EUROPEAN banks’ capital returns to shareholders may have already reached a peak, according to JPMorgan Chase strategists.

The prospect of central bank rate cuts this year will reduce earnings power for the sector, a team led by Mislav Matejka wrote in a note on Monday (Feb 19), adding that current returns “are likely as good as it gets.”

The strategists remain underweight on the sector, as positive catalysts including higher bond yields and earnings per share growth fade. “We note the EPS revisions of European banks have just recently entered negative territory,” the strategists wrote.

While the European economy avoided a recession in the second half of 2023, its prospects are currently seen to be weak. “Both dividends and buybacks are unlikely to be safe if the credit and macro environment weakens, or if regulatory scrutiny increases,” the JPMorgan strategists added.

Lenders have benefited from the European Central Bank’s historic monetary-tightening campaign, but its expected conclusion has sparked warnings that increases in lending revenue will be capped, curbing earnings growth for banks in the region.

Still, lenders were among the best-performing equity sectors in Europe on Monday, amid speculation as to when the world’s central banks will begin reversing the interest rate hikes they enacted to curb inflation. ECB president Christine Lagarde last week cautioned against rushing into cuts amid concerns over reigniting price pressures.

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The JPMorgan strategists noted that their underweight on banks is “one of the sector calls where we face the most pushback from investors.” However, given bond yields have likely peaked, “banks should be peaking, as well.”

Banco Santander has been the latest to join European peers in raising investor payouts as it announced on Monday a new 1.5 billion euros (S$2.2 billion) share buyback and boosted its cash dividend after record profit last year.

The likes of Deutsche Bank, Intesa Sanpaolo and UniCredit have also announced share buyback plans during their 2023 earnings presentations. BLOOMBERG