The interest of the tracker BNK lies in the fact that it includes the largest banks in the main European economies, great geographical diversity and a good North/South mix while including the biggest and more capitalised european names.
BNK is composed of commercial banks (Lloyds and Santander) but also of universal as the French who rely both on investment banking and commercial banking. The activities of large banks are well represented. Banks are currently in ‘transition’, while 2008’s impact is still felt across several plans. Following the actions of the central banks and QE programmes, banks see their margins eroded because of negative yields, while they can no longer gather interests on deposits by placing them to the ECB.
On the other hand, the greater demands in terms of regulation forced banks to significantly strengthen their capital, reduce leverage and hence the risks associated with their operations, but leads automatically to weaker ROCE. Moreover, the model is increasingly challenged by more innovative competitors, the ‘fintech’ companies which redefine the relationship and the notion of service in the financial world through offerings with high technological content, while disruptives approaches such as blockchain ‘which is to secure transactions outside any’ third party could in the long run threaten the role of banks in developed economies.
However, banks already discounting a lot of these risks, while a number of them have already started ambitious transformation/digitalisation plans and should take advantage of the current changes. In the same way as the distribution was transformed 20 years ago by the arrival of web players, however, it is likely that banks will follow the same path of adaptation and modernisation without refrain from acquiring knowledge do by buying from fintechs.
Significant bullish catalysts have emerged in recent months with the potential tapering in Europe, the bank restructuring in Italy which gives visibility to the sector, and the rise in US banks with the prospect of a deregulation accelerated by the new US administration. The European political cycle turned positive, first in the Netherlands and now in France which strengthens the integrity of the eurozone, crucial for banks and should be a net positive for European growth in the short and medium term. The ECB seems to have begun to change its dovish policy, a first step which had a bullish impact on rates and bank stocks. The better prospects of the euro area should produce a reflation and therefore a normalisation of the policy of the European Central Bank.
Banks could be the big winner of this transition period.
