ASK investors if they liked European bank stocks and for years you’d have probably heard: Non, nein or no. Finally, things are changing.

       BNP Paribas SA of France, Banco Bilbao Vizcaya Argentaria (BBVA)SA of Spain and UniCredit SpA of Italy are among those that have reported good results for 2021 this month and begun returning billions of euros of capital to shareholders.

       With interest rates set to head higher, they should actually start making money from ordinary lending, too.

       Share prices have already rallied.

       Banco Santander SA, one of the worst performing of the big European bank stocks, has risen by one-fifth in the past 12 months.

       Societe Generale SA has more than doubled. The Euro Stoxx Banks index is up 50%.

       But there are likely more gains to come: Valuations are still very low, especially compared with US peers.

       For a long time, many investors looked at the mismatch and saw a value trap – European banks were cheap for a reason: Profits weren’t going to improve any time soon.

       Negative interest rates, high costs and piles of seemingly immovable bad debts all added up to a bad proposition.

       Now, it’s true that forecast returns on equity are still below 10% for the next couple of years at many eurozone banks, which is roughly the level typically assumed to be a bank’s cost of capital, or the returns that shareholders should expect.

       In comparison, JPMorgan Chase & Co hit a 19% return on equity for 2021, while Swiss bank UBS AG returned nearly 13%.

       Still, many European banks’ shares trade at a greater discount to forecast book value than expected returns suggest they should. Another way of looking at valuations is as a multiple of earnings.

       Profit forecasts have jumped more quickly than share prices in recent months as interest rate rises have come to seem more likely.

       Price-to-earnings multiples have fallen even as bank stocks rallied.

       For example, look at Deutsche Bank AG: It might still have much to prove to investors, but many are clearly ignoring better expectations for its profits: The German bank is trading at half the earnings multiple it was last March.

       As life returns to normal following the Covid pandemic, lending should start to grow again.

       Banks should get more revenue from their core business as the European Central Bank (ECB) finally moves away from its long experiment with negative rates. But that’s just one part of what’s making life look better.

       They have repaired their balance sheets by getting rid of bad loans and cutting costs.

       UniCredit is a poster child for this effort.

       In 2017, the Italian bank raised about US$14bil (RM56bil) from shareholders to help fix its problems. Now, it has pledged to hand back to investors more than US$18bil (RM75.3bil) in dividends and share buybacks by 2024, including US$4.3bil (RM18bil) this year.BBVA is buying back billions in stock and BNP will also do so once it completes the sale of BancWest, its US business.

       Regulators have finished adding to European capital requirements and banks are all now ahead of where they need to be, some by a large margin.

       Across European and UK banks, capital returns to shareholders in the next two years could add up to more than ？130bil (US$148bil or RM619.4bil), according to analysts at Bank of America.

       Beyond lending, banks have been forced to find other revenue sources by the long years of negative interest rates.

       They are getting more fees from things like wealth and asset management or insurance, adding to profits even before rates rise.

       Of course, there are risks. Investors still remember the doom-loop that tied the fates of over-indebted European governments and weak banks in a highly destructive and self-reinforcing tangle.

       Italy especially suffered in the debt crisis of a decade ago.

       These problems haven’t been completely solved, but they have been diluted significantly.

       Italy’s banks still hold a lot of Italian government bonds, however the ECB holds more and isn’t about to start selling.

       As the central bank changes monetary policy to rein in inflation, the ECB will keep a close eye on the all-important difference between yields on government bonds from Germany and more indebted countries like Italy or Spain.

       The ECB has also been supporting banks by paying them both to borrow money from its targetted long-term repo operations, and to deposit a lot of it back at the ECB.

       That policy will end, but banks should replace it with normal lending income and at better margins.

       Bad loans might also return if or when Europe’s economies slow, but here too there have been reforms, especially in Italy where a slow court-based bankruptcy regime made bad loans hardest to shift.

       As long as the changes are fully implemented, it will be far easier and quicker for Italian companies to restructure debts when they start to struggle.

       In the past, the only choice was bankruptcy court, which depending on where you were in Italy could take more than a decade to reach a conclusion.

       Banks in the eurozone aren’t about to race ahead of the returns made by US rivals, but they are dragging themselves out of the quagmire of the past decade. It’s time to start looking at their valuations as more an opportunity than a trap. — Bloomberg

       Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. The views expressed here are the writer’s own.