What to expect in European bank results

Fearing the worst from coronavirus, Europe’s banks collectively set aside tens of billions of euros in July last year to cover an anticipated wave of loan defaults, as their shares tumbled towards record lows.

But a year on, and as banks prepare to report second-quarter earnings, the outlook is brighter. UK, Swiss and eurozone lenders are expected to start cautiously paring back some of those worst-case debt provisions as government support measures have prevented a torrent of bankruptcies and job losses.

Banks’ capital buffers held up, instead of buckling as they did during the financial crisis. They continued to lend and act as conduits for state relief schemes. As a result, regulators are lifting the sector-wide bans they placed last year on dividends and stock buybacks, which may help attract sceptical investors back to the sector.

Yet few expect generous payouts to be reinstated immediately, while concerns about the spread of the Delta coronavirus variant and inflation upsetting the delicate global economic recovery add to the headwinds.

Here are some of the big themes featuring in this results season.

Investment banking

Wall Street reported near-record banking revenues this month amid a boom in mergers and acquisitions, private equity takeovers and capital markets issuance, fuelled by cheap credit and economic optimism.

Analysts expect Europe’s investment banks such as Barclays, Deutsche Bank and BNP Paribas to post a more modest increase in earnings, but this should help cushion the impact of trading revenues that have plunged from the record levels reached during the early stages of the pandemic.

UBS, the first to report earnings last week, followed this trend. Revenue at the advisory and capital markets unit jumped 68 per cent to a record level, which offset a 14 per cent decline at the trading arm.

Dividends and buybacks

Last year, regulators ordered banks to suspend shareholder payouts to ensure they retained sufficient capital to lend. UK and Swiss supervisors ended their bans earlier this month — but urged executives to show restraint — while the European Central Bank said on Friday it would follow suit.

“The most important thing in these results is dividends,” said Stuart Graham of Autonomous Research. “The ECB’s lifting of its restrictions is positive for the sector, especially by signalling that it will allow 2019 and 2020 catch-ups and buybacks. Investors needed this guidance before they would re-engage.”

While the share prices of European and UK banks have recovered 16 per cent and 11 per cent respectively this year, they remain far below the levels they were before the pandemic in January 2020. Absent any material increases to payouts, they are likely to remain depressed.

Line chart of Indices rebased to Jan 2020, € terms showing UK banks lag behind European peers

UBS again is a leading indicator. It announced a $600m buyback, far more modest than it could have afforded with an estimated $4.4bn of excess capital.

Loan provisions

As the economic outlook improves, banks have started to “write back” some of the tens of billions of euros in reserves for potential bad loans they built up during the early stages of the pandemic.

So far, US lenders have been more aggressive. In the first half of the year, Autonomous estimates the 10 largest have withdrawn about 75 per cent of the $55bn of coronavirus-related precautionary provisions they took in 2020.

In Europe, where the recovery is shakier, caution prevails. In the first quarter, the top 30 banks in the region together wrote back only 5 per cent of the €35bn of precautionary provisions they made. Autonomous expects this to rise to only about 25 per cent in the second quarter.

Credit Suisse

Credit Suisse has had a difficult 2021. The Swiss lender is in crisis after suffering two scandals in quick succession: the closure of $10bn of funds linked to Greensill Capital and the collapse of Archegos Capital, which caused $5.5bn in losses. On Thursday, all eyes will be on new chair António Horta-Osório, who is tasked with guiding the ailing 165-year-old bank through the chaos.

The former Lloyds Banking Group chief executive has promised a strategic review by the end of the year that could involve shrinking the investment bank. How well earnings hold up amid a rash of senior departures and dented client confidence will come under close scrutiny.

“We expect a poor quarter,” Citigroup analyst Andrew Coombs said of Credit Suisse. “A decline in risk appetite is likely to slow revenue growth across the franchise.”

UK retail outlook

Consumer banks such as Lloyds and NatWest will rely on mortgages as an important driver of growth, as demand for personal loans and new business lending remains subdued.

The UK housing market performed better than expected over the past year, thanks in part to a temporary tax break. Executives hope a permanent shift to hybrid working will continue to fuel demand beyond the withdrawal of the stamp duty holiday, as homebuyers prioritise space. House prices were up 11.3 per cent year on year and mortgage volumes jumped 34 per cent, according to UBS.

Line chart of Units (000) showing UK residential property transactions surge

“There is going to be a re-evaluation of how important property is and what people are looking for,” said one senior banker. “We are constantly surprised by the sustained level of interest.”

However, rising competition between lenders is expected to push mortgage rates lower and thereby pressure banks’ lending margins.

European loan demand

Loan demand in Europe is rebounding as confidence returns. Net demand for home loans is up 36 per cent in the second quarter, with the greatest increases seen in France and Spain, the ECB’s bank lending survey shows.

Corporate loan demand has also turned positive as more deals are done and companies take advantage of low rates to finance growth or refinance debt. Again, France and Spain are the most active markets, which is likely to benefit BNP Paribas, Société Générale and BBVA, say analysts at Citigroup. There has been only a moderate increase in consumer credit demand, however, probably a result of pent-up household savings.

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