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What is behind the winter rally in bank shares

Expectations for a return to normalcy, following the positive developments on the vaccine front. The faster return of economies to normalcy will allow for more efficient management of loans where payments have been temporary frozen on debt reaching 20 billion euros.

With a jump of more than 45%, in the space of a few sessions, bank shares are back in the spotlight. Analysts and stock market sources distinguish three, plus one, reasons for the gains:

  • Expectations for a return to normalcy, following the positive developments on the vaccine front. The faster return of economies to normalcy will allow for more efficient management of loans where payments have been temporary frozen on debt reaching 20 billion euros. Restoring visibility reduces concerns about further hikes in non-performing loans due to the second lockdown, and raises reasonable expectations that, combined with increased liquidity, there could be a strong recovery in 2021. Banking sources consider it realistic that the amount of new non-performing loans created by the pandemic will be at the lower range of estimates, close to 5 billion euros. Restoring visibility drastically improves the framework for completing Alpha Bank's major deal, the Galaxy project.
  • The resolving of uncertainty concerning Piraeus Bank. The issue of convertible bonds (CoCos) issued by the bank in the context of the third recapitalization was a chronic problem and a source of uncertainty for the lender. The conversion of CoCos into shares strengthens the bank's capital base. As Piraeus Bank announced yesterday: "the evolution of the bank's capital will be significantly enhanced as: CET1 additional funds of the order of 40 basis points per year, ie 495 million euros for the three years until 2022, further strengthen the capital structure of the bank." It is noted that the conversion price, according to the 2015 agreement, is particularly high, at 6 euros per share, resulting in the benefit for the bank being much higher than the impairment of existing shareholders.
  • Improving outlook for European banking stocks, a shift to classic values. Announcements concerning the two highly effective vaccines are restoring visibility, and international investors are shifting their strategy from "work from home stocks" to the classic sectors of the economy, including banks. In addition, the results of European banks in the third quarter were positive, showing strength in revenues and reduction of costs and forecasts after their significant increase in the first and second quarters due to the pandemic. It is characteristic that the European banking index ESTX BANKS has increased by 40% since the end of October. Improving the climate for European banks also has a positive effect on domestic banks.
  • Finally, one of the reasons for gains in recent days is the very low valuations of domestic banks. It is noted that, based on Friday’s closing prices, the general index shows, lost 28.5% since the beginning of the period while for the same period, the pan-European index Stoxx 600 declines reach 7.4%. In terms of the banking sector, the domestic index is down 65%, while European banks are off 21.4%.

According to stock market sources, the steep profits booked in the last few days are likely to lead to profit taking, however, a large number of domestic investors have high liquidity and could push prices even higher - especially if the rise in global markets continues in the wake of the vaccines and growing expectations of a return to normalcy. The big challenge for the industry is the lifting of the loan moratorium period and how well the repayment of these loans will resume at a minimal cost.

Yiannis Papadogiannis

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