Bank of America predicts which banks will win as interest rates rise

Looking ahead at what the next 12 months holds for European banks, Bank of America’s (BoA) Year Ahead 2022: Buy Better Banks report is optimistic, seeing revenue growth, stable regulation and surplus capital on the cards.

Of the 34 banks analysed, BoA rates 25 as ‘buy’, highlighting BNP, CASA, Intesa, NatWest [NWG] and HSBC [HSBA] as top picks with 2023E PE multiples of 8x or below.

 

BoA sees the 10% dividend growth and €24bn buyback as key attractions for banking stocks. The bank adds that its rule of thumb for choosing winners is to look for banks engaging in buybacks, and to avoid those focusing on acquisitions. BNP, for example, is rumoured to be looking to sell its US Bank of the West business for up to $15bn. The proceed could be used to fund the $1bn stock buyback programme it is planning, according to Bloomberg.

HSBC, meanwhile, is among the top three large-cap European banks where analyst recommendations have improved the most dramatically over the past six months, according to Bloomberg.

 

Good times ahead

This is a refreshing outlook considering the investor uncertainty surrounding the sector, where central banks cutting interest rates to below zero has led to lower banking revenues and flat yield curves.

BoA says the return of inflation will mean that the central banks will have up their interest rates and reduce their balance sheets in order to maintain economic stability. In turn, this is set to increase banks’ revenues.

Uncertainty around new coronavirus variants means there is no “one-way path to pre-crisis levels”, says the report, and the timing of rate rises could of course be delayed. However, BoA predicts that European banks are set to see a €23bn uplift in recurrent profit from a 100 basis points (BPS) upward shift on interest rates.

 

 

Pandemic reaction

As the COVID-19 omicron strain illustrates, recovery is dependent on vaccine efficacy and take-up. According to the UK Health Security Agency, Omicron is projected to soon become the dominant variant in the UK, based on current trends. It added that coronvirus infections could reach one million a day by the end of the month.

Full and partial lockdowns have been imposed in Austria, Slovakia and the Netherlands, while the UK and Germany have tightened their COVID-19 measures.

BoA believes central banks will print money to absorb any sudden spike in government debt issued to fund lockdowns, should they be required. In its view, the stabilisation of the disorderly government bond markets will be the main focus of the central banks – even those with a “newfound need to worry about inflation”.

However, unlike in 2021, the end of a new bout of quantitative easing should coincide with the end of the lockdown. BoA’s analysis shows that last year, the Bank of England (BoE) printed more money outside of lockdown than during, with the result that inflation expectations have become unanchored from central bank targets.

The latest inflation figures for the UK sees inflation rising to 5.1% (double the 2% target) and the IMF has predicted that inflation could reach 5.5% early next year. It has warned the Bank of England not to be too hesitant to increase interest rates — advice that appears to have been heeded. On 16 December, the BoE increased interest rates from 0.1% to 0.25%.