European lenders to post 11% profit rise despite geopolitical risks
Europe’s major banks are expected to report an 11% jump in second-quarter pretax profit, but investors will focus on how escalating tensions with Iran and a persistent investment banking gap might threaten the sector's two-year rally.
Europe’s largest lenders are set to deliver another quarter of robust earnings when reporting season kicks off this week, though the pace of profit growth is slowing. Goldman Sachs forecasts an 11% year-on-year increase in second-quarter pretax profit for the sector. This continued profitability comes from stronger loan volumes, elevated interest rates, rising non-interest income and strict cost control.
Italy’s UniCredit and Spain’s Santander open the earnings cycle on Wednesday, followed by France’s BNP Paribas on Thursday. Barclays, Deutsche Bank, UBS and BBVA will report next week. The results arrive after more than two years of expanding margins and low credit losses propelled banking stocks to the top of Europe’s equity performance tables.
The macroeconomic backdrop is darkening, making management guidance more critical than the headline numbers. Analysts are watching for any indication that the Iran conflict is damaging business confidence or economic activity. Lenders also face the threat of rising bad loan provisions and sluggish broader growth across the continent.
A persistent weakness in investment banking remains a major concern for European lenders compared to their US rivals. While market volatility from the Iran conflict should boost trading desks, and a pickup in IPOs and mergers is helping, Wall Street firms are still capturing the lion's share of growth.
The disparity is stark in analyst estimates. Morgan Stanley projects UBS will post a 21% jump in investment banking revenue, driven by equities, while BNP Paribas and Societe Generale are expected to manage just 7% and 2% growth respectively. Those European figures pale against the more than 30% gains expected from major US banks.
Consequently, Morgan Stanley has recommended Deutsche Bank as the most attractively valued stock in its coverage, while maintaining an underweight position on UBS due to looming Swiss regulatory uncertainties. French banks' trading businesses will also face close scrutiny after a weak first quarter. For Spanish and Portuguese lenders, fears that rate cuts would crush margins have faded.
Deutsche Bank analysts note that positive net interest income and loan growth are shifting investor focus toward earnings recovery in Iberia. Furthermore, the European Commission's recent proposals to reduce political interference in cross-border mergers could provide a long-term valuation boost for the entire sector.
