Frankfurt, Paris, Rome, Zurich Despite all the fears of recession and inflation in Europe, Europe’s banks made surprisingly good earnings in the first half of the year. Several institutes have exceeded the expectations of the analysts with their quarterly figures, in some cases significantly.
Not only BNP Paribas presents itself confidently. The Spanish Santander, the Italian Intesa Sanpaolo and the British Standard Chartered are also sticking to their forecasts. “Despite the uncertainty and economic headwinds, we remain confident of achieving the 2022 targets,” said Ana Botin, CEO of Santander.
Deutsche Bank was a little more cautious. Despite strong business figures, she had put her goals for the current year into perspective: her goal of achieving an after-tax return of eight percent on tangible equity is “more challenging” due to the difficult environment. The institute announced this and also set itself a less ambitious target for its relative cost target.
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Financial institutions are heading for uncertain times. Thanks to the interest rate turnaround by the European Central Bank (ECB), financial institutions can earn money more easily in the lending business again – but the risk of a recession is growing. The war in Ukraine, the threat of Russian gas deliveries to Europe being stopped, inflation and disrupted supply chains are all contributing to this. Should this lead to more company bankruptcies, it would also affect the financial institutions. The share prices of most European institutes have fallen since the beginning of the year.
Many stock market professionals interpreted the decision by the Californian asset manager Capital Group in the spring to divest its holdings in banks such as Barclays, Deutsche Bank and Commerzbank as a vote of no confidence in the prospects for the European financial sector.
Hardly any new IPOs
In some lines of business, the uncertainty has already left its mark. The IPO business has practically come to a standstill due to the market environment and company acquisitions.
So far, however, other business areas have often been able to iron out the slack in the issuing business: Many trading departments instead benefited from the volatile stock market environment and made good money from buying and selling shares, bonds, foreign exchange and commodities. Financial institutions with strong private and corporate customer business benefit from rising interest rates and from the fact that the demand for credit from companies and private customers was very high in the first half of the year.
BNP Paribas is one example. The major French bank increased its net profit in the second quarter by nine percent to around 3.2 billion euros. Both the classic banking business and the capital market business contributed to this.
The private customer division made the largest contribution, with profits rising by a third to 2.4 billion euros. In addition to higher interest income, the institute also benefited from rising commission surpluses. Profits in the corporate customer and investment division rose by 5.3 percent to 1.7 billion euros.
Profit drivers are rising interest rates
Spain’s Santander, which is primarily active in traditional banking, also benefited from higher interest rates. The country’s largest lender earned 2.4 billion euros net, 14 percent more than in the same quarter of the previous year. This is also a value that was above analyst estimates.
Above all, net interest income, i.e. the difference between interest income from loans granted and interest payments for customer deposits or bonds, rose significantly and was 16 percent above the previous year’s figure. The bank was thus also able to compensate for an increase in costs and risk provisions that exceeded expectations.
Business at Deutsche Bank also went better than expected in the second quarter. The bank doubled its profits in corporate customer business, and the institute made money again with private customers after a loss in the previous year.
However, not all major banks in Europe increased their profits. The major Italian bank Intesa Sanpaolo, for example, had to make provisions of 700 million euros for possible loan defaults. At the bank, corporate and private customer business accounts for around half of the business. Therefore, the profit fell by twelve percent compared to the same quarter last year to 1.3 billion euros. Since analysts had expected even higher provisions in the second quarter, Intesa still exceeded their forecasts.
Setbacks in wealth management
The major Swiss banks, whose core business is mostly managing the money of wealthy and wealthy customers, also had to cope with setbacks. The record-high valuations on the financial markets up until the beginning of the year had also pushed up the volume of assets under management at UBS, Credit Suisse, Julius Baer and Co.
Since then, however, the climate on the capital markets has clouded over significantly. The wealth management business suffers from the simultaneous sell-off in stocks and bonds. “In the crisis, institutional investors rely on cash,” said Zeno Staub, CEO of Bank Vontobel, in an interview with the Handelsblatt.
>> Read here: German investors fear for their money in Russian stocks
At UBS, pre-tax profits in wealth management fell by 11 percent. At Julius Baer the minus was 27 percent and at Credit Suisse even 74 percent.
Since the income from commissions from asset management is more important to most institutes than income from the traditional lending business, the Swiss financial institutions also benefited less from the rising interest rates.
Trading business compensates for M&A slump
The British bank Standard Chartered achieved a profit increase of seven percent thanks to a record profit in its trading department. However, Barclays benefited the most from the volatile financial markets: The trading business of the major British bank increased by 70 percent and thus performed best in an international comparison. For comparison: At JP Morgan, trading sales increased by only about 15 percent. At Deutsche Bank it was 30 percent.
The fact that Barclays’ pre-tax profit halved across the group was largely due to fines that the big bank had to pay for the unauthorized sale of structured financial products in the USA.
From the point of view of many investors, however, the positive surprises prevailed in the European banking sector: The European banking index Stoxx 600 Banks, for example, ended the current week with an increase of around 4.5 percent. Since the beginning of the year, however, the index has lost a total of 14 percent. And DRBS Morningstar analyst Arnaud Journois also warns: “It is possible that the third and fourth quarters will not be as good for European banks.”
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