnings trend since 2007:
http://link.reuters.com/mec42v
Banks’ 12-month expected earnings:
http://link.reuters.com/nec42v
Banks’ earnings momentum:
http://link.reuters.com/fuc42v
Banks’ capitalisation ($)
http://link.reuters.com/red65t
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Societe Generale strategists wrote this week that U.S.
companies’ overall earnings’ outperformance mainly reflected
higher profits at U.S. banks.
U.S bank earnings are on average about 15 percent below the
peaks of 2007, while European bank earnings are still 30 percent
below their highs, Datastream data shows, reflecting the
stronger state of the U.S economy.
DRAG ON THE MARKET
While most expect the earnings of European banks to improve,
and dividend payouts should increase, the gap with their U.S.
peers is unlikely to close quickly and should remain a drag on
the broader market.
According to StarMine, European banks’ earnings per share
are set to rise by 9.2 percent a year for the next five years,
compared with growth of 11.2 percent over the same period for
financials in the S&P; 500 index.
That relative earnings strength has been helped by the fact
that U.S. banks largely cleaned up their balance sheets after
taking hits in the financial crisis, while European lenders are
still trying to plug holes.
Britain’s Barclays, for example, this month started
work on a 5.8 billion pound ($9 billion) share sale, while the
capital position of German banks has also come under scrutiny.
“If you fear a continuation of the political malaise that
has dogged sentiment over recent years and also expect banks to
be forced to raise more capital after their recent rally, then
you probably wouldn’t rush to buy Europe,” said Tim Gregory,
head of equities at Psigma Investment Management.
($1 = 0.6460 British pounds)
(Additional reporting by Blaise Robinson; Editing by Nigel
Stephenson and Susan Fenton)
