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Video / 01 May 2014 at 10:18 GMT

Banks bounce back

Peter Garnry

European banks remain undervalued according to Saxo Bank’s Head of Equity Strategy, Peter Garnry.

In the years after the 2008 economic crisis, European banks have endured a much slower recovery than US banks. This is in part due to the fact that Europe’s economy experienced the financial impact of the Great Recession much later than the US; but with two of Europe’s biggest banks now reporting solid first quarter results the signs of a recovery for European banks may be here.

Lloyds Banking Group reported pretax profit had increased by 22 percent. The positive results have prompted Lloyds to consider applying for permission from the Bank of England to reestablish its dividend payment rights during the second half of the year. The bank has not made a dividend payment since the start of the economic crisis.

Support for Lloyds recovery is evident in the impending IPO of one of its assets: TSB Bank. The bank has a current valuation of GBP 1.5 billion and could become publicly available as early as mid-June. The British government is seizing this moment of opportune strength by reducing its stake in the company to 25 percent. Last year the government owned 39 percent of Lloyds. 

The European banking index is up 0.2 percent at the open, after the S&P downgraded 15 major European banks from ‘stable’ to ‘negative’.

On Tuesday the S&P announced change in ratings standards after European lawmakers approved legislation making it harder for governments to assist in offering aid to banks. The S&P also raised its outlook on 38 banks including Danske Bank from ‘negative’ to ‘stable’ ahead of the banks promising first quarter results were released.

Danske Bank surpassed analysts’ expectations reporting USD 674.3 million in pretax profit. Competitors Jyske Bank and Sydbank failed to beat analysts’ forecasts. 

European banks in general are still trading well below pre-crisis levels. Large banks like Deutsche Bank AG, USB AG, and Credit Suisse Group AG are currently trading at levels less than half of their 2008 prices. Garnry views this as a possible investment opportunity ahead of the European banks recovery.

 

 

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