The Euro Stoxx banks index is up 25% over the past year vs. a 12% gain in the aggregate on the back of economic recovery and rising interest rates. The recovery trade in banks, though, has its limits. The business model is broken. Banks have reduced their asset books and retained earnings to rebuild capital, and European regulators may use the respite to require banks to raise considerable new capital. Dilution is a significant threat to bank share performance in 2017. Banks still look cheap at 12 times forward looking earnings, but rotation out of the sector into industrials and consumer sectors is worth considering.
Time to take profits on European banks?
European bank stocks have outperformed over the past year, but it may be time to quit while you’re ahead.