US and European banks now present a buying opportunity as they are predicted to be among the biggest beneficiaries from rising interest rates and improving housing markets, according to ETP provider Source.
Source research see steepening yield curves are already benefiting banks, which outperformed their respective stock markets in both regions during Q2, the latest Source Sector Selector, a quarterly update, says. European banks are also benefiting from economic recovery in the Eurozone.
According to Source research, the performance of Eurozone banks tends to follow the path of loan volumes and house prices, both of which had turned positive by the end of 2014. Return on equity for banks is now improving but from low levels: it is 3.4% in Europe and 8% in the US, while banks’ price to book value has normalised in both regions to around 1x after hitting nadirs in 2009 and 2012
Paul Jackson, Head of Multi-Asset Research at Source, says: “We remain fully committed to financial on both sides of the Atlantic and we are overweight all subsectors, including banks, financial services, insurance and real estate.
“In our view, valuations of banks are cheap when put in an historical context, although they may be considered to have been in a bubble for 10 years of that history. Profitability remains a problem, with limited loan growth, poor markets and regular dilution from stock issuance; hence return on equity is unlikely to return to pre-crisis levels. But a combination of good valuations, improving economic fundamentals, rising interest rates and a high beta in a rising market means banks, in our view, are a compelling buy.”