LONDON (Reuters) – Europe’s top banks may have survived a milestone test of their resilience but strengthened balance sheets count for little when they generate such meager returns compared with U.S. rivals, investors say.

The European Banking Authority stress test results on Friday showed the sector in reasonable financial health, with a clean sweep of 48 lenders judged capable of withstanding economic shocks like a crash in real estate or bond prices.

For the first time since 2009, the EU health check of the sector showed all top banks passed a key capital threshold under the most adverse economic scenario.

However European Central Bank vice president Luis de Guindos on Monday said a dozen banks that came below the 9 percent threshold in the adverse scenario should strengthen their capital positions.

Those banks include Deutsche Bank, BNP Paribas and Societe Generale. For interactive graphic, click here tmsnrt.rs/2D4c7an

Fears of fresh cash calls partly explain why investors are still running shy of the sector. The STOXX European banks index, which has tumbled 20 percent so far this year, held flat on Monday following the results. This rejection looks set to continue as Europe’s economic prospects darken, according to some fund managers and analysts.

A decade on from the financial crisis and despite years of central bank stimulus, Europe’s growth is slowing, with economists polled by Reuters forecasting full-year GDP growth in the euro zone of 2.1 percent this year and 1.8 percent next.

That reflects an outlook depressed in part by Italy’s political crisis, the slowdown in Turkey and the likely fallout from Britain’s divorce from the European Union, which were all factored into the stress test scenarios.

On the surface, European bank stocks look like bargains. The sector’s valuation via the STOXX bank index is hovering just above all-time lows, long after lenders shed the toxic assets that destroyed faith in the financial system in 2007.

But the fact that bank capital levels are now roughly three times higher than pre-crisis levels has failed to offset worries about where bank revenue growth is going to come from.

“Profitability remains quite a problem for many banks in Europe,” Mario Quagliariello, director of economic analysis at the EBA, told Reuters.

ROUGH YEAR

Low base rates – 0.75 percent in Britain and negative 0.4 percent in the euro zone – are forcing lenders to cut margins and take greater risks as demand for loans slows amid stagnant growth, resulting in paltry returns for investors.

“European bank stocks have had a rough year thus far – and until there is economic data that suggests robust economic growth in the eurozone, bank stocks seem unlikely to recover,” said Mike Olivia, an advisor at WestPac Wealth Partners, which holds bank stocks.

Bank bosses also have fewer freedoms to make money in investment banking post-financial crisis, investors say. This is compounded by an equally striking incapacity to curb costs.

And tighter regulation has made the sector safer but less lucrative, fund managers say, making it a tougher sell to their insurance and pension fund clients, who demand bigger rewards for what they perceive to be riskier investments.

EU banks’ average return on equity in 2017 stood at 5.6 percent, just over half the 2007 level of 10.6 percent, according to data from the European Banking Federation and below the 9 percent recorded by U.S. peers.

U.S. lenders’ investment banking businesses have increased their market share at the expense of their European rivals, thanks to weaker markets and tougher regulations in Europe, and laid bare in much more impressive operating margins – a key measure of profitability – for the U.S. banks.

The top U.S. banks’ equities and fixed income businesses ran at margins of 31 and 42 percent in the first half of this year, according to data from Coalition, compared with 14 and 27 percent for the same businesses in Europe’s biggest investment banks. For an interactive graphic, click here. tmsnrt.rs/2PwqxXA

POWERLESS

The biggest two buying signals for investors in banks are an uptick in interest rates, followed by growth in demand for debt. But both of these factors are in the hands of policymakers, not bank CEOs, noted Vincent Vinatier, portfolio manager at AXA IM, which holds bank shares.

“Most people doubt we will ever again see the kinds of profits we saw before the crisis … ROE (return on equity) will be just a fraction of what it was,” Vinatier told Reuters.

Long-awaited rate rises will come, but those who jumped back into European bank shares in February, when hopes of a shift in monetary policy last peaked, have been punished with a 20 percent fall in prices.

When rates do move upwards, this will likely happen in small increments after extensive sign-posting by EU policymakers.

And the benefit on margins for banks will likely be largely offset by the need to repay ultra-cheap loans offered by the European Central Bank in recent years, and replace them with costlier funding, analysts at Berenberg said.

Higher debt costs could also prove fatal to a glut of so-called ‘zombie firms’ – companies struggling to cover borrowing costs on current profit levels. Forbearance – the act of turning a blind eye to a faltering loan – and ‘zombie companies’ are most apparent on Italian and Spanish bank balance sheets.

COSTS

With revenue growth so hard to capture, a tighter rein on costs is seen critical in the battle to win back investors.

“There is still much more cost cutting to be done i.e. further branch closures and retrenchment of people,” said Marc Halperin, manager of the Federated International Leaders Fund, which counts ABN AMRO, AIB Group, Credit Suisse, BNP Paribas, Intesa Sanpaolo and UniCredit among its holdings.

Expenses at Barclays’ investment bank, for example, continue to spiral, leaving the bank short of its target to cut group cost to income to under 60 percent.

Standard Chartered Finance Director Andy Halford said his bank had made “virtually no progress” on reducing costs this year in a leaked staff email last month.

And the benefits achieved by cutting jobs and branches have been eclipsed by fresh spending in technology and cyber defense.

Banks have largely put massive penalties for past misconduct behind them but regulatory compliance is an unavoidable overhead set to rise as activities expand.

And promises of 4, 5 and even 6 percent annual dividend payouts are not luring investors either, because European utilities, telecoms and insurers can offer the same dividends at reduced risk, fund managers said.

Banks are the second cheapest sector on a price to earnings basis, trading at 9.1 times consensus estimates on 2019 earnings, a 30 percent discount to the market while offering a estimated 2019 yield of 5.7 percent, Berenberg data shows.

Only the autos sector is cheaper.

Although neutral to the sector, analysts at Bernstein said investors had rarely had a better opportunity to buy the ROE currently offered by the sector at such cheap prices.

“If one did want to make a positive case for it, the European banks are somewhat cheaply valued against their level of ROE compared to what history would suggest.”

The most bearish of investors say the lack of love for European banks reflects growing fears the European project is ultimately doomed, or another global financial crisis triggered by trade wars or sovereign insolvency is just around the corner.

“The next financial crisis will be triggered by sovereign debt, rather than the banks themselves. However the banks own a lot of the sovereign debt so there is contagion risk,” said Matthew Gallagher, managing member at Odinic Advisors.

“Greece and Italy are starting to show cracks and won’t be helped as interest rates rise in the US.”

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