As rates fall, European banks can still rise

- Advertisement -

By Liam Proud

LONDON- The bosses of Europe’s biggest banks are asking investors to believe two seemingly contradictory things: that while their earnings benefitted from rate hikes, rate cuts could be good for them too. It’s less implausible than it sounds.

Lenders like HSBC and Intesa Sanpaolo did well when tighter monetary policy turbocharged returns. The 10 biggest members of the STOXX Europe 600 Banks Index will this year generate a 13 percent average return on tangible equity, according to Breakingviews calculations based on analyst forecasts gathered by LSEG. That performance was unthinkable for much of the past decade, when low or negative interest rates kept returns well below the 10 percent bank investors generally require.

- Advertisement -

Even now, banks’ share prices aren’t behaving as if this good performance will last. Those 10 banks trade at slightly below forecast tangible book value, on average, suggesting that longer-term returns will fall below the cost of equity. In simple terms, the profit party that has buoyed bank bosses like Charlie Nunn of Lloyds Banking Group and UniCredit’s Andrea Orcel will be short-lived.

The case for skepticism about European banks is pretty easy to make: the money came a little too easily last year. European banks have been able to invest zero-cost deposits at a handsome spread. Even ultra-safe two-year German debt has yielded close to 3 percent since early 2023, while money placed on reserve at the European Central Bank and Bank of England has paid about 4 percent and 5 percent respectively, compared with nothing in 2021. The result is a ton of interest income that plumps up revenue. The 10 big banks are likely to make 213 billion euros of net interest income this year, according to Visible Alpha, or 36 percent more than in 2021.

As interest rates start to recede, it might seem like profit will too. Not according to bank bosses, who are generally still gunning for chunky double-digit returns this year and next.

Ana Botí­n’s Banco Santander for example, is targeting a 16 percent return this year and 15-17 percent in 2025. That implies a big gap between her expectations and those of the market, which values the Spanish lender below tangible book value — implying that its long-term returns might be in the single digits. Analysts are generally on the optimists’ side, forecasting roughly flat returns of around 13 percent for the 10 banks on average in the coming years, despite looser monetary policy.

Author

- Advertisement -
Previous article
Next article

Share post: