European Banks: Fear and Potential

Shares of European banks were very volatile this week and have fallen sharply year to date. But with the financial sector looking much healthier than a few years ago, we think fears of a dividend collapse may be overdone.

Many banks trade at distressed multiples not seen since 2009–2012, suggesting an imminent economic disaster. But today, the European financial sector has cleaner balance sheets, stronger capital and improved liquidity positions.

It’s natural for investors to scrutinize banks over their ability to pay dividends in this environment. Highly rated stocks generally trade at low dividend yields, indicating investors are willing to pay a premium for dividend sustainability and growth potential. For European banks, both dividend yield and dividend growth metrics are elevated, which means investors have lost faith in the banks’ ability to maintain dividends.

If a recession develops, European banks will be in trouble. However, if the region avoids recession, we believe that select banks have healthy balance sheets and resilient loan books, and offer solid returns and excellent dividend potential at current market prices.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

Chief Investment Officer and Director of Research—European Value Equities

Tawhid Ali was appointed Chief Investment Officer of European Value Equities in 2012 and also serves as the division’s Director of Research, a position he has held since March 2008. Ali was previously a research analyst covering retail and leisure stocks in Europe. Prior to joining the firm in 2003, he worked in the New York and London offices of McKinsey as an engagement manager. Ali holds an AB from Harvard University and an MBA from the University of Chicago. Location: London

Senior Research Analyst

Philippos Philippides joined the firm in 1999 as a research analyst. Previously, Mr. Philippides was director of finance at Citibank. He earned a BA from Trinity College in 1988 and an MBA from the Wharton School of Business at the University of Pennsylvania in 1991. Location: London

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