Despite political tension and underperformance of the European Financials sector in the June quarter, results in 2017 and the first quarter were solid. We saw upgrades for the European banking sector through 2017 on the back of improving loan losses and continued uptick in lending growth. The banks are also continuing to make good progress on some of their legacy issues, and mainly two key ones: fines and non-performing loans (NPLs).
Looking at the sector now, the valuations look compelling-
- Absolute P/Es are around 9x, so a 30% discount to the wider European market
- Dividend yield for the sector is 5%, and higher for a number of banks, even with the sector only paying out around half its profits
- Eurozone banks are trading at around a 20% discount to tangible book value (TBV) - that is a very big discount to the US banks which are trading at closer to 2x TBV
We’ve seen how the US financials have recovered from the crisis and that still represents something of a roadmap for Europe.