EURUSD: Low valuations of euro zone bank stocks could hamper creThe European Central Bank (ECB) on Monday expressed concern about the low valuations of euro zone bank stocks, suggesting it could have a negative impact on future credit growth. Hybrid by imposing strict conditions on the borrower. Bank profits have increased significantly this year, thanks in part to higher net interest income due to higher ECB rates, but stock market valuations have not kept pace. Many banks appear to be trading at a discount to fundamentals.
The ECB has pointed out that this could lead to financial system instability in the long run. Banks that are undervalued by investors may struggle to raise new capital when they need it, the ECB said in its financial stability review report.
The central bank continued to insist that weak valuations directly lead to tighter financing conditions for the real economy. We find that banks' increased exposure to corporate credit risk and the perception of bank stocks as value stocks are major contributors to valuation stagnation.
However, the ECB also noted that these fundamentals do not fully explain current valuations. Increased uncertainty regarding future payments to shareholders may also be a factor. Meanwhile, some euro zone governments have introduced banking taxes and the ECB is considering raising interest-free reserve requirements, which could lead to lower revenues. The ECB argues that the tax risk on dividend income sources impacts valuations more than on growth stocks, whose cash flows are expected to be reinvested internally and returned to investors in the future. Far away.
