temporary 2023 crisis, we look to the future with confidence

A year has passed since turbulences that have affected the banking sectorstarting with the US one, which saw a series of failures regional banks (Silicon Valley Bank and others), to arrive at the European one, which in March 2023 witnessed the maxi aggregation of Swiss banks USB and Credit Suisse. A year in which many things happened, but in the end it turned out to be favorable for the banking sector, thanks to the progressive increase in interest rates and the favorable performance of the markets.

Scope Ratingsthe first European rating agency, takes stock of the entire European sector, reporting that one year later the sector is still “in good shape”. “If we consider the year that has passed since the collapse of Silicon Valley Bank and the acquisition of Credit Suisse – underlines Marco Troiano, Head of Financial Institutions ratings at Scope Ratings – the European banking sector has emerged unscathed and looks in good shape for the remainder of 2024.

No transmission effect but a warning

Despite fears of a violent pass-through effect in Europe in the immediate aftermath of the spring 2023 banking turmoil, the European sector has resisted the disorder immediate and overcame the resulting market volatility without suffering any real repercussions.

Scope Rating notes, however, that the episodes from a year ago serve a purpose remember that large uninsured depositors remain prone to flight and that bank liquidity can evaporate quickly when confidence declines.

Large capital reserves

European banks have maintained – and continue to do so – capital buffer well above regulatory requirements and their position of relative tranquility has meant that most banks are committed to returning the excess capital through the distribution of dividends and the repurchase of own actions. And this, according to the agency, reflects the lack of profitable growth opportunities in a mature and highly regulated market.

The favorable interest rate policy raises profit margins

Another positive element is represented by the higher interest rates, which have had a beneficial impact on banks’ profits, pushing up profitability and returns on equity in 2023 as net interest margins widened. The champion of Spanish banks taken into consideration (BBVA, Santander, Caixabank, Sabadell) recorded a Average ROE of 13%, in 2023, higher than the average for the period 2018-2022.

The champion of Italian banks (Intesa Sanpaolo, UniCredit, Banco BPM, BMPS, BPER, Mediobanca, Credem, Banca Popolare di Sondrio) reported a Average ROE of 14.6% in 2023, almost double that of the previous year.

However, not all banks have benefited to the same extent. THE French banks’ margins have decreased, at least temporarily. This reflects the faster revaluation of regulated savings and the limitations on mortgage revaluation under French usury law.

What to wait for 2024

“We expect banks’ overall costs to increase this year,” says the Scope Ratings expert, adding that “cost growth will exceed revenue growth in 2024 and 2025, leading to a slight deterioration in profitability and ratios of efficiency, even if at very high levels”.

As central banks rein in excess liquidity, one will emerge greater competition for deposits. Higher rates have already led some customers to switch from demand deposits to more expensive time deposits, which will reduce interest margins and hurt banks’ profitability. “We expect that the pressure on interest margins net interest margins will become more evident in the second half of this year – explains Troiano – and we expect that the median net interest margin will contract from 1.71% in 2023 to 1.63% in 2024 and to 1.52% in 2025, although it’s worth noting that the 2024 number is higher than 2022’s 1.3%.

Given the higher rate environment and the anemic EU economic growth forecast for 2024, the volumes of loans will stagnate a faced with sluggish demand”, which will translate into a slowdown in revenues and a deterioration in asset quality “although fears of a repeat of the rapid accumulation of NPLs post-global financial crisis are misplaced.”