European markets rise as investors sniff out bank bargains

“Bargain hunters were out in force for Europe’s banks following the chaos of the past few weeks. Deutsche Bank jumped more than 4% in early trading, regaining some of the territory lost last week when its share price plummeted,” says Russ Mould, investment director at AJ Bell.

“Investors had been worried about the strength of the banking sector following the collapse of several banks in the US including Silicon Valley Bank.

“Only a few months ago, investors were excited about the prospect of the banking sector being one of the few beneficiaries of rising interest rates as it allows them to make a bigger margin on loans.

“Now, questions are being asked about a potential rise in costs amid fears of tighter regulation. Banks may also become more cautious with lending and that could make it harder for consumers and businesses to borrow money which in turn could have a negative impact on the economy.

“Many investors still don’t want to touch the banking sector for fears there is more distress to come. Yet for every bleak situation there is always someone who sees an opportunity to make money, hence why we’re seeing a rise in the share price of many European banks today.

“UK ones offer large dividends, and Lloyds is effectively trading with a ‘10% off’ label, being the share price decline over the past month. A lower share price equates to a higher dividend yield, assuming analysts don’t downgrade dividend forecasts. That means investors taking the risk of buying banking stocks today could receive a bigger reward in the form of a greater dividend yield than what was available in February.

“Helping to repair sentiment towards the sector was the news that First Citizens Bank is to buy $72 billion of Silicon Valley Bank assets at a discount of $16.5 billion. Together with HSBC’s purchase of SVB’s UK operations and UBS’ takeover of Credit Suisse, investors will be hoping for some stability from now on in the broader sector.

“That naturally turns the attention back to central banks where there are lingering concerns that some like the Federal Reserve might have made policy mistakes, going too fast and hard with interest rate rises. It means that worries are merely shifting to something else on the menu, rather than having a clean slate with which to drive a new global market rally.”

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