European banks have earned their low valuation after years of risky lending, risky trading and overzealous financial engineering. However, investors may not be aware that many lending institutions, such as Deutsche Bank and others, have adjusted their course over time. Major eurozone and UK banks see their shares trading 40% below the broader index, using a forward price-to-earnings multiple tracked by Refinitiv. History says that owning lending institutions during a recession like the one that is coming is a bad idea. Banks were at the center of the 2008 crash, and many of them needed help. The eurozone crisis in 2012 triggered a wave of bad debts that hurt profits. With growth slowing and EU banking watchdog Andrea Enria sounding the alarm about growing credit union bankruptcies, investors seem to assume the same thing will happen again. However, banks may deserve more credit for rebuilding their operations, which can be seen as a sort of six-step recovery program. First, European banks liquidated many bad loans. According to Bank of America, a decade ago, about half of their so-called credit losses were actually due to deteriorating loans that soured but remained on their balance sheets. Recently, however, eurozone banks have been struggling with their old sins and getting rid of problem loans.

Credit goes to the relevant regulators, who have encouraged them, as well as governments, who have often guaranteed sales. Secondly, credit organizations pay more attention to the availability of new loans. There are no signs of overspending on bank loans, despite chronically low interest rates. Between November 2012 and November 2022, total lending by eurozone banks to households and businesses grew at an annualized rate of less than 2%, which is only a fraction of what it was before 2008. Third when banks lend now, they take on less risk. For example, in the Eurozone, the sector’s exposure to relatively risky consumer finance has declined as a percentage of the total, while the share of mortgages has increased. Clients meanwhile are in a better position.

Banks are phasing out variable-rate mortgages in favor of fixed-rate mortgages, helping to insulate borrowers from the immediate cost of higher interest rates. Fourth, business lending is still associated with risk, but it is shared between banks and the state. For example, according to Jeffreys, almost 1/10 of loans to non-financial companies at BNP Paribas and Société Générale are government-guaranteed. Fifth, banks curbed bad habits such as leverage and mortgage bonds. There are still pockets of risk in these sectors, such as the French company BNP Paribas, which supports the acquisition of the social network Twitter and the British supermarket Wm Morrison. However, it should be noted that in 2007, Eurozone and UK banks accounted for nine of the world’s top twenty leveraged financial tables, according to Refinitiv, while only three remained there last year. And sixth, and finally, banks have reduced the percentage of their balance sheets available to stockbrokers and brokers.