Handelsblatt editor Michael Maisch analyzes the new success of Commerzbank and other European banks.
Even 15 years after the financial crisis, the Germans have still not made their peace with the banks. Because the financial institutions are not immediately passing on the higher interest rates that they have recently been receiving from the European Central Bank for their deposits to their customers, the “Bild” newspaper castigated “the big interest mess”. This isn’t quite as subtle as Bertolt Brecht’s bon mot from The Threepenny Opera “What’s breaking into a bank compared to founding a bank?”, but points in the same direction.
Banks, if they don’t have to be rescued by the state, can certainly be a source of joy. Commerzbank proved that on Thursday when its boss Manfred Knof announced that profits would triple in the past year and promised even higher profits for 2023. Investors heard the message, and actually believed it. At its peak, the Frankfurt money house’s share rose by more than ten percent.
The fact that Commerzbank has excellent chances of climbing back into the elite class of the German stock market, the Dax, also contributed to the confidence of investors. The leading German index closed on Thursday without tailwind from Commerzbank with a small plus of 0.2 percent at 15,534 points.
Thanks to its business model, Commerzbank is one of the major beneficiaries of the turnaround in interest rates. Net interest income climbed more than 33 percent to 6.45 billion euros in 2022, and CFO Bettina Orlopp expects a further increase to well over 6.5 billion euros in the current year. Interest income has not yet peaked.
This is consistent with the assessment of the analysts at Algebris Investments. They believe that the market is still underestimating how much European banks benefit from positive interest rates. It will take several years for financial institutions’ balance sheets to be revalued, and even after interest rates have peaked, profits are likely to continue to rise.
A recession could end the boom in banks
That sounds almost too good to be true. An economic crisis could spoil the euphoria because many companies would then no longer be able to repay their loans and the defaults would tear ugly holes in the bank balance sheets. Recently, however, fears of a deep recession have eased noticeably. The algebris experts therefore assume that the banks will soon be able to release the safety buffers they have created for these failures. This also applies to the provisions for corona risks, which can still be found in the books of many financial institutions.
Algebris therefore expects that in 2023 Europe’s banks will make the most money in a decade. In addition, there is a dividend yield of seven percent and the comparatively cheap valuation of many bank stocks. According to calculations by Algebris, the paper is currently trading at six times future earnings. Even in the difficult decade after the financial crisis, this value would have been closer to ten.
The European sector index Stoxx 600 Banks Europe has already risen by around 25 percent in the past six months. Whether further significant gains are possible depends, like so much on the markets at the moment, primarily on the development of the global economy.
Can the US and Europe Really Avoid a Recession? Will the economy remain so robust and inflation so persistent that the central banks will continue to raise interest rates? Or will the guiding principles drop again soon after a short break? That would be bad news for bank shareholders, but it might make Bertolt Brecht happy.
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