Bruised European Lenders Rise on Yield Optimism After BOJ Move

European Stocks Rise Ahead of Fed Rate Decision
  • Investors also await Fed rate decision after market close
  • Banks in Italy and Spain lead gains on the Stoxx 600

Europe’s worst performers of 2016 just won a respite, thanks to the Bank of Japan.

The region’s lenders rallied the most in almost a month after the BOJ’s steps to mitigate the impact of lower yields on Japanese banks set a precedent and stoked optimism for similar moves in Europe. Worries about profitability in a low interest-rate environment have sent banks in the Stoxx Europe 600 Index tumbling as much as 36 percent this year, and they trade near their cheapest ever relative to the broader gauge. Today, they are the biggest winners.

“Central banks are acknowledging that excessively negative rates are damaging to bank profitability,” said Michael Hewson, a market analyst at CMC Markets in London. “There is a perception that maybe what the Bank of Japan is looking to do could be a template for the European Central Bank and potentially the Bank of England. What’s really damaged European banks over the past 12 to 18 months has been the ECB’s negative interest-rate policy.”

With the ECB deploying an array of stimulus measures, central banks in Portugal and Spain have warned of the effect of decreasing borrowing costs on profit margins. Long periods of low interest rates result in diminished net interest margins for banks and make it difficult to increase revenue. The declines in shares have sent the price-to-book value of Stoxx 600 lenders to 0.7, less than half the multiple of 1.8 for the broader gauge.

Stocks in the so-called peripheral countries were among the biggest Stoxx 600 gainers today: Italy’s UBI Banca SpA climbed 5.4 percent and Spain’s Banco Popular Espanol SA jumped 9.1 percent. The Stoxx 600 rose 0.4 percent at the close of trading, paring an earlier gain of as much as 1.1 percent.

“Maybe we have seen the first explicit admission here that negative interest rates in particular are not positive for banks, and in particular are not positive for the transmission mechanisms for credit-based economies.” said Jon Mawby, a London-based bond fund manager at Man Group Plc’s GLG unit, which oversees $26 billion of assets.

The Stoxx 600 is rising for the second time in three days, after a rally of as much as 14 percent from a post-Brexit low evaporated amid worries that central banks may be less willing to boost stimulus measures. Investors are also looking to a policy update by the Federal Reserve, due after the European market close, for guidance on the trajectory of interest rates in the world’s biggest economy. A press conference by Chair Janet Yellen will be in focus, with traders pricing in only a one-in-five chance of higher borrowing costs in September.

While all but four of the 44 Stoxx 600 lenders rose today after the BOJ took steps to control bond yields, a similar move by the ECB would be “tricky” to implement in the euro area from a technical and political standpoint, Bank of America Merrill Lynch economists led by Giles Moec wrote in a note.

Among other stocks active on corporate news today, Telefonica Deutschland Holding AG climbed 6.3 percent after announcing new tariffs for its O2 service, targeting premium customers. Atos SE rose 3 percent to a 15-year high after Kepler Cheuvreux upgraded the shares to buy, saying the digital services company’s free cash flow will increase in the years through 2019.

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