European banks, facing a potential economic storm and rising borrowing costs for the first time in more than a decade, are expected to show their weak spots as they update investors on how their business has fared. behaved this year.
They have already had to deal with soaring inflation and rising interest rates, a pincer movement that is squeezing borrowers, as well as the Ukrainian conflict which has shaken the European economy, in particular by limiting its energy supplies.
UBS UBSG.S, Deutsche Bank DBKGn.DE, Credit Suisse CSGN.S, BNP Paribas BNPP.PA and UniCredit CRDI.MI could set the tone for investors when they report Q2 results next week.
On the one hand, higher interest rates are good for banks because they can charge more for loans. But they suffer if customers, struggling with rising prices and borrowing costs, cannot repay.
Tough economic conditions have put investors in a cautious frame of mind, which means European banks, like their US rivals, will make less money on transactions and the sale of investment products.
Within Europe, German banks are at the center of the storm as the country is particularly dependent on Russian energy and its economy will be hit hard by any supply shortages.
Giles Edwards, an analyst at ratings agency S&P, said any fears about European banks this year will depend on how borrowers continue to repay their loans.
While he doesn’t expect a big jump in bad debt right away, he said he’s been watching for “early warning indicators, signs of pressure, kind of a slow squeeze basically starting to pop a few pimples here and there”.
Analysts are also waiting to see what happens to Uniper UN01.DE, the German power utility which is in talks with the government over a bailout.
German banks may still have to set aside more for the resulting loan losses, said Michael Rohr, an analyst at ratings agency Moody’s.
Over the past two months, analysts have cut profit forecasts for Germany’s biggest bank Deutsche Bank, which has emerged from a series of crises, and raised forecasts for the amount of provisions for bad debts it has need.
For Deutsche, the biggest risk is “a severe recession,” Rohr said.
Other warning signs are flashing.
Eurozone banks tightened access to credit in the second quarter and will remain cautious, according to a European Central Bank survey.
And Germany’s cooperative banks have said they expect a “significant drop” in profits this year as they brace for loan losses.
Underscoring these concerns, Eurozone banking stocks .SX7E have fallen more than 22% year-to-date, underperforming the broader pan-European STOXX 600 equity index STOXX which is down around 13%.
The ECB, which unexpectedly raised interest rates by 50 basis points on Thursday to rein in soaring prices, also warned earlier of potential dangers, such as an overheated property market.
During the pandemic, governments have spent billions to support much of the economy, but the ECB has said this time around they may not be able to do so.
In Spain, a senior Spanish economics official, who asked not to be named, said banks were generally vulnerable, pointing to a large number of loans under special watch for default and the potential lifting of payment moratoriums.
“I don’t know what the real impact will be…and…it worries me,” the official said. Santander SAN.MC and BBVA BBVA.MC publish their second quarter results at the end of the month.
In Italy, in the throes of a political crisis, pressure is mounting on the country’s government bonds, which is also eroding banks’ capital cushions as the Italian government bonds they hold lose value.
Italy’s dependence on Russian gas and the importance of its manufacturing sector, made up mainly of small businesses, increase the risks of recession.
Nearly 300 billion euros (more than 40%) of Italian business loans are guaranteed by the state after banks used emergency measures during the pandemic to refinance existing debts.
As UK banks are expected to post strong results, Tom Merry, banking strategy consultant at Accenture, said he expected provisions for bad debts to rise.
NatWest NWG.L is expected to move from releasing 38 million pounds ($45.43 million) of cash set aside against potential defaults in its first quarter results, to further impairment charges of 136 million pounds, according to a poll of analysts.
In higher-margin investment banking, European banks are expected to see a year-over-year decline in banking fees similar to that reported by their US rivals earlier this month, analysts said.
JPMorgan JPM.N and Morgan Stanley MS.N announced that investment banking fees have more than halved from a year ago. US merger volumes fell 29% in the first half of this year, according to Refinitiv data, while they rose 1% in Europe.
Barclays BARC.L, with its large US operations, could see similar performance to its Wall Street rivals, while banks like HSBC HSBA.L and Standard Chartered STAN.L, with their focus on Asia, could fare better.
Source: Reuters (writing by John O’Donnell; reporting by Tom Sims in Frankfurt, Jesus Aguado in Madrid, Lucy Raitano, Iain Withers and Lawrence White in London, Valentina Za in Milan and Noor Zainab Hussain in Bengaluru; editing by Jane Merriman)