Investment Idea

European banks are attracting investors' interest

09/06/2017 | 2 min read

At the beginning of the year, the common equity tier 1 capital showed a stable value for European banks. As a result, most of the institutes fulfill the Basel III regulatory requirements.

Investors have regained some confidence in European bank titles over the past twelve months. Just over a year ago the situation looked a bit different. The shares of individual large banks fell, and the broad market also began to waver.

Banks are preparing themselves for "Basel III"

Many investors have noticed that the solvency of banks has improved for the recent years. The core capital quota, which is important in terms of regulation, has improved on average from 12 percent in the previous year to about 13 percent. On the other hand, the banking sector still struggles. There are still many non-performing loans in the bank accounts. According to the European Banking Supervisory Authority (EBA), the proportion of non-performing loans exceeds the 10 percent mark in one third of all European banks. In its recent supervisory report, the European Central Bank has concluded that credit risks represent the greatest threat to European banks.

Moreover, the banks' inadequate profitability is a source of concern for investors. The return on equity has reached a low of about 3 percent at the beginning of the year. In the middle of the last year this figure was still around 5 percent and in mid-2015 it was over 6 percent.

Operational risks are increasing

According to the European Banking Supervisory Authority (EBA), the operational risks of the institutes also increase. Process and reputation risks from ongoing processes as well as IT risks are named as particularly threatening. Investors who see a favorable entry here should pay attention to the still existing risks of European banks and take into account their investment decisions.

However, since a share’s performance depends on corporate-, industry- and economic-related conditions, investors should always consider the risk of their investments. Developments could turn out differently than expected by investors.

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