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Bank earnings have surged this year, partly on higher ECB
interest rates that allowed lenders to beef up their net
interest income, but stock market valuations have lagged behind
and many banks appear to be trading at a discount to
fundamentals.
"In the long run, this may adversely affect financial stability
as banks which are valued by investors at a discount will likely
find it more challenging to raise new equity when needed," the
ECB said in a Financial Stability Review article.
"Weak valuations translate directly into stricter terms and
conditions for finance to the real economy," it added.
The ECB argued that banks' exposure to rising corporate credit
risk and the perception of the shares as value stocks play a big
part in stagnant valuations.
Fundamentals, however, do not fully account for current
valuation and heightened uncertainty about future shareholder
payouts may also be playing a part, the ECB added.
Some euro zone governments are now implementing taxes on banks
and even the ECB is discussing an increase in unremunerated
mandatory reserves, which would reduce earnings.
"The risk of the dividend income stream being taxed affects
valuations more strongly relative to growth stocks, which
reinvest cash flows internally and are expected to return them
to investors in the more distant future," the ECB added.
(Reporting by Balazs Koranyi)
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