Market Analysis

Europe's bank earnings will serve as a reality check for interest rates

Amos Simanungkalit · 22 Apr 2024781 Views

Investors are poised to gain insight this week into whether the recent surge in interest rates is still bolstering profits for European banks or if the momentum in share prices will begin to falter.

Lloyds Banking Group will kick off the reporting season for major European lenders on April 24, followed by BNP Paribas, Deutsche Bank, and Barclays the next day.

After a prolonged period of low interest rates, the recent uptick in borrowing costs has significantly impacted bank profits in Europe, driving up shareholder payouts and sparking a rally in bank shares.

Christian Edelman, Co-Head of Europe at Oliver Wyman, noted the fundamental shift as Europe moves away from negative rates, which continues to shape the outlook for banks.

While earnings reports from Nordea and Bankinter suggest robust growth, concerns linger over declining margins and sluggish loan demand. Analysts at JP Morgan acknowledged their previous caution on European banks had not paid off, given the impressive performance of European bank shares compared to their U.S. counterparts.

In the U.S., the picture is mixed, with JP Morgan's net interest income falling short of expectations while Goldman Sachs benefited from strong investment bank revenues.

European banks are expected to start 2024 on a strong note, buoyed by higher rates and lower bad loans. Deutsche Bank is anticipated to report its 15th consecutive profitable quarter, while BNP Paribas is likely to show improvement following a previous slide in its shares.

Santander and BBVA are projected to report increased net profit and net interest income, supported by their diverse geographic operations. However, investors remain wary of the economic disparity between Europe and the U.S., as well as the prospect of rate cuts in Britain and the euro zone.

Some analysts caution that the current rise in banks' net interest income may not be sustainable, particularly as the repricing of loan portfolios nears completion. Concerns also persist regarding potential losses in the commercial real estate sector if high rates persist amid economic slowdown.

UBS's integration of Credit Suisse and its response to regulatory proposals will be closely monitored, as they could significantly impact investor sentiment.