European bank shares have been knocked to two-year lows by deepening fears about the global economy and the threat the eurozone crisis may spur more capital raising. Bargain hunters are not biting yet. The lowly valuations reflect a deeply bearish view on the European and US economies and the risk to earnings and capital raisings, investors and analysts said.
And profits may not recover to lofty pre-crisis levels anytime soon, as finance watchdogs across the globe tighten the rules after the credit crisis plunged the world into its worst economic crisis since the Great Depression. "You might say banks were good value now, but they might still be (at that level) in 5-10 years time," said a fund manager at a top UK firm who holds several banks.
"That visibility is what investors are lacking in order to get excited about the sector because they cannot see what the upside trigger is," the fund manager said. Bank shares - closely linked to the health of the economy given the hit earnings take from lower income, higher bad debts and trading losses - are trading at half their historic averages, sending a grim signal on economic prospects.
The European bank index is trading at 6.7 times the next year's expected earnings, according to Thomson Reuters I/B/E/S estimates - well up from the sector's low of 4.9 times when the financial crisis raged in 2008. But that compares to an average multiple of 10.8 over the last decade and 12 over the past 16 years. The reasons are that investors expect more trouble in short-term funding, losses from eurozone government debt and weak investment bank trading income.
In terms of book value, the sector is trading at an average of 0.6 times book value, compared to a 16 year average multiple of 1.6. "The market is starting to price in writedowns of sovereign debt not only in Portugal, Greece and Ireland but also Italy and Spain and the associated recapitalisations ... It is getting pretty extreme," the fund manager said.
Barclays and Societe Generale shares are respectively trading at 4.4 times and 3.7 times earnings for the next 12 months, less than half their 10-year averages of around 9.5. BNP Paribas, Santander and Intesa Sanpaolo are also heavily discounted. "Current prices suggest that the market is discounting much more than a moderate, medium-term earnings downgrade driven by weaker revenues," Leigh Goodwin, Citi analyst, said in a note. An immediate concern is over banks' funding.
The pressure is most apparent for European banks in need of short-term dollar borrowings, after US money market funds cut their exposure to eurozone banks in recent months. Concerns heightened this week after an unidentified eurozone bank borrowed $500 million in one-week dollars from the European Central Bank, for the first time since February, signalling a possible squeeze in dollar funding.