European banks face interest rate test in earnings reports
Investors are eagerly awaiting the first quarter earnings reports from major European banks, starting with Britain’s Lloyds Banking Group on April 24, followed by BNP Paribas, Deutsche Bank, and Barclays the next day.
The reports will provide insights into whether higher interest rates continue to boost bank profits or if the year-long share price rally is losing momentum, Reuters reported on Monday.
After years of low interest rates, the recent surge in borrowing costs has significantly impacted bank profits in Europe, leading to a sharp increase in their share prices.
However, the full impact will not be immediately clear as European bank earnings reports will be released over several weeks. Spain’s BBVA and Santander are set to report at the end of April, followed by France’s Societe Generale and Switzerland’s UBS in early May.
Despite expectations of a rate cut by the European Central Bank in June, recent earnings from Finland’s Nordea and Spain’s Bankinter suggest that earnings growth remains robust. However, Christian Edelman, Co-Head of Europe at consulting group Oliver Wyman, warned of potential concerns due to falling margins and weak loan demand.
“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,” stated Edelman.
JP Morgan analysts recently acknowledged that their cautious stance on European banks was misplaced, as a 15 per cent increase in European bank shares since the start of 2024 outperformed US banks. They suggested that lower valuations indicate further potential for growth, even if growth in earnings weakens as expected.
In the US, the picture is mixed. While JP Morgan reported disappointing net interest income, Goldman Sachs beat forecasts thanks to strong investment bank revenues.
Most European banks are expected to start 2024 strongly, aided by higher rates and bad loans. Deutsche Bank is anticipated to report its 15th consecutive quarter of profit, and BNP Paribas is expected to have a strong first quarter. Santander and BBVA are also forecast to report higher net profit and NII, boosted by their Spanish, Brazilian, and Mexican businesses.
However, investors will be watching for signs of strain due to the underperformance of European economies compared to the US and the potential for earlier rate cuts in Britain and the eurozone. Last week, Deputy Bank of Spain Governor Margarita Delgado warned that the rise in banks’ NII may not be sustainable.
UBS, which is currently integrating Credit Suisse and evaluating Swiss capital holding plans, will be under close scrutiny. Analysts from KBW suggested that comments on these proposals could significantly influence market sentiment.
