News

Before the financial crisis of 2008 the earnings of European banks reached unsustainable levels due to the high debt across companies, individuals and governments. The Eurozone crisis of 2011 dealt another blow to both earnings and the stability of the sector. Since then intervention by the European Central Bank (ECB) and the rebuilding of confidence in both the regulatory environment and prospects for economic growth has led to the beginning of a recovery in earnings and share prices.

Given the extent of the problems this recovery was always unlikely to be simple or smooth, as we were reminded last week with the news about problems at Banco Espirito Santo (BES) and their privately owned parent company affecting markets globally. Whilst we are watching the situation and believe the ongoing Asset Quality Review (AQR) being conducted by the ECB may yet uncover some issues in the weakest banks, we do not, at this stage, think these or the problems at BES will prove to be too severe.

In the meantime we are remaining overweight to the European banking sector. We believe earnings remain depressed and have significant upside potential as the economy improves, bad loan impairments fall, lending growth gradually picks up and costs are cut. Whilst we don’t expect earnings to recover to the peak achieved before the crisis, a recovery to the long term trend should provide upside to share prices.

"Opinions constitute our judgement as at the date shown and are subject to change. This article is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation.

C. Hoare & Co. or a connected company, and their customers, officers and employees, may have a position in, or engage in, transactions in any of the securities mentioned."