© Reuters. FILE PHOTO: A view of a BNP Paribas bank building in Paris, France, February 24, 2023. REUTERS/Sarah Meyssonnier/File Photo
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By Mathieu Rosemain, Matteo Allievi and Tom Sims
PARIS/FRANKFURT (Reuters) – A strong recovery by European banks faces a possible setback after BNP Paribas (OTC:BNPQY) and ING warned on Thursday of a more challenging outlook and investors reappraised which lenders are most vulnerable as a boost from higher interest rates recedes.
Shares in BNPP, which missed forecasts and pushed back a key profitability target, slid 8% in their biggest one-day drop since March, while Dutch bank ING’s stock fell sharply as it forecast lower income for 2024.
“The (euro zone) economy is in the process of slowing down,” BNPP CEO Jean-Laurent Bonnafe said after reporting revenue falls across the bank, including in investment banking.
“From that point of view, 2024 won’t be very favourable for us,” Bonnafe told reporters.
Deutsche Bank, however, was more bullish, in a sign that the rebound Europe’s banks have enjoyed since 2021 — after a decade of low interest rates squeezed their profits and shares — may not be over.
Germany’s biggest bank raised its revenue growth targets and unveiled 1.6 billion euros ($1.7 billion) more in shareholder payouts, while Spain’s BBVA (BME:BBVA) and Santander (BME:SAN) beat forecasts this week.
The STOXX Europe 600 banks index hit its highest since mid-2018 last month, fuelled by a recovery in profitability, record shareholder payouts and little provisioning for bad loans. The index fell 0.9% on Thursday and is down 2.4% from its January high.
The big payouts seem likely to keep coming, and there is little concern yet about a spike in bad loans.
But it is the potential decline in net interest income (NII) – the difference between interest on loans and the cost of customer deposits – and the prospect of a slowing economy unnerving investors. JP Morgan analysts estimate that a 22% net interest income (NII) jump in 2023 for European banks will turn to 0% NII growth this year, and a 3% decline in 2025.
“We’ve made switches, getting out of banks more sensitive to rate movements and buying those with a higher fee component related to asset management”,” said Andrea Scauri, portfolio manager at Luxembourg-based Lemanik.
However, he cautioned that, “we certainly haven’t thrown in the towel on banks; we are still well-invested.”
Adding to the nervousness was a selloff in U.S. regional banking stocks on Wednesday.
RELATIVE STRENGTH
More diversified lenders that are less exposed to falling rates can better withstand European Central Bank rate cuts, which markets expect this year, and a gloomier economic environment.
BBVA and Santander reported big jumps in profits and sounded an optimistic note, helped by strong performances at home and in their Latin American businesses.
Banks also come into 2024 from a position of relative strength, with many flush with cash and the rate environment still far more helpful than it has been for years.
Analysts also say that volatile fourth-quarter earnings are not a great guide, and that banking stocks remain undervalued, with most trading far below their book value.
The STOXX Europe 600 banks index trades at a price-to-book ratio of 0.72, according to LSEG Eikon data.
Still, after the surge in share prices in 2023, investors are jittery, with UniCredit, UBS, Societe Generale (OTC:SCGLY) and Credit Agricole (OTC:CRARY) all set report next week.
JP Morgan analysts called the BNPP results “disappointing” and said the “weaker trends across retail and specialised businesses do not bode well for all the French banks”. SocGen and Credit Agricole shares fell 2% to 3% on Thursday.
ING is expected to continue dispersing excess capital to investors, supporting its shares, but there is “no getting away from the conclusion that guidance is underwhelming,” UBS analysts wrote.
“While growth stood up well in 2023, it is expected to slow this year (and) at the same time, banks are having to pay elevated deposit rates to investors,” said Stuart Cole, analyst at Equiti Capital. “So right now the outlook is not looking quite so rosy for the banking sector generally.”
Source: Investing.com
