Since the financial crisis of 2008-09, European banks have shown robust health, largely due to capital accumulation, restructuring, cost reductions, and supportive central bank policies. These factors have driven stock buyback programs, boosting bank profits and contributing to double-digit stock price increases this year. However, with declining interest rates and a weakening eurozone economy, banks' net interest income—a major revenue component for commercial banks—is under pressure. Investors are concerned about the banks' ability to sustain long-term profitability.
Deutsche Bank (DB, Financial), Lloyds Banking Group (LYG), and Barclays (BCS) are set to release their third-quarter earnings reports, with UBS and HSBC following suit next week. These reports are expected to reflect the banks' ongoing profitability, with robust investment banking activities offsetting margin declines and weak loan demand from consumers and businesses. Yet, investors seek more confidence, looking for evidence of asset quality resilience and strategic clarity amid a low-growth global economy.
The European banking sector is witnessing a wave of mergers and acquisitions for sustainability. Recently, BNP Paribas acquired AXA Investment Managers, and UniCredit increased its stake in Commerzbank, sparking speculation of cross-border integration. Filippo Maria Alloatti from Federated Hermes noted that if the ECB cuts rates as expected, up to €600 billion in net interest income could be at risk by early 2025. Banks are actively exploring acquisitions in asset management, wealth management, and niche fintech sectors. Notably, NatWest (NWG) acquired Metro Bank's residential mortgage business, and media reports suggest that HSBC's new CEO may significantly restructure the bank.
Scope Ratings indicates that government disposal of crisis-era bank shares removes a hurdle for deals, though challenges remain. McKinsey analysts stress that executives need to achieve "escape velocity" for distinction and investor appeal. They state that to maintain current returns on tangible equity, banks must cut costs 2.5 times faster than revenue declines. Globally, only 14% of banks have a price-to-book ratio exceeding 1 and a price-to-earnings ratio above 13, significantly lower than other industries.
PIMCO's Philippe Bodereau observes a division in European banks: those capable of achieving sustainable double-digit returns like their US counterparts, and those stuck in low single-digit growth. He suggests these institutions should undergo strategic introspection.
UBS and Barclays are anticipated to report a recovery in their investment banking income, particularly in equities and advisory fees, following strong results from US rivals JPMorgan Chase (JPM), Morgan Stanley (MS), and Goldman Sachs (GS). Moody's suggests European banks' asset quality will remain stable, although there are concerns about commercial real estate affecting capital. Stress tests on 21 European banks show that even under severe loan quality shocks, the capital adequacy relative to CRE exposure remains above minimum thresholds.
HSBC analysts remain cautious about unexpected net interest income declines, which reflect the difference between loan revenue and deposit interest expenses. They favor asset-centric stocks like Crédit Agricole and KBC Group over BNP Paribas and ING, citing weaker net interest income momentum for the latter. Meanwhile, Barclays analysts expect positive growth in net interest income for Lloyds and NatWest, supported by better loan growth prospects.
Concerns over potential UK budget increases in bank taxes on October 30 are dampening market sentiment. UBS suggests that if the UK government maintains the current tax arrangement, domestic-focused banks' stock prices could rebound by over 5%.
