A supportive quarter leading to further EPS upgrades
Overall, a good quarter for banks, with a 70% positive surprise rate and ~2% forward EPS upgrade.
NII beats were mostly driven by loan growth. Benelux, Nordic and Greek banks surprised positively. Domestic Italian and Spanish banks were just in-line, while UK names underwhelmed. Unicredit and BBVA displayed strong balance sheet growth, while ING printed solid deposit margins.
Fees were generally robust. Healthy IB, wealth and asset management results contrasted with weaker FICC and softer payment fees.
Banks continue to manage costs well, with efficiency ratios flat or trending down. Despite the macro context, provisions generally came in lower than expectations (again). Deutsche, Lloyds, HSBC took precautionary “Middle East” provisions.
Unexpectedly, HSBC and BNP got hit on MFS. BAWAG took high provisions for large unsecured consumer exposures. There was some RWA inflation, with some large misses (Deutsche Bank, Credit Agricole), due to loan growth, market volatility and lower SRT usage.
Insurance saw decent EPS upgrades overall despite strong competition in P&C reinsurance and UK bulk purchase annuities.
Volatility beneficiaries such as stock exchanges and brokers saw strong upgrades, while alternative AM suffered from lower performance fees.
Yield and growth credentials intact
The total distribution yield for European banks is an attractive 8.5% for 2027e (of which 6.5% dividend yield and 2.0% buyback yield). There is ample excess capital to support shareholder returns.
On top, shareholders benefit from 3-4% revenue growth and ~6% earnings growth, bringing the dividend + EPS growth yield above 14% for a reasonable 9x-10x multiple (35% discount to the Stoxx 600).
Earnings should be resilient in a stagflationary shock: higher deposit margins would compensate lower loan growth, while precautionary provisions, low private sector leverage and targeted government support would prevent a material asset quality deterioration. Further cost optimisation through M&A and AI could improve earnings further irrespective of the macro environment (30% ROI on Bawag-PTSB deal)
Key sector debates and portfolio positioning
Against a backdrop of ECB rate hikes and energy volatility, we anticipate strong resilience in net NIMs. The deposit mix remains supportive, with solid stability in sight deposits, while loan growth is expected to remain sustained, backed by low private-sector leverage.
The sector benefits from tailwinds on multiple fronts: the acceleration of value-creative M&A, progress toward the Savings and Investments Union, and the massive adoption of AI to optimize costs. Ongoing intense US competition in investment banking and private credit, alongside higher overlays linked to the prolonged closure of the Strait of Hormuz (impacting tourism and airlines), remain key points of vigilance.
We favour banks with structurally low funding costs and weak deposit competition, reduced exposure to consumer credit, in fiscally healthy geographies, and a high payout ratio for shareholders. We hold defensive P&C insurers, exchanges, and non-cyclical residential REITs to protect the portfolio against a sharp unemployment spike scenario.