Joice Alves

LONDON, (Reuters) – European bank shares rose to a new three-year high, boosted in part by the U.S. Federal Reserve signaling that rates could be raised faster than anticipated, lifting some of December’s gloom.

European bank stocks saw a steep rise in borrowing prices on Thursday, following minutes of the December Fed meeting that were published on Wednesday. This was after officials indicated they might want to raise interest rates earlier than originally expected.

The European Bank Index jumped by 1% and reached its highest point since October 2018. This surpasses the pan-European, which dropped 1.3%.

Central banks raising interest rates are a common way for banks to increase their profitability. The only thing that would result in a substantial increase in earnings for banks throughout the region was a reaction from the European Central Bank, which is considered the last central bank to hike interest rates. Max Anderl of UBS Asset Management said this.

Anderl suggested that the rally of early 2022 may still be viable, and that banks could profit more from the “move from growth towards value than from a real increase in underlying fundamentals.”

Standard Chartered (OTC), saw a 4% rise to their highest level within two months. Deutsche Bank (DE) climbed 3% to a seven-month peak, and Spain’s Caixabank gained 2.5% at its highest level since October.

After climbing 70% over the year ended November 2021 (more than double the 30 percent growth rate of the index), European bank stocks lost steam in December. This was despite banks having restored dividends and benefited from Europe’s recovery. (Graphic: Banks top sectoral performer in Europe, https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwjngkpo/Banks%20top%20sectoral%20performer%20in%20Europe.png)

The last quarter of 2021 will see a revival in COVID-19 cases. This means that the European financial sector’s growth prospects are weakest among all STOXX 600 segments.

According to Refinitiv, the financial sector had the lowest expected year-on-year revenue growth rate of 3.5%, compared with the 64.2% rate for utilities and an overall 17.2% revenue growth rate estimated for STOXX 600.

BofA analysts predict that European bank revenues will reach 23 billion euros if there is a 100 basis point shift in yield curves. Bank stocks and bond yields are strongly linked. This would be 4% of industry revenue for 2022, and 15% profit before taxes.

The low valuation of European bank stocks is another factor that supports them. Europe’s banking sector trades at 8.8x forward earnings. This is compared to 12.9 times in the U.S. and 16.8 times with the STOXX600 benchmark.

Barclays (LON:). Analysts believe that 2022’s outlook for banks is still positive, as credit demand in Europe continues to rise and stock prices remain attractive. (Graphic: European banks vs U.S., https://fingfx.thomsonreuters.com/gfx/mkt/zjpqknwmnpx/European%20banks%20vs%20U.S..png)