Another “beat and raise” quarter, with increased management conviction
- A strong set of results with an average pre-provision operating profits (PPOP) beat of 3% and 2025/2026 consensus earnings up ~2%.
- NII was up 1% QoQ in the Eurozone, better than expected. French retail was strong, up 3% QoQ at BNP and 8% QoQ at CASA. Spanish results suggested NII has troughed. UK matched expectations despite a competitive ISA season.
- Fees missed slightly due to FX/April sell-off/weaker Investment Banking fees but were offset by strong trading (which came c. 2%-8% above expectations). The tone was upbeat on IB pipeline and AuMs with a strong start to Q3.
- Costs were flat and 1% better than consensus.
- Capital was strong. Deutsche provided reassuring guidance on CRR3. Socgen launched a €1bn buyback + an interim dividend.
Further positive earnings and payout revisions are likely
- The EUR 1Y1Y swap rate has stabilised above 2%.
- Interest rate curves have continued to steepen, driven by growth expectations, fiscal expansion, QT and Dutch pension fund reforms.
- Strong market performance and inflows, especially in European equities and bonds, will boost commissions.
- Trading momentum is intact, with double digit YoY modelled growth so far in Q3 in Equities and IBD, and high activity in FICC.
- Regulatory and consolidation trends favour higher capital generation and deployment, in distributions or highly accretive M&A.
Diversified, resilient banks screen attractively after the strong beta rally
- Valuations have normalized, with the sector trading at c. 9.5x P/E 25-26E, a ~37% discount to the wider European market, and a ~28% discount to US banks. The relative rerating could continue, reflecting the improved resilience of the sector, especially if the European macro-outlook firms up.
- Intra-sector valuations have compressed following an aggressive beta rally in the cheapest names (Socgen, Commerz, Deutsche, ABN, etc.). Given the low opportunity cost of moving up in quality, we favour franchises able to deliver double digit ROEs even in a more adverse macro scenario.
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