European banks are set to report another quarter of resilient earnings this week, supported by higher interest rates, improving loan growth and steady trading activity. According to reports from Reuters, analysts expect European banks to post healthy second-quarter results, with Goldman Sachs forecasting an 11% year-on-year increase in second-quarter pretax profit for European banks. The earnings season begins on Wednesday with Italy's UniCredit and Spain's Santander, while France's BNP Paribas is scheduled to report on Thursday. Next week, Britain's Barclays, Germany's Deutsche Bank, Switzerland's UBS and Spain's BBVA will announce their quarterly results. As Goldman Sachs analysts noted this month, "We continue to see a 'better-for-longer' backdrop for European Banks, underpinned mainly by volume-led revenue growth (with potential upside from the move higher in rates), improving efficiency (with AI emerging as key enabler), and benign asset quality trends against the current macroeconomic backdrop."
Euro zone banks tightened lending standards in the second quarter as geopolitical uncertainty and economic risks prompted greater caution, according to the ECB's latest Bank Lending Survey. The survey, which covered 159 of the euro zone's largest banks, found that while demand for business loans increased, banks adopted more cautious lending practices by tightening credit standards and rejecting a larger share of loan applications. The stricter lending conditions were particularly evident in sectors such as the automobile industry and energy-intensive manufacturing. As reported by Reuters, the ECB said banks cited worsening risks to the economic outlook and lower risk tolerance as the main reasons for tightening lending standards, with financial institutions remaining highly alert to geopolitical and energy-related risks. The survey showed that lenders expect credit standards to tighten further across all major loan categories during the third quarter.
European banks have enjoyed more than two years of improving profitability, driven by wider lending margins following higher interest rates and relatively low credit losses. As reported by Reuters, the EURO STOXX Banks Index has doubled over the past two years, reaching its highest level since the 2007-2008 global financial crisis. The strong earnings momentum has helped banking stocks become some of Europe's best-performing equities. Adding to the sector's positive outlook, the European Commission last week unveiled proposals aimed at reducing political interference in European Union banking mergers and easing barriers to cross-border consolidation. The recovery follows a decade of weakness and a competitive landscape in which more profitable U.S. rivals have taken market share.
While trading desks are expected to benefit from heightened market volatility linked to the Iran conflict, U.S. investment banks continue to outperform their European counterparts. According to Reuters, Morgan Stanley forecasts investment banking revenue growth of 21% for UBS in the second quarter, reflecting its strength in equities trading. In comparison, BNP Paribas is expected to post growth of 7%, while Societe Generale is projected to record a modest 2% increase, well below the more than 30% gains reported by several major Wall Street banks. The brokerage has recommended Deutsche Bank shares, describing the German lender as the most attractively valued bank in its European coverage, with analysts calling it "the cheapest bank in our coverage." Morgan Stanley is underweight on UBS partly because of uncertainty about the impact of new Swiss regulations.
The ECB is widely expected to leave interest rates unchanged at its policy meeting later this week, though many market observers still expect the central bank to resume rate hikes in September after the surge in energy prices linked to the Iran conflict pushed inflation to around 3%, well above the ECB's 2% target. The central bank continues to view the 21-member currency bloc as relatively resilient because it is a major energy exporter, although elevated oil prices are expected to weigh on consumer spending and reduce manufacturing profitability. The survey also highlighted weakness in the housing market, with demand for home loans falling sharply during the second quarter, with banks expecting housing loan demand to decline further in the current quarter. The lending survey is closely watched by policymakers as an important gauge of financial conditions and credit availability across the euro area ahead of monetary policy decisions.
