Bank Stocks in Europe Zoom Higher, Rewarding Bargain Hunters

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European banks are among the stock market’s top performers, making winners out of the investors who backed them when many wouldn’t touch them during the pandemic.

This year, the Euro Stoxx Banks index is up 26%—compared with a 14% rise for the broader benchmark—and has recently regained all the ground it lost during the pandemic. Some individual stocks have done even better. Spain’s Banco de Sabadell SA, which was hammered during the pandemic’s shutdowns, is up 60% in 2021, while French banking giant Société Générale SA is up nearly 50%.

“European banks have really surprised on the upside,” said Tom Kinmonth, a fixed-income strategist at Dutch bank ABN AMRO. He said a big reason was that loans in the region hadn’t turned sour in droves as was feared.

The rebound began in November, after news of successful vaccine developments started emerging. An improvement in the region’s economic outlook and the easing of a dividend ban for banks gave a further boost.

Tom O’Hara, a Janus Henderson portfolio manager, said price moves were also being driven by international investors dipping back into the sector after years away. These investors are looking to diversify from U.S. and technology stocks and prepare for rising inflation, which would trigger interest-rate increases that could be good for banks.

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