Industry Sector Weekly

The European banking sector has been under the spotlight, especially after the Spanish authorities’ takeover of Cajasur in May. However, the sector was supported last week by EU plans to publish bank stress tests in July. Whether it is seen as informative will depend on how rigorous the tests are, but the degree of transparency it is expected to offer has supported the sector.

Banks and insurance outperform

The European banking sector has been under the spotlight, especially after the Spanish authorities’ takeover of Cajasur in May. However, the sector was supported last week by EU plans to publish bank stress tests in July. Whether it is seen as informative will depend on how rigorous the tests are, but the degree of transparency it is expected to offer has supported the sector. Overall, we remain cautiously optimistic on the sector, supported by improving economic conditions, which have helped to stem impairments and drive up non-interest income. Moreover, the steep yield curve will support performance. The sector, however, remains highly dependent on state support and funding conditions, while future regulation is an added uncertainty.

Insurance also performed well in the past week, boosted by AXA’s plans to sell its UK life insurance unit to Resolution. This may accelerate consolidation and help to raise margins in the mature life insurance sector. In contrast, the increased prevalence of defined benefit schemes in the pensions sector and the expectation of increases in private sector savings point to increased volume growth in financial services. Chart b shows that, in recent years, financial services has outperformed insurance.

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