Europe's biggest banks are healthier than at any point since the 2008-09 financial crisis, but investors want reassurance that they can trust their longer term earnings power as interest rates fall.
Bank share prices (.SX7P) have broadly delivered a double-digit rise this year, driven by stock buyback programmes made possible by years of capital accumulation, restructuring, cost cuts and supportive central bank policy, which boosted their profits.
Deutsche Bank (DBKGn.DE), Lloyds (LLOY.L) and Barclays (BARC.L) will kick off third-quarter earnings reporting this week, while UBS (UBSG.S) and HSBC (HSBA.L) will be among those reporting next week.
The numbers are expected to show continued profitability, with robust investment banking activity offsetting squeezes on margins and weak demand for loans among consumers and businesses.
But investors want more. Besides looking for evidence of asset quality resilience, they are seeking sharper strategy, lower costs and the potential to outperform in a low growth global economy.
Deal-making has captured the imagination of bank boards in the last three months. BNP Paribas BNPP.PA bought AXA Investment Managers (AXAF.PA) and UniCredit (CRDI.MI) raised its stake in Germany's Commerzbank (CBKG.DE), stirring chatter on cross-border consolidation.
"Estimates suggest that up to 600 billion euros ($652 billion) in net interest income could be at risk in the first half of 2025 if the European Central Bank cuts rates as expected," Filippo Maria Alloatti, Head of Financials for Credit at Federated Hermes, told Reuters.
"Management teams are proactively taking measures ... exploring bolt-on acquisitions in asset management, wealth management and even niche fintech opportunities," he said.
Britain's NatWest (NWG.L) swooped on Metro Bank's MTRO.L residential mortgage book while media reports suggest HSBC's (HSBA.L) new CEO Georges Elhedery may make a much bigger mark on the lender's structure than previously thought.
"ESCAPE VELOCITY"
Analysts at McKinsey said executives needed to attain "escape velocity" to distinguish themselves from peers and increase appeal to investors.
To maintain the current return on tangible equity margins, banks will need to cut costs 2.5 times as fast as revenues decline, McKinsey said in its Global Banking Annual Review 2024.
Just 14% of global banks have a price-to-book ratio above 1 and a price-to-earnings ratio of more than 13 - more than four times lower than companies in all other industries, McKinsey said.
Philippe Bodereau, head of credit research at PIMCO, said Europe's banks were separating into two camps; those with potential to mirror U.S. peers with consistent, double-digit returns on equity, and those stuck at depressed single-digit levels.
"I think those institutions should be doing a fair bit of strategic soul searching," he said.
INVESTMENT BANKING BOOST
UBS (UBSG.S) and Barclays (BARC.L) are expected to report a third quarter bounce in investment banking revenues, particularly in equities and advisory fees, where U.S. rivals JP Morgan (JPM.N), Morgan Stanley (MS.N) and Goldman Sachs (GS.N) outshone expectations.
Like U.S. peers, European banks are not expected to show a marked deterioration in asset quality, and fears have waned that commercial real estate (CRE) could dent capital, ratings agency Moody's said.
A stress test of the 21 European lenders with the highest CRE exposure relative to Common Equity Tier 1 (CET1) capital showed all would remain above minimum CET1 capital thresholds, even under a scenario of severe loan quality shock.
Analysts at HSBC remain on guard for negative surprises in net interest income, a measure of profitability that reflects the difference between what a bank earns on loans and how much it pays depositors.
HSBC prefers asset gathering stocks like Credit Agricole (CAGR.PA) and KBC (KBC.BR) over BNP Paribas (BNPP.PA) and ING , where net interest income (NII) momentum was seen weakest.
UK domestic lenders Lloyds and NatWest (NWG.L) should report continued third quarter growth in NII, Barclays analysts said, boosted by an improving outlook for loan growth, particularly mortgages.
Concerns about a possible rise in bank taxation in the UK Budget on Oct. 30 is weighing on sentiment.
But shares in domestically-focused lenders could bounce by more than 5% if the government opts to leave current arrangements intact, UBS said.
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