As a general rule of thumb, an environment of interest rate increases is generally seen as a positive catalyst for the banking sector as net interest margins can begin to expand as they exploit the spread between loan and deposit rates. Whilst the reaction of European share prices in the sector today would certainly affirm this(the SX7P is +2.1% at pixel time,) there is a trend developing in OTAS which identifies thematic geographic dispersion suggesting some investors may not believe the rally is all encompassing.
One of the best ways to interpret the markets’ forward share price expectations of a stock is to analyse its implied volatility and associated sentiment indicators.
Currently in the European Banks sector all of the Scandinavian large cap banks are seeing above average implied volatility readings, with 3 companies specifically: SEB, Nordea and Svenska Handelsbanken, seeing extremely high volatility levels relative to the rest of the sector.
To contextualise this, comparing the current median implied volatility of the Scandi banks to that of the wider Euro Banks sector(versus history) it is evident that expectations of significant share price moves are presently being priced in to these companies. Indeed, you would have to go back to Q1 2010 to see such similar levels previously.
Whilst it is noted that volatility is high across the curve specifically for the Scandinavian banks, it is in the single stock detail where we get a true sense of investor sentiment and positioning. Focussing on the 3 companies OTAS previously identified as exhibiting extreme behaviour(SEB, HandelsBanken & Nordea) some important correlations are observed:-
The Put Ratio(an expression of the total amount of Put options traded versus the total number of options traded) in all 3 companies is flagging as extremely high compared to normal suggesting downside protection is being sought. This is further evidenced by our analysis indicating the heaviest volume recently has been dominated by at the money & out of the money Puts.
Additionally, skew curve analysis can also give a good indication of the demand dynamic from investors. Currently, both Nordea and Handelsbanken have flags indicating the current cost of upside exposure is at or around year lows implying that bullish positioning is minimal.
Interestingly, whilst the vol markets are seeing considerable activity and bias there does not seem to be specific directional positioning in the cash market as depicted by short interest. The current percentage of free float on loan for all of the large cap Scandi banks remains largely unchanged suggesting traditional equity long/short funds are not playing this theme.