European Bank Stocks Plummet... 73% Trading Below Liquidation Value

Economic Recession and Windfall Tax Imposition Hinder Stock Price Rise

More than 70% of stocks of European banks are trading below their liquidation value. Although profitability has expanded due to increased net interest margins amid a high interest rate environment, factors such as economic recession and windfall tax imposition are hindering the rise in bank stock prices, analysts say.

On the 4th (local time), major foreign media outlets cited data from Boston Consulting Group (BCG), reporting that 73% of European bank stocks are trading below their book value. This means that the current stock price is lower than the amount received if the company sold all its assets at book value.

European banks have escaped the ultra-low interest rate era that hindered profitability over the past few years and are now enjoying increased profits due to high interest rates, leading to analyses that bank stocks are excessively undervalued. In particular, it is understood that European banks have not had loan margins as high as they are now in the past 15 to 20 years. Given that shareholder-friendly policies such as share buybacks and dividend increases are actively being implemented, the current stock prices are widely regarded as too low.

Concerns about the economy, such as low economic growth rates in the European region, have dampened investor sentiment toward bank stocks. The European economy is overshadowed by recession as the effects of nearly a year and a half of intense tightening accumulate. The European Union (EU) Commission lowered its forecast for Eurozone economic growth this year from 0.8% to 0.6%. This is analyzed as a consequence of the European Central Bank (ECB) raising its benchmark interest rate from 0% in June last year to 4.5% currently, rapidly cooling the economy. Especially, as the possibility of a pivot (monetary policy direction change) next year has increased due to economic slowdown, investors believe that the current high interest margins will not continue. Angelo Meda, Chief Equity Officer at Italian asset management firm Banor Sim, explained, "Overall profitability in the banking sector remains strong, but macroeconomic concerns have started to take a toll," adding, "(the underperformance of bank stocks) is a tense reaction to uncertain circumstances."

Additionally, moves to impose windfall taxes on banks that have expanded profits due to high interest rates have negatively impacted stock prices. Spain has been imposing windfall taxes on banks and energy companies since last year, and Italy initially planned to actively introduce windfall taxes but has significantly retreated from the original plan by setting a cap on tax burdens. As a result, bank stocks in both countries have fallen sharply, and the market criticizes that this could increase banks' capital costs and reduce their lending capacity to ordinary citizens. Earlier, the ECB warned in September that "windfall tax legislation could make banks vulnerable to recession."

However, although bank stocks are particularly undervalued in Europe, it is pointed out that this is not a problem unique to Europe. BCG analyzed that one-third of U.S. banks and most Asian banks are also trading at valuations below their enterprise value.