In London and Madrid on Jan 28 (Reuters) - It is anticipated that European banks will announce a significant increase in profits for the final quarter of last year, aided by strong margins from lending and robust investment banking revenues.
Despite this positive outlook, analysts are questioning whether this trend can be sustained, as decreasing interest rates may pose challenges in surpassing forecasts for the upcoming year.
Encouraged by a streak of growing profits and stocks at their highest levels since 2010, banking executives are generally optimistic, with some using surplus funds to bid for competitors—a potential initiation of a long-awaited consolidation phase.
According to S&P, "More confident in their financial standing and supported by positive market dynamics, some European banks are expanding their ambitions." This expansion may involve diversifying product offerings or increasing scale, with a renewed focus on inorganic growth and partnership opportunities.
Examples of this ambition include UniCredit's acquisition of a stake in Commerzbank, unsolicited takeover offers in Spain and Italy, and last week's unexpected bid for larger rival Mediobanca.
Moreover, banks' experts in mergers and acquisitions are anticipating heightened corporate deal-making activities, spurred by the robust U.S. economy. However, concerns linger as the new administration under Donald Trump may reduce regulatory hurdles for American banks, potentially placing European institutions at a disadvantage amidst domestic economic frailty.
Christian Edelmann from Oliver Wyman anticipates "solid results" from European banks with sustained levels of buybacks and dividends in 2025. Nonetheless, he acknowledges that the gap with U.S. banks may widen due to European banks' diversified franchises, less reliant on investment banking and market businesses that benefit from other sources.
Key upcoming reporting dates for European banks include Deutsche Bank and BBVA from Germany and Spain on Thursday, alongside France's BNP Paribas and Societe Generale, Switzerland's UBS next week, and British banks such as Barclays and HSBC later in February.
Despite expectations of a slowdown in net interest income, European banks are poised to benefit from increasing investment banking revenues similar to their U.S. counterparts. However, the challenge lies in navigating potential rate cuts by the European Central Bank and Bank of England at a faster pace than the U.S. Federal Reserve.
Earnings reports from Bankinter in Spain have highlighted the impact of lower rates on lending income, partially offset by fee income. Achieving performance targets this year is expected to be more demanding.
JPMorgan notes that French banks' 2024 net profit targets are attainable but sees a rising bar for 2025, especially for BNP Paribas. Deutsche Bank is projected to post a fourth-quarter net profit of about 380 million euros, lower than the previous year, mainly due to legal provisions and restructuring costs.
Analysts anticipate BBVA reporting increased fourth-quarter lending income growth in Turkey and South America, counterbalancing slowdowns in Spain and Mexico. Investors will be eager for updates on BBVA's offer for Sabadell, potentially involving competition commitments.