The impressive results of European banks continue to reflect years of strengthening balance sheets, regulatory changes and the end of the era of rock-bottom interest rates. By using Cash Collect Certificates, financial products capable of reconciling the possibility of growth in value and the protection of your portfolio in various structures, it is possible to take a position on the European banking sector by aiming for the most promising securities.
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Profits for banks in 2023
In recent weeks, European banks have once again delivered solid results, with profits in line with consensus expectations. 2023 was a stellar year for bankswith the sector finally achieving a double-digit RoE (Return On Equity) (around 12% in the year 2023).
In recent quarters, the market has begun to focus on “peak earnings” as the impact of rising interest rates it had repercussions on the banks’ budget lines. The prospect of a rate cut starting in late 2024, along with other headwinds (such as deposit repricing, cost inflation, or rising loan loss provisions) will likely offset some of the earlier increase .
Nonetheless, experts predict that the European banking sector will continue to record satisfactory profits in the coming years, with a Consensus-expected RoE of 10-12% for full fiscal year 24-25compared to about 5% for fiscal 18-22.
To put into perspective the scale of the additional revenues these banks are producing, according to data from the European Banking Authority, EU banks have generated a annualized net profit of 180 billion euros per quarter starting in the third quarter of 2023, compared to an average of around €90 billion over the past five years.
Strong capital and asset quality metrics
The fourth quarter did not show a significant change in the capital parameters of European banks. Common Equity Tier 1 (CET1) ratios, which demonstrate a bank’s capital buffers, remain near record levels. On average, large European banks have CET1 capital ratios around 15%representing more than 400 basis points (bps) of capital in excess of regulatory requirements.
Looking ahead, analysts predict that i capital levels remain solidalbeit modestly down from record levels, as several European banks operate with capital ratios above management targets.
Finally, European banks have consistently demonstrated the quality of their loan portfoliosas non-performing loan (NPL) ratios remain persistently low and loan loss provisions were mostly lower than expected in the fourth quarter.
New Cash Collects with the innovative All Coupon effect
Based on the above, the renewable energy sector can be an interesting investment theme. An alternative way to take a position on the sector is to use investment certificates. BNP Paribas recently presented a new and completely innovative series: these are the All Coupon Cash Collect on baskets of stocks.
Lasting three years, the new certificates offer potential monthly rewards with memory effect between 0.71% (8.52% pa) and 2% (24% pa) and have maturity and premium barriers that coincide, as they are both set at up to 30% of the initial value of the underlyings. With this issue, the French bank enriches its range of Cash Collect certificates with the All Coupon effect: an important innovation designed to allow the investor to maximize the return of the instrument.
The All Coupon certificates, in fact, provide for the possibility of early expiry at the end of the 12th and 24th month, therefore in February 2025 and February 2026 respectively: on these two dates, if the price of all the underlyings is equal to or higher than the respective initial value, the certificate expires and corresponds, in addition to the notional amount (100 euros) and the monthly premium, all potential future monthly premiums that the Certificate would have paid if it had reached its natural maturity (24 monthly premiums if the early repayment occurs in the first year; 12 monthly premiums if the early repayment occurs in the second year). Added to these are any monthly premiums not previously paid, thanks to the memory effect.
Potential return of 22.5% at the end of the 1st year
The 16 certificates are designed to allow the investor to take exposure to some via a single instrument among the most important financial and industrial companies Italian and international: from the banking sector, to the energy sector, from the luxury sector to the aerospace and artificial intelligence sectors.
For example, the certificate with ISIN NLBNPIT1ZZY5, which has as underlying Banco BPM, Intesa Sanpaolo and UniCredit, allows you to have exposure to Italian giants in the banking sector. The product will pay a monthly premium equal to 0.90% of the notional amount (0.9 euros, equal to a potential return of 10.80% per annum) on each monthly valuation date on which the value of the underlying share is higher or equal to the barrier level, set at 60%.
Corresponding to the two early expiration dates, if the value of all the underlyings is greater than or equal to the Initial value, the certificate expires and pays 102 euros plus any previously unpaid monthly premiums (memory effect) plus all future monthly premiums (All Coupon effect). If the deadline occurs on the first scheduled date (26 February 2025), the prizes will be 24, for a total in this case of 122.50 euros; or 12 if the deadline occurs on the second date (26 February 2026), for a total of 111.70 euros.
However, if the certificate reaches the expiration expected after three years (26 February 2027), if the price of all the underlyings is equal to or higher than the barrier level (60%), the product pays the notional amount plus the premium (0.90 euros) and any premiums not previously paid thanks to the ‘memory effect. If the price of at least one of the underlyings is below the barrier level (60%), the certificate pays an amount commensurate with the performance of the worst of the underlyings (with consequent loss, partial or total, of the notional amount).
Analysts’ opinions on the stocks in the basket
The consensus collected by Bloomberg on the three stocks in the basket, which we report in the table above, it’s positive. The vast majority of analysts who follow Banco BPM, Intesa Sanpaolo and UniCredit have a purchase recommendation (buy) on the stock, the remaining part suggests keeping the shares in the portfolio (hold) and only 3 analysts on Banco BPM say to sell (sell ). Furthermore, the average target price indicates that these three stocks currently still appear under-priced and from which analysts expect potential upside within the next 12 months.
This makes the underlying assets of the basket suitable for strategies with an All Coupon Cash Collect, i.e. for those who have one sideways or moderately bullish view of a given sector (in this case the Italian banking sector). These certificates offer the investor both the possibility of receiving monthly premiums even in the event of a negative performance of the underlying, and of riding the bullish trend of the stock markets, thanks to the possibility of early recall with All Coupon effect. For example, in the event of early expiry of the certificate after one year, the investor will also be paid the premiums for the second and third year of the certificate’s life, enjoying the possibility of maximizing his investment.