Even if the dividend reductions help European banks meet higher capital stipulations, the risk of a recession will remain, and its severity will determine future returns from bank shares, according to Didier Saint-Georges, who helps oversee $58 billion at Carmignac Gestion in Paris.
“The question is whether valuations have become attractive,” said Saint-Georges, “Our answer is not positive at this stage. Given returns are still falling, and earnings expectations are still too optimistic in our opinion, we do not think valuations to be particularly compelling, given the balance sheet risks.”The simple truth is that falling earnings, no dividends and high risk because they are a 'black box' combine to make bank stocks a particularly unattractive investment opportunity.
Meeting higher capital ratios does nothing to reassure investors about the balance sheet risks. The only way to achieve this is to require banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.
Lenders are under pressure to raise an additional 115 billion euros ($146 billion) of capital by June to meet European rules. They’re finding it harder to generate that money from earnings, which are forecast to shrink 20 percent from 2010 levels, or raise it from investors in rights offerings. Bank stocks in the region have declined 36 percent in the past year.
“Shareholders and regulators do not currently see eye to eye as regulators are asking the banks to do recapitalizations at the worst time possible,” said Christophe Nijdam, an analyst at Alphavalue in Paris. “The big question mark will be the economic slowdown. The more severe it is, the higher the cost of risk and the more constrained the dividend-payment capability.”