Demand for eurozone bank shares is abnormally weak – Natixis


In the eurozone, banks’ market value is extremely low relative to the book value of their assets (their value-to-book ratio is very low). This may reflect one of two realities, either their market value is incorrect or their book value is incorrect. An observation of past developments in these two variables seems to show that the dominant mechanism is market undervaluation, not book overvaluation, according to analysts at Natixis.

See: The fall in banks’ equity market valuation is clearly excessive – Natixis

Key quotes

“The low valuation of eurozone banks may reflect one of two realities, either the market valuation is abnormally low, and investors have an abnormal aversion to banking risk or undervalue banks’ future profitability or banks' book value (the value of their assets) is overestimated. Banks will suffer losses in the future that are not currently provisioned, and therefore not deducted from their book capital.”

“Let us first look at the link between eurozone banks’ market capitalisation and their earnings to see whether the banks’ valuation is abnormally low. We see that their market capitalisation has declined relative to earnings since 2010.”

“Let us next look at eurozone banks’ book value to see whether it has been revised downwards in the past after having been overestimated, in particular when banks have suffered losses. We see that banks’ book value was not revised downwards after the 2013-2016 peak in defaults (non-performing loans).”

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Feed news

Latest Forex News


Latest Forex News

Editors’ Picks

EUR/USD hits fresh two-month highs amid dollar weakness

EUR/USD has hit new two-month highs above 1.1940 as the dollar resumes its decline. Optimism about the US transition and covid vaccines is weighing on the safe-haven dollar. 

EUR/USD News

GBP/USD falls toward 1.33 amid Brexit acrimony

GBP/USD is falling toward 1.33 as both the EU and the UK are busy blaming each other for an impasse in Brexit talks. The thorny issues remain fisheries, governance and setting a level playing field.

GBP/USD News

XAU/USD attempting to bounce up from $1,775 low

Gold futures accelerated heir downtrend from last week highs near $1,900, breaking below the 200-day SMA, at $1,800 area, to hit its lowest prices in nearly five months, at $1,775.

Gold news

Dollar offered ahead of the weekend

Equities are finishing the week on a firm tone, while the US dollar remains heavy. In the Asia Pacific, only Australia and India did not end the week on a firm note.

Read more

Black Friday 2020 Discounts!

Learn to trade with the best! Don't miss the most experienced traders and speakers in FXStreet Premium webinars. Also if you are a Premium member you can get real-time FXS Signals and receive daily market analysis with the best forex insights!

More info

Forex MAJORS

Cryptocurrencies

Signatures