We are approaching the end of the reporting cycle from the european banks pfor the first half of 2024. Unlike other quarterly reports, the results ofthe middle of the year are in our opinion particularly useful. They confirm the trends already seen in the first half of the year and therefore validate or call into question the outlook that management teams have outlined for the entire fiscal year.
European Banks, the Earnings Season
He writes it Jacob Lichwamanager of TwentyFourAssetManagement in a lengthy analysis explaining that with just five months to go in the year, the results offer a credible outlook for trading conditions in the remaining months. This reporting season offers a keen perspective on the full year, while final results are, in most cases, only available from February. In light of this, it is reassuring to see that banks have often reiterated a strong full-year outlook or increased their previous guidance.
First, “to put the results into context, the constituents of the EURO STOXX Banks Index (SX7E) recorded a return on equity of 11.1% in the 2023 fiscal year. The latest index reading stands at 11.8% and is expected to stand at 11.5% for the 2024 fiscal year. For the following year is expected to decline moderately to 10.5% – this reflects the expected rate cuts that will feed into consensus estimates. In parallel with this latest announcement, some banks have revised their targets upwards, while many others have remained above their stated targets, although they have not updated them in the last quarter”.
TwentyFour AM Analysis
Second, the strong results we have seen and revised full-year expectations have often been underpinned by a message of better-than-expected asset quality and hence lower provisions. Somewhat counterintuitively, higher rates are not translating into higher cost of risk for the time being, and some banks have even revised down their full-year loan loss provision expectations. We would point out that unemployment is often cited as themain indicator of deterioration asset quality and of course this statistic has received a lot of attention in the US just last week. However, it is worth noting that the expected reduction in interest rates will likely boost affordability metrics and provide a tailwind against any potential further deterioration in the labor market.
Finally, “the financing profiles remain resistant. This element of bank performance is particularly important now, as the sector’s interest earnings have shifted from lending margins (in a low rate environment a few years ago) to deposit margins (in a higher rate environment now). During the latest results, we saw a further migration from sight deposits towards term accounts, but the trend has been substantially slower than in 2023. On the term accounts side, we have seen more favourable pricing in some jurisdictions, particularly the UK, but also in Germany, which has supported net interest margins relative to management expectations and the trends seen in the final quarter of 2023.”
Looking ahead, “we are aware that banks still have to repay central bank loans (TLTRO – Targeted longer-term refinancing operations, TFSME – Term Funding Scheme with additional incentives for SMEs) and we will certainly monitor depositor behaviour as the rate reduction cycle kicks in. However, we are comforted by very strong liquidity profiles across the sector, which provide flexibility with respect to deposit reduction and a buffer against the need to compete for funding”.
Capital levels remain vastly superior to regulatory parameters. Banks largely confirmed the expected headwinds from the final Basel rules and the additional headwinds that emerged this quarter. there are few.
Possible scenarios
“We are encouraged by another solid set of results from the sector,” she concludes. “We are particularly reassured by the low level of provisions and the revised expectations of a lower cost of risk for the rest of the year. Let’s stay alerti to the dynamics on the collection front, given the importance of deposit margins for overall profitability, but at the same time we recognize that the latest results are not a cause for concern. Indeed, we expect a gradual reduction in rates and let’s see the sector gradually adapt to this environment. We expect all these dynamics to continue to support European bank sentiment and, in this context, we are not surprised that the AT1 market has outperformed other pockets of credit in the latest sign of market weakness”.
