Since Covid, European banks have focused on share buybacks rather than prioritizing capital accumulated during the pandemic for growth.
Below-book share prices mean that banks have been able to buy back their own stock cheaply, at a steep discount to equity value. This year, investors’ concerns about the impact of the war in Ukraine on the European economy have dashed any hopes that European bank stocks would rise above book and incentivize institutions to invest more capital in growth such as M&A.
Many in the industry feel the European Central Bank (ECB) is partly to blame for that discount to equity value, which has reached 30%. They say the single supervisor’s dividend ban in 2020 has left investors fundamentally less confident in the banks’ freedom to distribute capital in times of stress, such as the Covid pandemic – or perhaps a Russian gas shutdown.
Speaking to Euromoney recently, ECB supervisory board member Edouard Fernandez-Bollo says that European banks nevertheless still have scope to grow – even those with multi-trillion-euro balance sheets already. Once volatility in markets subsides, such deals could therefore be on the way, he says.
“We don’t think that in future banks will stop growing completely,” he says, when asked whether large bank balance sheets are a barrier to deals from the ECB’s perspective.
