Shares of European banks were very volatile this week and have fallen sharply year to date. But with the financial sector looking much healthier than a few years ago, we think fears of a dividend collapse may be overdone.

Many banks trade at distressed multiples not seen since 2009–2012, suggesting an imminent economic disaster. But today, the European financial sector has cleaner balance sheets, stronger capital and improved liquidity positions.

It’s natural for investors to scrutinize banks over their ability to pay dividends in this environment. Highly rated stocks generally trade at low dividend yields, indicating investors are willing to pay a premium for dividend sustainability and growth potential. For European banks, both dividend yield and dividend growth metrics are elevated, which means investors have lost faith in the banks’ ability to maintain dividends.

If a recession develops, European banks will be in trouble. However, if the region avoids recession, we believe that select banks have healthy balance sheets and resilient loan books, and offer solid returns and excellent dividend potential at current market prices.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorized and regulated by the Financial Conduct Authority in the United Kingdom.

© AllianceBernstein

© AllianceBernstein

Read more commentaries by AllianceBernstein