European banking stocks surged to their highest level since 2015 on Friday, propelled by better-than-expected first-quarter earnings and indications that banks were thriving in a favorable environment.
The STOXX Europe 600 banks index touched 197.7, a peak last seen in October 2015, bolstered by a significant 5.9% surge in NatWest’s shares following the release of their first-quarter results.
This year, the index has surged by 16.7%, outstripping the 6.1% increase in the broader pan-European STOXX 600 and surpassing U.S. banking shares.
The resurgence of European bank stocks follows a tumultuous period since March 2023, marked by the U.S. banking crisis and the collapse of Credit Suisse.
Friday’s milestone signifies a remarkable reversal for a sector that has grappled with challenges since the 2008 financial crisis, including weak profitability, regulatory issues, and the encroachment of Wall Street firms in investment banking.
Russ Mould, investment director at AJ Bell, noted, “They (bank shares) were very cheap for a long time … what we’re now getting from the banks is less bad news, or maybe even slightly better news, in that we haven’t had that recession, we may be getting interest rate cuts, and net margins are more plump than they were on their loan book.”
He emphasized that banks are currently positioned in a relatively favorable scenario.
Despite this uptick, European banking shares still lag far behind their pre-crisis highs of 2007 and would need to climb approximately 20% to reach late 2009 levels.
While concerns persist about potential profit declines amid expectations of central bank rate reductions, recent earnings reports indicate that many banks remain in decent shape, with manageable bad loan provisions and healthy margins.
Although risks linger, including the threat of economic downturns leading to increased bad loans and intense competition among lenders for savings and mortgage products, there are indications that investors are returning to banks, enticed in part by substantial dividends and share buybacks expected to be distributed this year.
Michael Christodoulou, an analyst at Berenberg, highlighted the growing importance of banks in indexes, suggesting that not being involved could pose challenges for investors and fund performance.