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European Banks Brace for Earnings Reports Amid Changing Economic Landscape
LONDON/FRANKFURT (Reuters) – This week marks a significant moment for Europe’s largest banks as they prepare to unveil their earnings for the second quarter. The focus will be on whether the benefits derived from increasing interest rates have begun to fade, alongside potential impacts from recent political developments.
The European Central Bank is anticipated to implement another interest rate cut in September. Despite this, the earnings reported by banks have remained unexpectedly strong, and their stock prices have continued to rise.
Analysts from JP Morgan have pointed out that European banks exhibit comparatively low sensitivity to interest rates. The proportion of clients moving their money to higher-yield accounts is minimal, leading to expectations that net interest income (NII), the difference between what banks earn from loans and what they pay on deposits, will remain healthy.
However, with enthusiastic market expectations and stock prices nearing nine-year highs, the recent performance of U.S. banks raises a cautionary note—there is a distinct lack of patience for any disappointments regarding NII, according to the analysts.
On Wednesday, two of the euro zone’s largest banks by market capitalization, Spain’s Santander and France’s BNP Paribas, will announce their results for the April to June period. They will be joined by Germany’s Deutsche Bank and Italy’s UniCredit.
On Tuesday, Spanish bank Sabadell, currently under a hostile takeover bid from competitor BBVA, will release its financial data. Investors will scrutinize these results as Sabadell seeks to demonstrate the merits of remaining independent.
The earnings season continues Thursday with Britain’s Lloyds Banking Group, followed by NatWest on Friday, and Barclays and HSBC in the following week.
Bankinter, a Spanish lender, recently reported a solid second-quarter performance, attributing its success to interest rates that surpassed expectations. This prompted the bank to revise its NII outlook for 2024 upwards, resulting in a sharp rise in its stock price.
Elena Iparraguirre, an S&P analyst focusing on European banks, expressed optimism about profitability levels moving forward. She noted that monitoring the “magnitude of NII compression and its quarterly evolution” will be essential for understanding the banking sector’s outlook as it approaches 2025.
European bank stocks have surged 20% this year, significantly outpacing the 7% increase seen in the Euro STOXX 600 index. This surge is bolstered by approximately 120 billion euros ($130 billion) in planned dividends and stock buybacks. Nonetheless, many banks still trade below their tangible book value, raising ongoing concerns about the sustainability of their profit margins.
JP Morgan analysts further highlighted that European banks are currently trading at a 43% discount compared to their U.S. counterparts when using two-year forward price-to-earnings ratios, markedly higher than the historical average of 27%.
The financial performance of major French banks, such as BNP Paribas and Societe Generale, took a hit in June following President Emmanuel Macron’s announcement of snap parliamentary elections, which came in response to a surge in support for populist parties during European elections.
Investors will be keenly interested in insights from these banks regarding their future strategies, especially amid anxieties over the possibility of a less market-friendly left-wing government emerging from Paris.
Investment Banking Prospects Shine
Banks with substantial investment banking divisions are expected to fare well, benefiting from an uptick in investment banking activities, including increased underwriting and advisory fees.
Analysts predict a strong quarter for investment banking arms at firms like Deutsche Bank and UBS, which is set to report on August 14, following positive results from U.S. banks.
Projected revenues from equities trading are expected to exceed those of the same quarter last year, while income from fixed income, currencies, and commodities (FICC) is anticipated to remain relatively stable, analysts noted.
However, Deutsche Bank is expected to report a second-quarter loss, marking a departure from its previous 15 consecutive quarters of profitability, largely due to an ongoing investor lawsuit concerning its Postbank division.
($1 = 0.9185 euros)
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finance.yahoo.com