A glance at European bank stocks reveals that the sector is extremely popular at the moment. Last year the EURO STOXX Banks Index climbed by 23.4%, leaving the market as a whole, which rose by around 8%, trailing in its wake. However, financial institutions have been outperforming for some considerable time already. On a 5-year view, the sector barometer achieved an annual increase of 8.7%, while the EURO STOXX 50 “only” managing a return of 6.3% p.a. Despite this clear outperformance, the sector is not expensive: the price-earnings ratio (PER) expected for this year is an attractive 6.7, compared with the 13.7 offered by the market overall. The banks are also well ahead of the EURO STOXX when it comes to the dividend yield, with the banks delivering 6.5% but the market as a whole returning just 2.7%.
The outperformance of the banking sector has continued so far this year, the EURO STOXX Banks appreciating by more than one tenth since New Year. It will be interesting to see how the financial institutions fare in the current reporting season. Deutsche Bank, which is one of the top 10 in the sector index, was one of the first to offer an insight. Although the Frankfurt company posted a significant drop of 36% in net profits, this can be attributed primarily to special factors. The bank remains optimistic for the future and is planning to reward its shareholders with an increase in the dividend from 45 to 68 cents per share and an extensive share buyback programme worth EURmn 750. Commerzbank, too, is holding out the prospect of higher dividends and a new share buyback in the wake of record earnings in 2024.
The Scandinavian bank Nordea has likewise already opened its books for inspection. Last year the EURO STOXX 50 member managed to increase its earnings by 3% to a little over EURbn 12. The operating profit also grew just as much on the previous year to reach EURbn 6.55. These figures from the bank, which was created by the merger of several banks in Denmark, Finland and Sweden, were in line with market forecasts. Nordea expects a return on equity of more than 15% in 2025. The management team is sticking with its dividend policy, a payout ratio of 60% to 70%. Furthermore, it is continuing to explore the possibility of utilising share buybacks as an instrument for distributing excess capital.
Speculative investors for whom a direct holding of bank stocks is not enough can now leverage an investment in the sector. Leonteq’s new outperformance certificates offer an optimum solution here. The clever structure allows disproportionately high profits without having to run an above-average risk. If prices go up, the product multiplies the movement. If they go down, owners of outperformance instruments are in no worse a position than with a direct investment. The outperformance certificate issued in CHF comes with a participation rate of 160%. If the underlying appreciates by 10%, for instance, the product turns this rise into a gain of 16%. The EUR equivalent even leverages a positive price movement by 200%, i.e. the performance of the underlying is doubled. Both products offer an unlimited opportunity for gains, so there is no cap in the structure. Should the EURO STOXX Banks plummet, the outperformance certificate only participates 1:1 in a negative performance below the strike at 100%. That means investors are not in any worse a position than with a tracker. Generally, the attractive payout profile does not kick in entirely until maturity in two years.
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