Strong start to earnings season – European banks beating once again
European bank earnings season has once again kicked off with a strong start. Nearly every bank has beat EPS estimates, with an average beat of 50%+ thus far. This has been driven by dramatically lower loan loss provisions, even negative in some cases, as banks adjust their forward-looking expected credit loss models to reflect the much stronger economic outlook versus what was feared last year. Revenues have also come in strong, driven by continued outperformance in investment banking fees, but also asset & wealth management flows. Even net interest income has remained resilient, coming in slightly ahead of consensus on average despite EURIBOR remaining at all-time lows, with several banks even upgrading their NIM guidance for 2021. While there are still several banks to report, at this pace this quarter will likely mark the third one in a row of significant beats, contributing to further earnings upgrades and “de-rating” the sector even after recent strong performance. Indeed, at the sector level we have seen the largest forward earnings upgrades since 2009, with 2023 estimates up by 12% so far year to date.

EU Recovery Fund nearing implementation – Euro bond issuance to begin this summer 
After a year-long period of negotiations, the EU Recovery Fund is at long last nearing its implementation, with 19 EU member states now having completed the ratification process and 14 having submitted spending plans. The European Commission has also laid out its financing strategy, with plans to start issuing the first “Euro bonds” in size by July, with expected issuance of €150bn per year through 2026. Italy in particular – now led by Mario Draghi – has laid out an ambitious spending plan totaling over 20% of its GDP in size, expected to put the Italian economy on a sustained higher growth track over time. For more details on member states’ spending plans please see our Policy Forum’s blog post.

Another bid for a portfolio holding, Flagstar Bank 
In April we had the announcement that Flagstar Bank (another key position in the US book) will be acquired by New York Community Bank in an all-stock deal. Our initial response to this deal was mixed as we thought the stock had much further upside given the growth in tangible book value that we projected as well as the excess capital that a slowdown in mortgage volumes was going to create. However, we do see the strategic and financial merits of the transaction which was accretive to both earnings and tangible book per share – a rarity these days. Assuming the pro forma entity can get to just 10x multiple on ’23 earnings (still a very substantial discount to peers), there is nearly 40% upside in the shares when we include the very safe 6% dividend yield.