GLOBAL EQUITY OUTLOOK

Global banks: Rent, don’t own

01 nov 2016 / por Kate Moore

In our first global equity outlook, we examine the prospects for global bank stocks and dissect the trends shaping this key sector in the U.S., Europe, Japan and China.

Equity highlights

  • We explore structural and cyclical trends affecting bank stocks in the U.S., eurozone, Japan and China. The question we asked ourselves: Should investors own the sector as a long-term holding—or simply rent it? We conclude renting may be the better option for most bank stocks at this time.
  • Rising inflation expectations and steepening yield curves around the globe have boosted investor sentiment toward the sector. Global bank shares have outperformed global equities during the last three months.
  • Yet structural challenges such as low growth, low rates and regulatory pressure remain, and cut into the sector’s key driver: net interest margins. We therefore see the group as a less compelling long-term investment and outline our likes and dislikes.

Snapshot

Bank profitability in developed markets is unlikely to return to pre-crisis levels, in our view, and may never see a return on equity in the range of 15% to 20% again. Bank valuations have de-rated and reflect these lower levels of profitability. We expect trading opportunities—small changes in policy or macro expectations can make a big difference in a sector many investors are underweight in. We favor U.S. banks over global peers due to strong fundamentals and a more robust economic backdrop. The chart below shows current valuations and profitability across global banks.

Getting what you pay for in banks
Global return on equity, price to book ratios, October 2016

Chart: Getting what you pay for in banks - Return on equity and price-to-book ratios of global bank equities, October 2016
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute.
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute.
Portfolio Manager, BlackRock’s Large Cap Series team
Portfolio Manager, BlackRock’s Global Equity team
Portfolio Manager, BlackRock’s Large Cap Series team
Portfolio Manager, BlackRock’s Global Equity team
Portfolio Manager, BlackRock’s Global Opportunities team
Research Analyst, BlackRock’s European Equity team
Portfolio Manager, BlackRock’s Global Opportunities team
Research Analyst, BlackRock’s European Equity team