Banks Rallying Four Times Broader Market Are Nudging Draghiby
Traders seek clues on ECB tweaks that will benefit lenders
Financial firms have suffered since Draghi started QE
A little help from Mario Draghi could push forward a recovery in the stocks that have suffered the most as he drove down interest rates and bought up every bond in sight: banks.
They appear to be expecting it, if share prices are any indication. Banks are rising four times as fast as the rest of the market in October. On Thursday, they led gains in the Euro Stoxx 50 Index following comments by European Central Bank President Draghi. Bulls are betting he’s getting ready to loosen limits on debt purchases, paving the way for yields to move in a way that could make bank lending more profitable.
Not that it need happen right away. While the ECB left stimulus unchanged at its latest meeting, Draghi said an abrupt end to its quantitative easing is unlikely. Investors are looking for any hint that it will look a little different by December -- mirroring the Bank of Japan’s announcement last month. That would be welcome relief for an industry that dropped as much as 47 percent since the ECB began buying bonds in March 2015, a move that led to a slump in yields and concerns about banks’ profitability.
“You can really tell that markets have already priced in some kind of adjustment from the ECB,” said Simon Wiersma, an investment manager at ING Bank NV in Amsterdam. His firm oversees about 26 billion euros ($29 billion). “The ECB knows that its policies have put a lot of pressure on banks. It’s soon time for Draghi to tell investors what he’s trying to do with the yield curve.”
When the BOJ said in September it would tweak its asset-buying program to better manage the difference between short and long-term bond yields, the Euro Stoxx Banks Index joined a global rally in lenders, surging the most in a month. After Draghi’s comments, the gauge climbed 0.9 percent at 2:24 p.m. in London, versus an increase of 0.3 percent for the Euro Stoxx 50.
Financial firms have suffered since the ECB started quantitative easing as its asset purchases suppressed bond rates across virtually all maturities. The yield on two-year German debt is negative, while that on 10-year bonds is at 0.03 percent. Banks benefit from a steep yield curve because they can borrow cheap, short-term cash and lend it out at higher, long-term rates.
ING’s Wiersma says that the ECB would help bank profitability if it makes debt that yields less than its deposit rate, or minus 0.4 percent, eligible for purchases. That would lead to more buying of securities with shorter maturities, easing the pressure off longer-term debt. While the central bank didn’t discuss an extension to QE, it talked about how to overcome scarcity in the bond market should it become a problem, Draghi said on Thursday.
Seventy-three percent of economists surveyed by Bloomberg said the central bank will change its QE rules, and of those, about three-quarters predicted a shift in issuer or issue limits by the end of the year. A majority of them see the ECB extending its QE beyond March.
The ECB is aware of the impact of its stimulus -- just this week it said that negative rates have harmed loan margins and net interest income at lenders. Commerzbank AG, which has halved in market value since the ECB started QE, said last month it expects gross revenue to decline by 300 million euros by 2020 if rates remain unchanged. Banco Santander SA, down 35 percent, also said low borrowing costs are damaging profitability.
“Given the low interest-rate environment, it’s very difficult for banks to make any profits,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. His firm oversees $260 million. “A company can only survive if it accepts that environment and moves on. It has to.”
Euro-area lenders have been hit especially hard in the past year, losing about a quarter of their market value. They trade at 0.6 times the value of their assets, compared with a multiple of almost 1 for peers in the S&P 500 Index. The gap prompted strategists at Citigroup Inc. to recommend buying their shares in early October, and Bank of America Corp. followed suit this week. The region’s banking gauge has jumped 7.5 percent this month through Wednesday, and analysts have tempered their estimates for profit declines in 2016.
“The first mission for the ECB now is to get a clear message about what it intends to do in the next few quarters,” said Francois Savary, who helps oversee the equivalent of about $2.8 billion as chief investment officer of Prime Partners in Geneva. “I expect some clarification about the way they are going to conduct monetary policy.”