Europe’s bank earnings to offer interest rate reality check
Investors should get a clearer picture this week of whether higher interest rates are still boosting European bank profits or if a year-long share price rally will run out of steam.
Britain’s Lloyds Banking Group (LLOY.L) is the first of the big European lenders to report its first quarter earnings on April 24, before BNP Paribas (BNPP.PA), Deutsche Bank (DBKGn.DE) and Barclays (BARC.L) publish theirs the following day.
After years of low interest rates, a surge in borrowing costs has been a game changer for bank profits in Europe, whose shares have soared on the resulting shareholder payouts.
“What is fundamentally different is that we are out of negative rates. That has had a fundamental impact on the outlook (for banks) and it still does,” said Christian Edelman, Co-Head of Europe at consulting group Oliver Wyman.
The full picture will not become clear immediately as European bank earnings stretch over several weeks, with Spain’s BBVA (BBVA.MC) and Santander (SAN.MC) reporting at the end of April and France’s Societe Generale (SOGN.PA) and Switzerland’s UBS (UBSG.S) in the first week of May.
Earnings last week from Finland’s Nordea (NDAFI.HE) and Spain’s Bankinter (BKT.MC) signal that earnings growth is holding up well, despite expectations that the European Central Bank (ECB) will cut rates in June.
But Oliver Wyman’s Edelman cautioned that falling margins and weak loan demand were causes for concern.
JP Morgan analysts admitted last week their caution on European banks had “not been the right decision”, with a 15 per cent jump in European bank shares since the start of 2024 beating US banks and lower valuations suggesting there was more upside, even if earnings growth weakens as expected.
The picture in the US so far is mixed. While net interest income, the difference between what banks earn on loans and pay out on deposits, disappointed at JP Morgan (JPM.N), investment bank revenues helped Goldman Sachs (GS.N) beat forecasts.
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The tailwinds of higher rates and contained bad loans are expected to help most European banks to a strong start to 2024.
Deutsche is expected to disclose a 15th consecutive quarter of profit after years of hefty losses. Germany’s largest lender should post around 1.2 billion euros in profit, according to a consensus it published, up from 1.16 billion euros in 2023 and helped by revenue gains at its investment bank.
BNP Paribas, which saw its shares slide at its full-year results after it delayed a key profit target, should have a better first quarter, as it tends to be seasonably strong, UBS analysts said.
The recent drop in expectations for a series of rate cuts this year could also give an unexpected boost, analysts say.
Santander and BBVA are forecast to report higher net profit and NII, helped by their Spanish, Brazilian and Mexican businesses.
Still, investors will be keeping a close eye for signs that the underperformance of European economies versus the US, and the likelihood of rate cuts coming sooner in Britain and the eurozone, is beginning to weigh.
Last week, Deputy Bank of Spain Governor Margarita Delgado said the rise in banks’ NII “cannot be considered sustainable” as the repricing of loan portfolios was almost done.
UBS, which is integrating Credit Suisse and assessing Swiss plans for it to hold more capital, will be closely watched. KBW analysts said comments on the proposals would “sway sentiment”.
Oliver Wyman’s Edelman said higher rates for longer and a weakening economy could worsen problems in commercial real estate (CRE), a sector in the midst of a downturn but which is yet to lead to much pain for the big European and US banks.
“If rates stay high for much, much longer and there is a slowing of the economy, expect some significant losses in the CRE book.”