European Banks Report Highest Profits Since Financial Crisis: Unlocking Success

European banks are experiencing their highest profits since the financial crisis, signaling success amidst a bleak global economic outlook. Explore margin pressure and deteriorating loans in this earnings season.

Bank profits in Europe are on track to reach their highest point since the financial crisis, thanks to increasing interest rates. However, as the global economic outlook becomes bleaker amidst ongoing geopolitical crises, the focus of this earning season shifts towards margin pressure and signs of deteriorating loans.

European Banks Report Highest Profits Since Financial Crisis: Unlocking Success | ogusyis

Investors are closely following comments from banks about the rising competition for deposits and mortgages across the region. This increased competition has been driven by central banks raising rates significantly, trying to rein in inflation. Additionally, the wars in Israel and Ukraine, China's economic struggles, and the implementation of windfall taxes in countries like Italy, Sweden, and the Netherlands, are all key concerns for investors.

Of particular interest are provisions for bad debt, especially those associated with loans supporting commercial real estate. Barclays Plc and UniCredit SpA will be reporting on Tuesday, followed by several other major banks, including Deutsche Bank AG, Lloyds Banking Group Plc, Banco Santander SA, Standard Chartered Plc, BNP Paribas SA, and NatWest Group Plc. HSBC Holdings Plc will update the market next week, and UBS Group AG is set to report on November 7th.

As the economic outlook darkens, the recent Israel-Hamas conflict and subsequent higher energy prices have raised worries among investors. Just two years after Russia's invasion of Ukraine caused concerns about oil supply shocks, energy prices are once again at the forefront.

Despite expectations of declining revenues in Europe's third quarter, fixed-income traders could benefit from increased volatility, similar to what was seen following the Ukraine invasion. It is anticipated that most European banks will allocate more money to cover potential credit losses compared to last year. However, bankers remain optimistic about the overall quality of their loan portfolios. Regulators, on the other hand, have warned about the potential impact of higher interest rates over an extended period.

Furthermore, analysts are likely to question banks about their exposure to commercial real estate, which has been largely undisclosed. The European Central Bank has requested property valuers to explain their methodology for estimating values, expressing concerns that banks have been slow to adjust the value of their commercial real estate loans.

Despite the strong first-half earnings, with most banks surpassing revenue and risk-cost consensus estimates, projections for the second half and beyond are increasingly grim. European banks have been facing continuous downgrades, unlike their American counterparts, whose investment banking fees have declined for seven consecutive quarters. This trend does not bode well for European banks.

However, there may be some areas of optimism for certain firms. Deutsche Bank, for instance, is expected to see an improvement in revenue from the third quarter of 2022, following markdowns in leveraged finance and losses on residual equity positions.

With regards to stock and bond trading, most European banks are expected to experience a decline in revenue. The exception is Barclays, where the equities business is projected to more than double from the same quarter last year, following a previous blunder involving the over-issuance of certain securities.

In conclusion, while European banks have witnessed strong earnings in the first half of the year, upcoming market challenges, geopolitical crises, and potential volatility in credit quality pose significant obstacles to sustaining this momentum into the future.