THE ascent of eurozone banking stocks has gathered pace to such an extent that they have become the most overbought in history.

The relative strength index of the Euro Stoxx Banks benchmark rose to 90 on Thursday (Apr 4), far above the level of 70 that some technical analysts see as a signal that an asset has risen too far, too fast. That exceeded the previous peak of 1993.

The subindex, made up of eurozone lenders including Deutsche Bank, has risen more than 20 per cent in 2024, far outstripping the 7 per cent gain of the broader Stoxx 600 Index. Italy’s BPER Banca and Spain’s Banco de Sabadell are among the top gainers.

Banks continue to benefit from higher bond yields, while the lending outlook is brightening as easing inflation spurs predictions of central-bank interest-rate cuts. Banks have also lured investors with higher dividends and buybacks.

“The speed of the rise in European banks gives us some vertigo,” said Ricardo Gil, head of asset allocation at Trea Asset Management. “But we still like the sector.”

Even after the latest steep gains, Europe’s banks are still cheap versus history. The subindex trades at 7.3 times earnings expected 12 months from now versus a multiple of 10 in the early part of 2022.

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The earnings outlook is also supportive, according to analysts at Bank of America.

“We expect a strong first quarter from European banks,” BofA’s Alastair Ryan said in a note. Deposit volumes have stabilised and while rates are set to decline, they will do so at a moderate pace and to a level that’s favourable, he wrote. BLOOMBERG