Faced with the possibility of an economic storm and the increase in borrowing costs for the first time in more than 10 years, European banks will reveal their vulnerabilities by announcing to the investing public their financial figures for 2022 so far.
As Reuters points out in its analysis, European banks already have to cope with the inflationary rally and rising interest rates, which are putting pressure on borrowers, and to manage the fallout from the war in Ukraine that is rocking economies in Europe – among other things , through cuts in its energy supply.
UBS, Deutsche Bank, Credit Suisse, BNP Paribas and UniCredit will set the tone for the market by announcing their results for the second quarter of the year next week.
The increase in interest rates is a good development for banks, in light of the fact that they make more profits from the loans they provide. On the contrary, it is unpleasant for their customers, since the rise in prices and the increase in borrowing costs make it difficult for them to repay.
Investors are cautious as worries about worsening economic conditions have rekindled. Therefore, European banks, like their American competitors, will make less money from making deals and selling investment products.
Within Europe, the German banks are at the center of a coming “storm” as the country is heavily dependent on Russian energy and any shortfalls in gas and oil supplies will hit its economy.
Giles Edwards, an analyst at Standard & Poor’s, pointed out that any fears for European banks this year will depend on whether – and to what extent – customers continue to repay their loans.
Although he does not immediately expect a significant increase in “red” loans, he is nevertheless alert to detect “signs that will mean pressure and start to “pop” problems here and there”.
Analysts are also monitoring developments in Uniperthe German energy giant that on Friday agreed to a “rescue package” with the country’s government.
German banks may need to “set aside” more money for losses that may arise from loan defaults, said Michael Rohr, an analyst at Moody’s.
Over the past two months, analysts have cut earnings forecasts for Germany’s largest bank, the Deutsche Bankand revised upwards their bad loan estimates.
For Deutsche Bank, the biggest risk is “a deep recession,” Rohr noted.
But there are other warning signs.
Banks in the Eurozone tightened access to lending in the second quarter and will remain cautious, according to a survey by the European Central Bank.
At the same time, the Cooperative financial institutions in Germany said they expect a “significant decline” in profits for 2022 as they prepare for loan losses.
Against this backdrop, the banking sector in the Eurozone has fallen more than 22% since the start of the year, while the pan-European Stoxx 600 has slipped 13% over the same period.
THE ECBwhich decided to raise interest rates by 50 basis points on Thursday to tame runaway inflation, has warned of potential risks such as an overheating housing market.
During the pandemic, governments spent billions to prop up much of the economy, but the ECB said that this time may not be possible.
In Spaina senior financial official, who asked not to be named, told Reuters that banks are vulnerable, citing a large number of loans under watch for default and the possible lifting of payment moratoriums.
“I don’t know what the impact will be and that worries me,” he said. Santander and BBVA will announce second quarter results at the end of July.
In Italyunder the shadow of a new political crisis, the pressures on government bonds are increasing, which is also eroding the capital “cushions” of the banks, as the Italian government bonds they hold lose their value.
Italy’s dependence on Russian natural gas and the importance of its manufacturing sector, which consists mainly of small businesses, increase the chances that its economy will enter a period of recession.
About €300bn (or more than 40%) of business loans have been secured by the Italian state, after banks implemented emergency measures during the pandemic to refinance their debts.
At Great Britainbank results are expected to show a stabilization of the industry, according to Tom Merry, a banking strategy consultant at Accenture, who estimated that bad loan provisions would be revised upwards.
NatWest is expected to be reeling from the release of 38 million pounds ($45.43 million) of cash it had set aside for potential defaults, as it announced in its first-quarter results, which will be channeled into new write-downs of 136 million pounds.
In investment banking with higher margins, European banks are likely to see their annual bank fees fall to the levels announced earlier this month by US banks.
THE JPMorgan and the Morgan Stanley reported that investment banking fees were down more than 50% compared to a year ago. Merger volume in the US fell 29% in the first half of 2022, according to Refinitiv data, while it rose 1% in Europe.
THE Barclayswith a significant amount of operations in the US, may perform similarly to its Wall Street competitors, while banks such as HSBC and the Standard Charteredwhich focus on Asia, could perform better.
Source: Capital
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