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Investing.com - European banks have broken the decade-long spell of underperformance, according to Goldman Sachs (NYSE:GS), with the investment bank seeing room for further expansion.
The STOXX 600 Banks is Europe’s best performing sector year-to-date, having risen by more than 25% in total return terms, and indeed outperformed the market by a factor of 3x since the start of 2022, the bank said, in a note dated May 17.
“The performance reflects continued strong fundamental momentum alongside a more recent shift in sentiment,” Goldman said.
The higher rate environment is driving the resurgence in earnings power, with the first quarter earnings season having been yet another strong quarter - with a 2% positive surprise on revenues and a 9% gain on profit-before-tax.
“Generally we have seen incrementally positive capital return commitments and re-iterated guidance,” Goldman said. “Earnings revisions have followed an almost mechanical upgrade pattern and have been decidedly positive for five out of the last six earnings seasons.”
European bank valuations are at a particularly steep discount to history, but have recently risen from a trough of 5x to c.7x.
“We believe there is room for some further multiple expansion with Euro Area macro-backdrop improving and broadening out,” the bank said. “Shareholder returns are still accelerating. Bank balance sheets (and corporate balance sheets broadly) remain strong. The sector’s CET1 ratio stand at 14% with excess capital continued to be returned to shareholders.”
