LIVE MARKETS-An old market panic, a different banking sector

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AN OLD MARKET PANIC, A DIFFERENT BANKING SECTOR

European banks have come under heavy pressure this month as widening sovereign spreads stir memories of the euro zone debt crisis. But analysts at KBW argue investors are reaching for the wrong historical playbook.

The selloff has wiped off half of the sector's outperformance this year, echoing moves seen in 2010-2012. Yet Andrew Stimpson, head of European bank research at KBW, says the backdrop is fundamentally different.

"There are many more differences than similarities," he writes, adding banks today are much stronger than they were around 15 years ago.

Back then, customers deleveraged and regulators tightened capital rules, while now banks have much higher capital ratios, face no constraint to growth and regulators are deregulating.

"Customers spent 15 years deleveraging and today are finally borrowing again. Volumes are higher," Stimpson adds.

The next test comes with third-quarter earnings, which begin in less than two weeks. KBW expects some lenders may need to raise guidance to reflect higher rates and good loan growth.

With a 2028 price to earnings ratio back to an average valuation of 8.5 times and profits still drifting higher, KBW sticks to its overweight.

The broader STOXX Europe Banks .SX7P index is still up around 14% this year, but has shed as much as 10% this month from the nearly 19-year high reached in August.

(Danilo Masoni)

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