Another beat and raise quarter
- Bank earnings maintained their momentum in Q4. The beat rate across NII and fees was over 80%. Forward EPS were revised up by 1.5%
- Banks were comfortable upgrading NII guidance on the back of strong volume growth and higher interest rate curves.
- Banks were generally able to surprise positively on distributions. Unicredit has communicated on 30bn for 25-27, while BCP committed to distribute 90% of earnings.
- EPS accretive M&A was still a highlight of the quarter, as Santander announced the acquisition of Webster, with funding and cost synergies.
- AI featured as a key technology to further improve the sector’s C/I ratio
- Banks have shined throughout the year, consistently leading the European market in terms of beat rates and EPS upgrades.
Revenue tailwinds are accelerating
- Customer spreads are climbing back above their pre rate cuts high due to stable loan yields and declining deposit costs
- Recent rates moves may lead to a further upgrade in NII expectations if sustained, with the market now pricing 2 rate hikes in 2026
- Fees are supported by strong inflows in European markets, high retail engagement, and good performance in diversified lines such as bancassurance
- The cost outlook is supported by lower wage pressures and AI
- Asset quality is projected to be stable thanks to low private sector leverage
[Translate to English:] Des banques bien placées pour résister au triple choc du crédit privé, de l'IA et de la crise iranienne
- Banks are well placed to weather the private credit, AI and Iran triple shock
- Banks have derated since the start of the year due to a trifecta of concerns: private credit, AI and Iran
- On AI, we think banks will be a net beneficiary: margin pressure due to agentic AI is still unproven, while cost benefits are tangible
- European financial institutions have limited exposure to private credit, which is more a US theme. Investment banks and PE-owned insurers are most at risk.
- The earnings impact from the middle east crisis is unclear: direct exposures to the region are minimal ; higher rates provide some NII upside ; while stress in sensitive sectors such as manufacturing, agriculture, construction and transport may be capped by fiscal support
- Post the year-to-date derating, banks offer a strong return outlook, with a 35% discount to the Stoxx 600 and an 8%-9% cash yield