Home » Dividends, ECB ready to remove banks noose. Among the top Barclays there is also Intesa SanPaolo. Not just for coupons

Dividends, ECB ready to remove banks noose. Among the top Barclays there is also Intesa SanPaolo. Not just for coupons

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“We still like European banks”, in particular Intesa Sanpaolo (overwright), Lloyd’s (overweight) e Santander (idem). Word of Barclays strategists, who today produced a new report on the banking sector made in Europe.

Of course the situation has changed, and they say so themselves, since, in October 2020, they released the report ‘European Banks: Too cheap to ignore?’, or “European banks: too cheap to ignore?”.

On Intesa SanPaolo, Barclays has an overweight rating, with price target of 2.8 euros.

It should be noted that the least favorite titles of Barclays are, however, ING, Commerzbank, UBS, all with underweight ratings.

“We remain overweight on Intesa SanPaolo for three reasons: the first is that we think the bank is already able to present a higher ROTE compared to its rivals, and we expect the upcoming business plan to further improve profitability thanks to stronger growth in the asset management and insurance business, and cost control. Second, we expect a positive earnings momentum in the short to medium term, as Intesa SanPaolo should benefit from the conversion of deposits into AUM and the synergies deriving from the recent integration of UBI. Third, we believe dividends are supported not only this year, but also from a longer-term perspective, as we believe the strategy will remain focused ondisbursement of high coupons to shareholders“.

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More generally, regarding European banks, Barclays writes that, “although the sector has performed well, and some ‘convenient’ options that we identified in the 6/10/2020 report have crystallized, we believe there are several reasons why investors they shouldn’t miss any more opportunities. We believe that consensus expectations on earnings could continue to improve, and that returns on capital could be significantly better than anticipated ”. The reference, in the latter case, is ai bank dividends, obviously, but also to the prospects of a relaunch of buyback operations.

In the last few days, reassurances have arrived on the decision of the ECB Banking Supervision to permanently remove the noose around the neck of dividends and share repurchase transactions – first banned in full for the whole of 2020, then grappling with a merciless guillotine – at the end of September.

ECB number one Christine Lagarde wished, among other things, that attention be paid to the balance sheets of companies, avoiding the bankruptcy of healthy ones and the domino effect that would have on the banking sector with non-performing loans (NPL) ”.

That said, the much-feared tsunami of NPLs hasn’t happened so far. It is not said that it will not happen or that the situation will get worse, it must be said, but even today the governor of Bankitalia Ignazio Visco, in his speech at the ABI Annual Meeting, he admitted that the increase in impaired loans was lower than in previous recession episodes.

Read JP Morgan’s top choices with dividend guillotine removal

In a hearing in the European Parliament in early July, both Christine Lagarde, number one of the ECB, who spoke as chair of the systemic risk board (ESRB), and Andrea Enria, number one of the European Central Bank Banking Supervision, made the long-awaited announcement on the coupons:

“In the absence of significant adverse developments, we plan to repeal our recommendation (not to distribute dividends or to distribute them within a cap) at the end of the third quarter of 2021 and to return to considering dividends and buybacks as part of our normal supervision process – said Enria, not failing to add a ‘but’: the European Central Bank, he continued, “expects distribution plans to remain prudent and proportionate to the internal capital generation capacity of banks and the potential impact of a deterioration in the quality of exposures, even in adverse scenarios “.

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With regard to the timing, it should be noted that last month Enria had anticipated that the ECB Banking Supervision would take a decision on the removal or not of the maximum limit imposed on coupons and buybacks on next 23 July.

Lagarde said that the ESRB board he will consider the matter at his next meeting in September.

With the removal of the cap, banks should be able to return to their normal dividend policy starting in October. And this is certainly a positive factor, which Barclays emphasizes being the center of attention. However, the investment bank analysts also point out that the return on capital is important more from a longer-term perspective than from a short-term one. Furthermore, the good news, which is to say the coupon restrictions, would have been taken for granted by now.

“We believe the market has anticipated broadly the relaxation of restrictions on capital returns, during this autumn and could, consequently, focus too much on the payouts of the second half of 2022 ″. In any case, what is most important, the report reads, is that “the coupons are sustainable”. Strategists write in this regard that they believe that, in these terms, the best banks are Nordea, NatWet e SHB. In general, “we expect a return of 18% of the sector compared to market capitalization for the years 2021-23”.

That said, what European bank bonds have not yet sufficiently discounted are the prospect of a growth in net interest income, with rising interest rates and, also, stronger growth in loan volumes.

In particular, Barclays advises to “take into consideration the fact that the expectations on net interest margins for 2022 are still 10% lower compared to the expectations of the period before the pandemic for 2021 ″. Consequently, “the recovery towards those levels could raise the RoTe of the sector by 10%, without prejudice to the other conditions”.

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Regarding the growth in loan volumes, the strategists point out that the consensus on loan growth in 2022 is only in line with expectations for pre-pandemic 2021, while no improvement is expected for 2023 “. Now, “given the rise in deposit levels and government loan guarantees, some limitations may be justified. But economic growth and the post-pandemic recovery could be even stronger than currently expected ”.

Yet, European banks could surprise in terms of “asset quality“, Or rather on the NPL front, if we consider that” the consensus estimates for 2022 are broadly in line with the levels of the period between 2015 and 2019 “.

“In any case – Barclays clearly writes – the valuation of the sector, on a two-year forward basis, is higher than the long-term average, which means that some upgrades could be discounted. Sentiment is also much better than it was 12 months ago. Still, we may see limited improvements in higher expectations, which could cause the sector to swing. We believe the time has now come for greater differentiation between stocks, ”advises Barclays.

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