December 24, 2019

In December 2011, shortly after he became the new chief of the European Central Bank (ECB), Mario Draghi opened the floodgates and offered unlimited amounts of euros to banks in three-year loans at 1% interest, with the intention that they would lend that money to businesses and spur growth.

The Basel Committee (which sets global requirements for liquidity and capital ratios for banks) announced an unexpected easing of rules. Rules approved by the Basel Committee on Banking Supervision were significantly more flexible than the prior structure. Banks were able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

Cumulative Index Performance Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It was seen then as a big win for Europe, where the credit system had been mired in a state of disrepair. Crucially for the euro zone, the Basel Committee watered down its liquidity requirements. European banks used to hold loans on their balance sheets, rather than securitize them. It was one of many radical measures employed to help fortify the fragile European banking system.

The driving message was that European authorities, namely the ECB and its national representatives, were doing whatever they could to help credit flow through the system, along with a series of follow-on ECB rate cuts that eventually resulted in negative yields on 10-year sovereign bonds in several European nations.

Fast forward to the current U.S stock market rally, as the yield curve in the U.S. Treasury market steepened these past two months. The banking sector, has rallied sharply in response to both a more normalized yield curve and a brighter outlook for the U.S. economy in 2020.

Too Big to Fail Means Too Big to Ignore

What is most interesting is how European banks, while still mired in negative interest rates, are trading higher, in tandem with their American counterparts. The exception is that they are coming off decades-low valuations in what can only be viewed as either pure speculation or the notion that the very worst of conditions is a thing of the past and business is about to get better – even if only infinitesimally better.

If so, investors should consider the “then and now” logic of what could be if, in fact, this is the start of a banking recovery in Europe. For historical reference, the following  U.S. banks have had large gains since 2008;

J. P. Morgan Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Wells Fargo and Company Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

U. S. Bancorp Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Bank of America Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I wonder if owning a basket of major European banks, all of which are among the world’s 50 biggest banks, could generate some impressive total returns over the next three to five years as a buy-and-hold strategy. Several of these banks have begun paying dividends again and a few have raised their dividends in 2019. Below are the names of select European banks with positive yields.

Lloyds Banking Group PLC (LYG) – United Kingdom
Royal Bank of Scotland Group PLC (RBS) – United Kingdom
Banco Santander S.A. (SAN)Spain
Unicredito SPA (IT: UCG) – Italy
UBS AG (UBS) – Switzerland
ING Group N.V. (ING) – Netherlands

Source: YahooFinance.com cited on December 20, 2019.

Navellier & Associates does not own JPM, WFC, USB, BAC, LYC, RBS, SAN, UCG, or ING in managed accounts and our sub-advised mutual fund.  Bryan Perry does not own JPM, WFC, USB, BAC, LYC, RBS, SAN, UCG, or ING in personal accounts.

From a purely fundamental standpoint, there is no hurry to buy these or any other European bank stocks. Shares of the iShares MSCI Europe Financials ETF (EUFN), which holds these banks and a host of others, look as if they have put in the quintessential “double-bottom” formation that chartists salivate over.

iShares MSCI Europe Financials Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

From a viewpoint of answering “is the easy money about to be made?” I’d say the recent move off of the lows for the sector has my full attention. As is usually the case with a potential generational investment opportunity, the stocks in question will likely make a dramatic move higher before the fundamentals start to justify the technical move.

I’m not at all certain this recent uptrend is truly the beginning of something greater in store, but if there was ever a hated and washed out sector that is “too big to fail,” it’s the European banks.

If there is also the potential for a 3x to 5x move in the making over the next few years, then I just want to highlight the potential of this trade heading into 2020.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry