by Tom Sims, Jesús Aguado and Valentina Za
European banks have increased their profit distribution in recent quarters but their good performance could be threatened in a context of economic slowdown and rate hikes.
The quarterly accounts of the banks BBVA BBVA.MC on Tuesday, Santander SAN.MC on Wednesday, Deutsche Bank DBKGn.DE and BNP Paribas BNPP.PA on Thursday and UniCredit CRDI.MI on the following Monday will make it possible to gauge the impact of these economic conditions on lenders.
The banks sector index .SX7P hit its highest level since mid-2018 in January, propelled by profitability supported by higher rates, record payouts to shareholders and low provisioning for bad loans.
If bank executives take advantage of these favorable conditions, investors fear that they will not last.
PEAK RATE
Retail banks, which earn most of their revenue from the difference between interest charged on loans and interest paid on deposits, are those that have benefited the most from rising rates, but more diversified banks, like Deutsche Bank and BNP Paribas, have also benefited.
However, worrying signals are emerging: last week, the net interest income (RNI) of the Spanish bank Bankinter BKT.MC was slightly lower than that of its fourth quarter, causing its shares and those of others to fall banks.
JP Morgan analysts warn that the rate cut will lead to a “cycle of outlook cuts” in the sector. After an estimated 22% jump in NIRs in 2023, the bank expects European lenders to post limited NIR growth this year and stable profits.
According to consensus, UniCredit should forecast a 4% drop in its RNI for 2024, write Jefferies analysts who nevertheless expect the bank to exceed expectations. UniCredit has 10 billion euros of excess capital to use.
Likewise, analysts will closely monitor BNP Paribas’ results. The bank must also decide how to use the excess capital it has left after the sale of Bank of the West.
NOT SO BAD
Not all analysts consider the decline in margins so worrying.
The average interbank lending rate in the euro zone in 2024 is expected to be higher than in 2023 and RNIs will only be “slightly falling”, according to Sebastiano Pirro, investment director at Algebris Investments, exposed to the banking sector.
“This is an inflection point for European banks” after ten years of negative key rates having weighed on banking profitability, underlines the manager.
“Today, banks earn more money than they can distribute and capital ratios are increasing,” adds Sebastiano Pirro.
Santander and BBVA are expected to report higher net profit and net interest income than in 2022, driven by their operations in Spain and Latin America.
The situation at Deutsche Bank is less encouraging. Analysts expect net profit attributable to shareholders of around 700 million euros in the fourth quarter, compared to 1.8 billion euros in 2022. This would nevertheless be the 14th consecutive quarterly profit after years of losses .
DOUBTFUL DEBTS
Investors will be attentive to the deterioration in loan quality linked to rising interest rates.
Rising borrowing costs have not yet caused the volume of non-performing loans (NPLs) to jump, with the only financing strains concentrated mainly on German and Swedish commercial real estate.
Sebastiano Pirro points out that balance sheet repair efforts have been so strong in southern Europe, and demand for new loans so weak, that NPL volumes will remain low.
The slowdown in the European economy will nevertheless reduce demand for loans, encouraging senior executives to be cautious.
Manfred Knof, Chairman of the Management Board of Commerzbank
CBKG.DE , told Reuters last week that it expected another year of stagnant loan applications.
There is no sign of a wave of failures, but “companies are reluctant to invest. The investment gap in the German economy is increasing every day”, explained the manager.
INVESTMENT BANK
The big five Wall Street banks posted fourth-quarter declines of 20% and 17% in trading and investment banking revenue, respectively.
Analysts will be paying attention to figures from Deutsche Bank, BNP Paribas and UBS, which have significant investment banking capabilities.
Analysts at Barclays estimate that fourth quarter figures in Europe will be comparable to those of the third quarter, with the wealth management business remaining stable and capital markets revenues increasing slightly, while advisory fees would fall.
MERGER RUMORS
The sea serpent of European bank consolidation resurfaced this month.
The leaders of Deutsche Bank and Commerzbank have ruled out any possibility of a merger in Germany. In Italy, UniCredit boss Andrea Orcel dismissed speculation it would take over a smaller rival.
However, the banks have a volume of liquidity not reached in years and managers could emphasize that mergers and acquisitions, at the right price and at the right time, remain possible.
(Reporting Tom Sims, Jesus Aguado, Valentina Za and Matthieu Rosemain, with Klaus Lauer and Sinead Cruise, French version Corentin Chappron, edited by Kate Entringer)