S&P webinar: Boost in dividends helps to narrow Europe, US bank valuation gap

➤ Better capital positions, combined with higher earnings and greater resilience, have created a sustainable distribution model that has improved the investment case for European banks.

➤ European banks' total payout ratio now surpasses that of their US peers.

➤ The move to positive interest rates represents a structural, rather than cyclical, change.

A structural change in net interest income has allowed European banks to increase dividend payouts, helping close a long-standing valuation gap with their US peers, analysts said during an S&P Global Market Intelligence and European Banking Federation webinar.

The shift from zero and negative interest rates has boosted European banks' ability to return capital to shareholders. Many lenders are now delivering total distribution yields in the double digits, an improvement from the restricted dividend environment that prevailed for years, analysts said during the June 18 "Value-added: Market valuation of EU banks at a turbulent time" webinar.

Access the webinar here.

US banks had been "consistently outperforming" their European counterparts when it came to price-to-book multiples, but the long-standing gap has started to narrow in the past two or three years, said Mohsin Ali Khan, director, EMEA Sell-Side Segment, at Market Intelligence. This was based on banks with assets of at least $50 billion at the end of 2024.

The European Central Bank raised its key interest rate to a high of 4.5% between September 2023 and May 2024, having maintained 0% rates between March 2016 and July 2022. Higher rates allowed banks to charge more on loans while passing on the higher rate benefit to depositors more slowly. The ECB has subsequently cut rates, most recently to 2.15% on June 5.

This increased net interest revenue enabled the increased dividend payouts that have been the "absolute core thrust" of the shift in investor sentiment, said Guy Stebbings, executive director, European banks equity research, at BNP Paribas Exane.

"The difference from going from 0 to 1 or 1.5 [percent] is massive. The difference from going from 1.5 to 3 [percent] is helpful, but it's nowhere near as significant," said Stebbings, who added that a rate of 1.5% to 2.5% would be a "pretty good backdrop" for banks.

"Align that with the fact that capital is broadly in the right sort of place in the system and that improved earnings very much feed through into distributions and, absolutely, [this] has been fundamental to the investment case," he said.

The sustainability of these distributions demonstrates that this is "more of a structural change that's taking place rather than just a cyclical move in interest rates," said Johann Scholtz, senior equity analyst at Morningstar.

"Around the 1% level, banks can manage their interest rate margins. Essentially, the moment that you approach zero and below, deposit taking becomes a loss-making activity for banks," said Scholtz.

US lenders have historically led their European peers in total payout ratios, which include share buybacks and dividend payments. However, the situation has changed in recent years, which "will have an impact on investor sentiment," said Khan.

"If we look at 2021 onwards, we're seeing European banks performing much better on the total payout ratio. Analysts expect … the positive momentum to continue," Khan said, citing estimates from Visible Alpha, a Market Intelligence company.

European banks have also strengthened their capital positions and shown the benefits of measures put in place after the 2008 financial crisis. This was demonstrated during the turmoil following the collapse of US-based Silicon Valley Bank in 2023.

"The SVB crisis was a bit of a turning point for European banks," Stebbings said. "It showed that the regulatory framework put in place after the financial crisis had created genuinely more resilient institutions."

While European banks have made significant progress, structural advantages still favor US banks in the long term, including deeper capital markets and a more favorable regulatory environment, the panelists said, even though they noted improvements in Europe.

– Read more about the top 20 European banks by market cap and how US tariffs initially hit European bank stocks. – Access the S&P Global Market Intelligence webinar replay portal. – View more webinars from the EBF and Market Intelligence Knowledge Partnership.

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