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Stellar EU banks’ performance won’t last: analysts
PARIS, Aug 5, 2018 (BSS/AFP) – European banks may have managed to generate
surprisingly solid earnings in the second quarter, but low interest rates,
Brexit fears and trade war woes make a repeat performance unlikely, analysts
say.
Big names BNP Paribas, Barclays, Intesa Sanpaolo, Credit Suisse and BBVA
all wrongfooted sector experts with results exceeding consensus forecasts.
“For many banks, earnings were better than expected,” Simon Outin, an
analyst with Allianz Global Investors, told AFP.
“But it’s also true that consensus forecasts had been lowered quite a bit
recently,” he said, as banks were seen struggling to thrive in their
traditional credit business.
That they still managed to pull off an earnings surprise was mostly down
to view that loan repayment rates are improving, justifying a reduction in
funds set aside to cover risky exposure, and giving the bottom line an
immediate boost.
– Banking on lower risk –
“The main adjustment variable for almost all the banks which have reported
earnings are the provisions against doubtful loans which are much lower than
expected,” said Jerome Legras, head of research at asset managers Axiom AI.
“This in essence was what made the results better than analysts’
expectations,” he told AFP.
Taking back risk provisions helped banks offset the dampening impact of a
low-interest rate environment that is set to linger even as EU growth and
inflation are showing signs of picking up.
French bank Societe Generale said it expects to improve its risk
management further throughout the year, a hint that it could take back more
provisions to feed profits.
In southern Europe, Spain’s BBVA and CaixaBank, Portugal’s Caixa Geral de
Depositos and Italy’s Intesa SaoPaolo are all making progress in removing
toxic loans from their books.
Even the world’s oldest bank, Monte Dei Paschi Di Siena, managed to eke
out a profit in the three months to June, a remarkable performance given that
the bank was so weakened by the 2008 financial crisis that it was pulled back
from the brink with a government bailout.
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– Don’t push it –
But while analysts accept that taking back risk provision is a legitimate
reward for improved risk management, they also say that banks shouldn’t push
their luck.
Some, like Dutch banking giant ING, are “playing with fire” with their low
provisions, said Martin Crum, an analyst with IEX.nl.
“You can’t reduce the cost of risk indefinitely,” added Legras at Axiom.
“At some point it will reach the bottom of the cycle and then you will need
other sources of growth, either from greater cost control, or from improving
interest rate margins.”
But those margins are difficult to boost while official interest rates
remain low, analysts warned, meaning banks can’t make much profit from loans.
The eurozone institution able to do something about that, the European
Central Bank, has not shown any signs of wanting to hike official rates any
time soon despite moving its quantitative easing stimulus policy slowly
towards the exit.
– Aiming for corporate –
The EU’s other big central bank, the Bank of England, raised its key rate
at the start of August, but also hinted that interest rates wouldn’t rise
again soon.
Instead, Europe’s retail banks try to use the improving economy to bolster
their loan volumes, especially in the corporate sector which is poised to
invest in the budding economic recovery.
But that strategy has become more uncertain as trade risks and political
worries threaten to throw a spanner in the works.
Swiss banking group UBS has warned that rising protectionism was
puncturing investor confidence, and Credit Suisse said upcoming monetary
policy shifts by the world’s central banks were likely to sow uncertainty.
Meanwhile, Britain’s looming departure from the EU is a big headache for
that country’s banks just as they have recovered a high level of financial
strength.
For them, the stakes in Brexit talks are especially high because of the
question of what will happen to passporting rights, which allow EU members to
do business in each other’s countries without needing further authorisation.
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