𝐒𝐭𝐢𝐥𝐥 𝐏𝐨𝐭𝐞𝐧𝐭𝐢𝐚𝐥 𝐢𝐧 𝐭𝐡𝐞 𝐁𝐚𝐧𝐤 𝐒𝐞𝐜𝐭𝐨𝐫
Last week’s interest rate cut by the European Central Bank (ECB) from 4.00% to 3.75%, combined with lower-than-expected inflation numbers, marked the beginning of a lower interest rate environment. The stock market responded positively, with significant gains across the board.
The banking sector is particularly benefiting from these changes. Banks can increase the spread between the interest earned on loans and the interest paid on customer deposits. This spread has grown from about 2.0% in 2022 to 3.2% today, a rise of over 50%.
This growth in interest income has been especially beneficial since banks haven't needed to increase their costs to take advantage of higher revenues. Some banks have even reduced their cost base, resulting in strong earnings. For example, the Danish bank (Danske Bank) has nearly doubled its earnings from 2021 to 2023.
Despite significant stock price increases, banks' valuation relative to earnings has remained stable, with some even having a lower P/E ratio today than a few years ago. Their low valuations and typically high dividend payouts make them a good addition to a diversified investment portfolio. In my portfolio, I have $BCS (Barclays PLC-ADR) and $DANSKE.CO (Danske Bank A/S) , and I might increase my positions in these or add another bank stock.
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