Even after Monday’s strong market rally, European bank shares are trading at just under eight times average two-year forward earnings forecasts, still a 20% discount to the five-year average of 9.2x and an average since 2006 of 8.6x.
Some of the big lenders in the UK, along with peers in Spain, Holland and France, are trading even bigger P/E discounts.
“This reflects uncertainty about their ability to generate earnings amid the COVID-19 crisis, and their ability to pay dividends on those earnings,” analysts at the Swiss bank said in a note to clients on Tuesday.
If a successful vaccine comes to market and leads to a normalisation of asset quality and to dividend payouts, the analysts said Lloyds had the biggest potential re-rating upside based on normalised P/E.
The Bank of England, along with other European regulators, will provide an update on their dividend bans in December.
“Even in the absence of a vaccine, we think the blanket ban will likely be dropped in 2021, albeit dividend payments could be delayed until mid-year so as be informed by stress tests,” the number crunchers said.
“With a successful vaccine, we think regulators will be more willing to allow banks to pay a normalised dividend for 2020, as well as some catch-up for 2019.”
Elsewhere, JPMorgan Cazenove’s banking team said they felt that European regulator’s decision around dividends is “finely balanced”, but expect well capitalised EU banks to pay dividends in 2021.
They also reiterated their positive view the European banking sector generally, with US election-related tail risks “reduced materially” as well as the vaccine news.
Post the US election, tail-risks from higher US corporate taxes and regulation are reduced, with the investment bank’s house view that an even balance of power in Washington’s legislature implying that major policy changes will be difficult to pass, while also easing global trade war tensions.
While the Senate run-off elections in Georgia could lead to a loss of both Republican seats and result in a ‘blue sweep’ outcome, bringing back the risk of higher taxes and regulation, JPMorgan’s US strategists believe that this risk is likely to be overstated.
The base case house view post US elections is that fiscal stimulus is still expected although at a smaller scale, with higher yields driving rotation into banks and value stocks and a more positive outlook for emerging markets.