Some perspective on the European banking sector rally

Interesting comments from Barclays’ equity research team…

« The two-month rally in European banks reflects some relief from post-Brexit macro data, coupled with hopes of fiscal stimulus. The benefits appear greatest for US/UK exposed banks such as Santander. For the rest of the sector, RoE improvements not CoE declines are needed to consolidate the rally. Spillovers from a sufficiently large US/UK stimulus might be enough to bolster bank margins if European rates (finally) rise. Spanish, Italian and investment banks appear most geared here. If we don’t get these spillovers and more Eurozone stimulus is needed, the outlook for banks is more challenged. The ECB’s options appear to be narrowing as the stock of purchasable government bonds runs low, raising the possibility that bank balance sheets become ‘in scope’. In our view, extending QE via buying banks bonds would be politically awkward and largely ineffective. ECB purchases of banks loans – and specifically NPLs – might release ‘trapped’ capital but would more likely add to banks’ margin pressure. »

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