Historically, bank spreads have typically traded wider than those in the broader corporate market. However, this gap has almost disappeared, driven by the positive dynamics and performance within the banking sector since the European Central Bank started the hiking rate cycle in 2022.
EUR IG Sr Financial spreads (see blue line in graph) are now at their lowest point in two years vs the Eur IG All Sectors OAS Index (green line). Banks are benefiting from higher net interest margins, which have significantly boosted net income and return on equity following years of underperformance and sluggish growth. Additionally, capital ratios have remained robust, with evolving capital requirements enhancing the sector’s credit quality. However, the potential for spread widening cannot be dismissed, as margins can shrink, and non-performing loans may increase in a weakening economic environment.
