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When the Financial Times interviewed James Gorman just before Christmas, the then-Morgan Stanley chief executive was clear: the past decade had produced huge growth for Wall Street groups like his, while European competitors had been left behind. But, in an apparent gesture of festive generosity, he sounded a bullish note for the likes of UBS, Deutsche Bank and Barclays. “I don’t think [over] the next decade the gap will be as large,” he said. “I think there’s opportunities for the Europeans.”
There is no obvious fundamental driver for any such re-rating: the European economy is downbeat; net interest margins have peaked, with both the European Central Bank and the Bank of England widely expected to begin cutting interest rates at some point in 2024; and bad debts are likely to increase, as the delayed impact of higher rates over the past year or two filters through to corporate and individual borrowers alike.
And yet there may be a valid technical trigger for higher European bank valuations: some analysts are arguing that a new era of capital returns to shareholders has dawned. After a decade during which US banks’ payout ratios — share buybacks and dividends as a percentage of earnings — trounced those of European rivals, the numbers are starting to look very similar, Autonomous Research points out. Since 2021, the ratio distributed by European banks has surpassed the historic norm of about 40 per cent and could now settle at closer to 80 per cent, it says.
Stronger earnings, combined with the willingness of European regulators to authorise a reduction in bank share counts for the first time ever helped the combined tally of dividends and buybacks by European banks to jump to €121bn for 2023 from €90bn in 2021.
Future dividends are expected to remain broadly in line with the historic average, but overall payouts will be substantially topped up by share buybacks — long a US corporate tradition, thanks to generous tax breaks.
For multiple reasons, buybacks have traditionally been less popular in European banking: investors in Europe have liked income stocks, so have preferred dividends; and since 2008 European regulators have been focused on the steady build-up of capital levels and have thus been unsympathetic to anything that would undermine that trend.
Over the past year, though, supervisors have become more receptive to an easing of equity demands. They were heartened by the events of early 2023, when eurozone and UK banks proved resilient in the face of the pressures that toppled regional lenders in the US and Credit Suisse in Switzerland. With existing capital levels deemed sufficient, mass buybacks have become feasible.
At the same time low share prices in many European sectors, but particularly in banking, have made buybacks a much more attractive option for banks themselves — especially given the absence of obvious opportunities to invest and grow instead.
Analysts at Berenberg point out that total returns from shareholder payouts could reach 14-19 per cent a year in 2024-2025, even before capital gains. Last year the sector clocked up a total shareholder return of 28 per cent.
Among those banks to watch this year will be UBS, where payouts should jump thanks to the vast $29bn “negative goodwill” gain made from its rescue of Credit Suisse on the cheap. Stockholm-based activist Cevian Capital recently made a €1.2bn investment in UBS in the hope that the share price will double in three to five years. UniCredit, a standout performer last year in terms of its share price recovery, is set to continue its efficiency drive to maximise returns. Analysts suggest the likes of ING, HSBC, Lloyds and the big Irish banks could also make outsized payouts.
For stock re-rating momentum to gather, though, the sector needs to attract more than a quirky Swedish hedge fund, and win over the mainstream US asset managers who have been put off by years of European bank underperformance and policymaker surprises.
We are still only a few weeks into 2024. But European banks may be tempted to think Gorman’s December prophecy is already coming true. Since January 1, all the European banks he name-checked have outperformed Morgan Stanley, not least because the group he still chairs reported disappointing fourth-quarter results. If they can maintain decent earnings and also deliver on analysts’ dividend and buyback expectations, they might just bear out Gorman’s faith.
patrick.jenkins@ft.com
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