An energy shortage and high inflation are likely to push Europe into a recession, but Schroders believes there is opportunity in European banks as interest rates rise.

The investment management firm says that European banks are trading well below their 20-year average, giving attractive valuation. Andy Evans, European Value fund manager at Schroders, says, “These are attractive valuations given the outlook for banks today is rosier than it has been for a long time, namely due to rising interest rates and strong balance sheets”.

Listing the reason to consider banking stocks in Europe, Schroders says there is a close relationship between higher interest rates and banks. Historically, bank stocks have moved in tandem with rising or falling interest rates, but that hasn’t been the case this year. “The relationship between interest rates and banks’ share price performance relative to the market has so far not moved in its typical lock-step fashion. We believe this gap will be short-lived and offers an opportunity to investors,” says Justin Bisseker, European banks analyst at Schroders.

Additionally, with a slowing European economy, markets are expecting that any pullback from interest rates will erode margin improvement achieved from rate hikes. But Schroders says that the scale of revenue of European banks is so large that it should outweigh the burden of credit losses in case of a recession.

The investment management firm in its recent insight goes on to talk about the impact of dividend yields and a windfall tax on banks.

View the complete insight here.