A Fed Awakening With No Material Impact On EU Banks


UBS | This time around consensus is unanimous and the question is more about the FOMC’s wording and guidance than the actual rate hike, although we assume the Fed is going to hike 25bp tonight. We expect the Fed to be cautious in its wording – 8 years into the financial crisis, a policy mistake could be disastrous, so the Fed is likely to keep its options open for the next few months, depending on data, FX, market reaction and other considerations.

So what does this tightening mean for the European banks? Not so much at this stage given the ECB is clearly in a different cycle and the relevant benefits will be small. The US banks (BAC, MS, Citizens etc.) and HSBC are the relative winners – though the behaviour of high yield markets from here remains unknown. The impact for EU investment banks (Barc, DBK, CS) will be mixed, with higher volatility in FX and interest rate divergence potentially helping their business. There should be no material direct impact on the European banks.

EM exposed banks like Santander and BBVA may face jitters on the hike, though clearly the key event for these names will be Sunday’s Spanish election. In addition, NII tailwinds from their US/Mexico business (esp. for BBVA) should help mitigate the EM fears.

The rest of the European sector should remain largely unaffected, though a fine combination of a perceived “decisiveness” and “dovishness” by the Fed may promote “risk on” which could drive a rally in the periphery following the recent pull-back. Prefer Intesa, Erste, and ING. In addition, the Fed’s hike should mean the ECB will remain less likely to expand QE which is a relative positive for EU banks’ margins.

Regarding the insurance industry, the impact will positive for its stocks mainly from higher investment yields, plus some fx tailwinds from a presumably stronger USD.  Historically, the EU companies most sensitive to US rates have been AGN, AXA, PRU, ZURN, and the Reinsurers (SREN & MUV2).

To put things in context, +100bp US rates would add ~7% to AXA’s earnings over a period of 5 years, so you’re not really going to see much benefit in the numbers from 25bp tonight; but it’s the direction of travel that counts. 

For the record, in the last month or so since the strong US payrolls made a hike tonight look odds-on, AGN is -10%, AXA +1%, PRU -4%, ZURN -5%, SREN +3%, MUV2 +1%…whereas SXIP has been -2%…so it’s fair to say the Fed hasn’t really been a driver.

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