Financial reports are coming intensively! Interest rate hike “dividends” dissipated+weak economy European banks face major tests
Zhitongcaijing · 01/29 11:25

The Zhitong Finance App learned that European banks' surging profits and record dividend payouts will face a major test this week. Investors will evaluate how fast the boost from interest rate hikes subsides and whether the weak economic outlook will drag down banks' performance.

The Spanish Bank of Bilbao (BBVA.US) will announce fourth quarter results on Tuesday. Santander Bank (SAN.US) will release financial results on Wednesday. Deutsche Bank (DB.US) and BNParibas (BNPQY.US) will announce financial results on Thursday. UniCredit Bank will release earnings next Monday, followed by UBS (UBS.US) and other Eurozone banks.

The Stoxx Europe 600 Bank Index hit its highest level since mid-2018 this month. Bank profitability recovered, driven by factors such as rising interest rates, record shareholder dividends, and low provision for non-performing loans.

Despite this, investors are worried that the situation is being reversed.

Worries are heating up

Retail-based banks profit the most from the difference between loan income and deposit costs, but larger banks with more diversified operations, such as Deutsche Bank and BNP Paribas, also made profits.

Investors, however, are uneasy. The fourth quarter net interest income (NII) reported by the Spanish International Bank (BKT) last week was slightly lower than expected, causing its share price to drop 6% and dragging down competitors' stock prices.

J.P. Morgan analysts warned that interest rate cuts would cause the entire industry to enter a “downgrade cycle.” J.P. Morgan predicts that after a 22% increase in net interest income in 2023, European banks will have limited net interest income growth this year, with zero profit growth.

Jefferies analysts said that the market generally predicts that UniCredit Bank's net interest income will drop 4% in 2024, although they expect the bank to exceed expectations. The bank has excess capital worth 10 billion euros (10.9 billion US dollars) and needs to decide how to use these funds.

Analysts will also keep a close eye on BNP Paribas's performance and how management will dispose of excess capital from the sale of American West Bank.

The prospects may not be that bad

Not everyone is pessimistic about profit margin prospects.

Sebastiano Pirro, chief investment officer of Algebris Investments, which holds bank shares, said that the average interest rate for European interbank lending in 2024 should be higher than in 2023, and interest income will only “drop a little bit.”

“European banks are facing a ten-year inflection point,” he said, pointing out that negative interest rates in the Eurozone have destroyed banks' profitability over the past ten years.

“Today, banks make more money than they allocate, and capital ratios are rising,” he added.

Thanks to the Spanish and Latin American operations, the market expects the net profit and net interest income of Banco Santander and Banco Bilbao of Spain to be higher than in 2022.

Deutsche Bank's situation is less optimistic. Analysts expect net profit attributable to shareholders for the fourth quarter to be around 700 million euros, down from 1.8 billion euros in 2022. This still means that Deutsche Bank will be profitable for the 14th consecutive quarter, after losing money for many years.

Weak loans

Investors will also pay close attention to whether the quality of loans will deteriorate as interest rates rise.

The rise in borrowing costs has yet to expand the size of banks' bad loans; the only real pressure comes from commercial real estate, mainly in Sweden and Germany.

Pirro of Algebris said that Southern Europe has been very aggressive in cleaning up non-performing loans in recent years, while demand for new loans is very sluggish, so non-performing loans will remain low.

However, weak economic growth expectations will dampen demand for loans across the Eurozone, and executives remain cautious.

Commerzbank CEO Manfred Knof said last week that he is prepared to deal with another year of stagnation.

He said that there is currently no sign of a wave of defaults, but “companies are unwilling to invest. The backlog of investments in the German economy is growing every day, and we have noticed this.”

investment banks

According to Barclays Bank's calculations, the fourth-quarter transaction and investment bank revenue of the top five Wall Street banks fell 20% and 17%, respectively, year-on-year, although the year-over-year decline was much smaller.

Analysts are closely watching the performance of Deutsche Bank, BNP Paribas, and UBS, which have huge investment businesses.

Barclays analysts estimate that Bank of Europe's performance will be similar to the third quarter, with wealth management business continuing to grow, capital market revenue growing slightly, and consulting expenses falling.

Merger rumors

Rumors of European bank consolidation resurfaced this month, but they soon subsided.

The CEOs of Deutsche Bank and Commerzbank threw cold water on the prospect of a merger.

In Italy, UniCredit Bank CEO Andrea Orcel denied rumors that the bank was buying shares of a smaller competitor.

But as banks reach their highest level of cash reserves in many years, the market expects executives to explain how to carry out mergers and acquisitions at the right time and at the right price.