European banking is no longer a laughing stock
Until a few years ago, most investors regarded any suggestion to buy shares in Europe's banks with derision and mirth.
Years of zero and negative interest policies (Zirp and Nirp) from central banks coupled with the increased regulatory scrutiny that followed the global financial crisis (GFC) made these companies exceptionally poor investments.
However, all that began to change when the US Federal Reserve increased rates in March 2022. Other central banks, including the European central bank, soon followed suit, ending the protracted period of Zirp and Nirp policies.
Banks make money based on the difference between what they pay for short-term funds from depositors and the amounts they receive from long-term lending. Positive interest rates are vital to the profitability of this enterprise. So, the change in monetary regime has led to a surge in bank earnings.
And because the industry's post-GFC penance meant most banks began this period of profit revival with fortified balance sheets, rising profitability has translated into bumper cash returns for their shareholders.
Share prices have followed suit, especially in Europe where valuations were hugely depressed during the sector's nadir. The Stoxx Europe 600 Banks index has delivered a 265pc total return, which compares with 150pc from the S&P 500 index measured in Euros.
France's BNP Paribas has been making good share price gains but has nevertheless lagged the sector – but increasing amounts of smart money is betting it is set to make up the ground.
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