European banks offer investors sweeteners as rally fades

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European banks are dangling sweeteners for investors, helping boost their share prices even as a lengthy sector-wide rally loses steam.

French banks BNP Paribas and Société Générale last week accelerated share buyback programmes, handing a combined €2.15bn to investors earlier than anticipated, while BNP also outlined a more robust capital target.

Deutsche Bank also unveiled new targets last week as part of a capital markets day, pledging to deliver higher returns and payouts to shareholders, as well as faster growth and lower costs, by 2028.

The flurry of announcements comes as a rally in European bank stocks over the past two years has shown signs of fading, with some investors starting to sour on the sector.

The Euro Stoxx Banks index, which tracks the biggest lenders in the Eurozone, is flat over the past three months, having climbed by more than 60 per cent between January and mid-August.

Investors and executives have warned that Europe’s banking industry is facing a more difficult period as falling interest rates put pressure on their net interest margins — a crucial measure of lending profitability, which has been boosted in recent years by higher rates.

Ian Horn, portfolio manager at Muzinich & Co, said credit spreads in the banking sector were particularly attractive in 2023 and 2024, but added: “Fast forward to today and a lot of that value has disappeared, particularly in Europe. Valuations are no longer as attractive [and] US banks are starting to look better value than Europe.”

After struggling for years to persuade investors their shares should be priced as richly as one times the book value of their assets, lenders including Banco Santander, Intesa Sanpaolo and UniCredit are now valued at between 1.3 and 1.5 times book, according to data from S&P Global. Spanish group BBVA’s shares are priced as high as 1.8 times book.

Andrea Orcel, chief executive of Italy’s UniCredit, who has pledged to distribute at least €9.5bn to investors through share buybacks and dividends for its 2025 financial year, has also cautioned that the market has potentially become overly optimistic about the prospects for European lenders.

“As we go into 2026, it is going to be tougher for European Union banks,” Orcel said. “I think net interest income will be more brutal than people expect.”

Frank Wedekind, global equity research analyst at William Blair Investment Management, added that he had become more “selective” on European lenders.

“I had been overweight [European banks] for five years or so. Now, I’m more selective depending on the stocks,” he said. “After what they’ve done in terms of performance, I think the air’s getting a bit thinner. And because the air’s getting a bit thinner, you want to be selective.”

However, analysts largely remain bullish about the outlook for the industry. Andrew Stimpson, an analyst at Keefe, Bruyette & Woods, said banks “are all looking out the next few years at pretty good conditions”.

“Loan growth is back, 2 per cent ECB rates are within the ‘Goldilocks zone’ and there is an upward-sloping yield curve,” he added. “It also seems unlikely that we will have a big problem on asset quality in the banks as loan growth has been weak for many years.”

Meanwhile, BNP Paribas’s decision to bring its buyback forward, as well as pledging to lift its common equity tier one ratio — an important measure of capital strength — to 13 per cent a year ahead of schedule, surprised analysts and wooed investors, with shares climbing 6 per cent on Thursday.

But BNP has been one of the worst-performing large European bank stocks this year amid legal woes related to Sudanese refugees and domestic political turmoil.

The French lender went from being the Eurozone’s most valuable bank by market capitalisation as recently as June last year to falling significantly behind Spain’s Banco Santander and BBVA, as well as UniCredit and Intesa Sanpaolo.

Joseph Dickerson, an analyst at Jefferies, said BNP’s new capital target and buyback were a statement of strength, adding that it should be a significant turning point for investor perceptions.

Deutsche Bank’s updated targets failed to impress investors, with shares falling more than 3 per cent on the day they were announced and more than 7 per cent across last week. However, the German lender has gained 75 per cent this year.