Europe’s Banks Lose Best-Performing Sector Crown on Growth Woes

(Bloomberg) — Banks are no longer the best-performing sector in Europe this year as US President Donald Trump’s trade tariffs raise recession concerns. 

The Stoxx 600 Banks Index fell as much as 10% on Friday, its biggest drop since March 2020, as Societe Generale SA, UniCredit SpA, Banco Santander SA and BNP Paribas SA sank. Lenders have been replaced at the top of the rankings year-to-date by utilities, which gained as investors looked for defensive assets after the US imposed 20% reciprocal duties on the European Union. 

Banks are often seen as a bellwether of economic health in the region and they surged after Germany’s surprise pledge last month to spend billions of euros on infrastructure and defense. Now, the latest tariffs broadside threatens as much as 40% of goods exports to the US, putting about 1% of Europe’s gross domestic product at risk, according to Bloomberg Economics.     

“If you’re starting to price a recession, you need to reprice banking stocks,” said Gilles Guibout, head of European equities at AXA IM, who trimmed his exposure to the sector. 

The sentiment was also negative on banking shares in the US. They were primed for another day of losses Friday, with Morgan Stanley falling 6.9% and Bank of America Corp. dropping 4.9% in premarket trading. 

Still, in Europe the sector remains up more than 6% in the year so far and has just wrapped up its tenth consecutive quarter of gains, a winning streak last seen prior to the global financial crisis.

Guibout said banking shares remain attractive as they are well capitalized, pretty cheap in comparison to historic valuations and offer 6% dividend yields on average.  

But if economic growth in the region deteriorates, investors will be looking to the European Central Bank to come to the rescue with more rate cuts. Lower rates mean less net interest income, one of banks’ big revenue drivers in the last couple of years.  

“Investors need to distinguish between well-diversified banking groups and those who make the bulk of their profits from net interest income margins,” Guibout said. “These are most at risk as they are the most exposed to a downward cycle.”

–With assistance from Michael Msika.

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