Spain and Italy look closely at the banks before the change in the cycle in rates

Banking has been the locomotive of the Ibex 35 and the Italian FTSE MIB in 2023. The forecast that interest rate increases would extend throughout this year put them on the radar of investors, turning these securities into a safe bet to recover part of the losses of 2022. With an outbreak of financial crisis included that shook the foundations of the US regional entities, forcing the public intervention of SVB Financial and the purchase by JP Morgan of First Republic, as well as to the Swiss financial system, in which UBS had to come to the rescue of Credit Suisse, the truth is that, with some exceptions, the bank is on its way to ending a positive year in both the Spanish and transalpine parks.

The question looking ahead to 2024 is whether the sector has room left now that central banks have slowed down. Now that the market concludes the interest rate increases by the Federal Reserve and the European Central Bank (ECB), the bets are on when the official rates, which are at their highest since 2001, will begin to fall. Given this starting point, some already anticipate that after a stellar performance over the last twelve months, the equities of both countries may be conditioned by a possible slowdown in banking.

Experts highlight that these entities have been one of the great beneficiaries of the increase in financing costs after years of lukewarm profits, since in both cases the proportion of loans at variable rates is greater than the fixed rate, a factor that for next year . It may result in a reduction in profits. “We expect European banks to perform worse in the first half of the year as the economy weakens, credit spreads widen and bond yields fall, which should hurt Spanish and Italian equities.” , says Bank of America strategist Andreas Bruckne, according to ‘Bloomberg’.

This vision is shared by the manager of AcomeA SGR, Fabio Caldato, who has warned that “it is unlikely” that the southern European markets after next year will face a scenario in which commercial banks “will have already reached the peak of “Interest income and they will not be able to improve it further.” Perspectives that do not imply that the increases in banking will stop abruptly, but rather that the advances may be less after the rebounds achieved, hence why managers like Bankinter have lowered their exposure to the sector in the portfolio. However, unlike other occasions, consider that the valuations are attractive and also have excess liquidity and a low default ratio. Hence your strategy will focus on being selective.

With three sessions left to close the year, the FTSE MIB leads the rises in the Old Continent with a rise of 28%, followed by the Ibex 35, which has achieved a ‘sprint’ of almost 23%. The ‘rally’ of the The Spanish benchmark is only six points lower than the Ibex Banks, which has rebounded more than 28% amid the symptoms of fatigue that began at the beginning of November, with large differences between values ​​with a more international profile such as BBVA and Santander, which lead the rise in the annual calculation with increases of 46% and 36%, respectively, while Bankinter and Unicaja Banco have not managed to recover since the turbulence of last March and accumulate annual losses of 5.4% and 13.2 %. Precisely, the entity based in Malaga is one of those with the greatest potential (more than 50%). Overall, the potential given by the ‘Bloomberg’ consensus to the Ibex Bancos is 26.9%, higher than that of the general index (14.4%).

Along these lines, in Italy the entities also record a double-digit run after meteoric stock market activity in cases such as Unicredit, which skyrocketed 84%, BPER BANCA (+59%), Banca BPM (+42%) and, to a lesser extent, Intesa Sanpaolo (+27%) or Banca Mediolanum (8.6%). Looking ahead to 2024, the potential of these entities ranges between 54% and 24%, with the average of the FTSE MIB index being slightly higher than 17%. These data reveal a division between those who warn that the drop in interest rates may lead investors to take refuge in other driving stocks such as energy companies in Spain or automobiles and defense in Milan, versus those who argue that they can still Continue Benefiting from the increase in financing costs.

It must be taken into account that there is still no certainty about when they will begin to cut rates, after central banks have rejected that this process is going to be imminent. The president of the European Central Bank (ECB), Christine Lagarde, has been one of the most blunt in this sense, pointing out after the last monetary policy meeting that “they are not discussing lower rates at all” in an attempt to overthrow the expectations of Market, which project up to six cuts such that the reference rate stands at 2.5% at the end of 2024.