A selloff in banking stocks is rarely comforting. But after three years of strong gains, the latest pullback in European lenders looks more like a reset than a crash.
The Euro Stoxx banks index has dropped by about 8% over two weeks, sliding to the lowest level since June and entering a technical correction on Thursday. Societe Generale SA, Credit Agricole SA and Deutsche Bank AG have all tumbled more than 15% from their recent highs.
Soaring bond yields have been at the heart of the sudden drawdown, adding to risks for borrowers and eroding the value of sovereign assets held by banks. Much of the drama centers on France, where political upheaval and fears over its finances have pushed the premium on the nation’s debt over Germany’s to the widest in more than a decade.
“Bond yields appear to have crossed a pain threshold that has prompted investors to reassess fundamentals,” said Roberto Scholtes, head of strategy at Singular Bank. “If interest rates rise as much as currently embedded in yield curves, non-performing loans could increase significantly, while loan growth and corporate banking activity would slow.”
On the other hand, the retreat in banking stocks follows a breakneck rally that saw their shares triple since 2022. Bulls can point to the bigger picture: bank balance sheets are more robust than in the European sovereign bond crisis more than a decade ago. The spike in yields is unlikely to bleed through to fundamentals unless they go higher and stay elevated.