The eurozone euphoria continues, with the economic recovery apparently well under way. With interest rates set to move at a glacial pace if at all, investors in European banks should show caution but also look for opportunities in the long-suffering sector.
The Economic Sentiment Indicator (ESI) for the eurozone beat expectations in October, soaring to 114 from 113.1. This was the highest level since January 2001, with marked increases in confidence in the industry, retail trade and construction sectors.
Confidence rose strongly in Germany and Italy while remaining broadly stable in the Netherlands and in Spain, despite that country's political challenges after the Catalan independence referendum. It decreased markedly in France.
Looking at the European stock markets, euphoria seems to be spreading there as well. Germany's DAX hit a series of highs in October while French stocks, despite the lukewarm sentiment indictor, still managed to close at their highest level since 2008 last week, immediately after the European Central Bank's monetary policy announcements.
Indeed, those announcements may have had a lot to do with the positive mood out there. ECB President Mario Draghi managed to sound extremely dovish despite announcing the halving of the central bank's monthly purchases of assets starting from January.
The gentle pace of tapering of the ECB's quantitative easing is good for the single currency's economy and for European equities in general, but perhaps not as good for the banking sector, which was expected to be the main beneficiary from the tapering.
An index of the major eurozone banks has had a total return of 28.6% year to date, while its trailing 12-month price-to-earnings (P/E) ratio is still only 11.3 compared with 18.1 for global stocks, according to data from FactSet. This shows that investors are still reluctant to put money in the stocks of eurozone banks, though perhaps it is time for them to take a closer look at this asset class.
Paris stock exchange-listed BNP Paribas is one of the components of the index and the latest in a series of banks to report weak revenue. The bank, which has the ambition of becoming one of Europe's top three investment banks, on Tuesday reported a 1.8% decline in total revenue year on year in the third quarter. There was a 23.6% slump in revenue from trading bonds, currencies and commodities.
Still, BNP Paribas retained its top position for bond origination, ranking No. 1 for all bond issues in euros. Also, revenue in its equity and prime services business increased by 9.4%. The bank's shares trade at a P/E of 11.8 compared with its five-year average of 37, according to FactSet. Investors interested in taking their research further should note that this bank only trades in Paris.
Spanish banking giant Santander (SAN) -- the country's largest by market capitalization -- is another component in the index. The bank reported earnings last week and beat expectations, with underlying profits coming in at €1.98 billion ($2.3 billion) versus forecasts of €1.83 billion.
Santander does not look like as much of a bargain as BNP Paribas, but it still looks cheap. Its current P/E is around 13 according to FactSet, and compares with a five-year average of 15. Its shares took a hit early in October after the independence referendum in Catalonia but managed to recover the lost ground.
Amsterdam-listed ABN Amro is another component of the index that investors should consider. The stock has gained 25% year to date and is trading in line with its five-year average P/E, a little above 10.
The bank is due to report results on Nov. 8 and one metric to watch will be net interest income, which is expected to come in at €1.59 billion, slightly higher than €1.57 billion in the third quarter of last year. If ABN Amro manages to meet those expectations in this environment on extremely low interest rates, it would be no small feat.
European banks have been in the doldrums since the eurozone debt crisis erupted in 2010-11, hot on the heels of the global financial crisis. But as the single currency area's economy is getting its strength back, aided by the ECB, it is time for investors to start picking the best stocks among eurozone banks.