The rout has “caught many on the wrong side of the bet and the situation is turning out to be very messy”, said Guillermo Santos at iCapital.
| Investors betting on a further outperformance in European bank stocks in 2023 have been caught wrong-footed by the meltdown inThe sector – among the year’s biggest gainers until last week against the backdrop of rising interest rates and a resilient economy – is now barely positive in 2023 after sinking 14 per cent since March 9 as the collapse of US lender Silicon Valley Bank triggered concerns about the health of the global financial system.
A Bank of America survey of regional fund managers showed banks were the most popular sector overweight in February.“With the expectation of higher rates boosting margins and high solvency, the overweight position was understandable for many,” said Guillermo Santos, head of strategy at Spanish private banking firm iCapital. “But contagions in markets are very rapid, especially from a large institution such as Credit Suisse.
The banking crisis in the US following the sudden failure of SVB and two other lenders has also led investors to swiftly temper expectations of rate hikes by the Federal Reserve, and as a result, the European Central Bank. That leaves earnings at European lenders particularly vulnerable as they’ve still seen estimate upgrades outnumber downgrades this year, according to a Citigroup. index. Estimates at US banks, on the other hand, have been consistently reduced over that period.
“There will be greater competition for deposits and pressure on bank earnings, and lenders in the UK and Europe will be hit by this,” he said. “There’s scope for European banks to ‘catch down’ with the US and in a broader risk-off scenario, rationality may go out the window with a pick-up in general contagion risks.
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