European banks are blowing the roof off, for now


European banks appear to be struggling a bit, but investors shouldn’t be overexcited by a string of earnings beating forecasts this week

There is little commonality in much of the good news: France’s BNP Paribas SA, the UK’s NatWest Group Plc and Standard Chartered, and Spain’s BBVA all posted strong second-quarter numbers on Friday, after better profits at Deutsche Bank. AG, Banco Santander SA and even Barclays Plc, if you ignore the costs of its structured product glut.

For some, it was countries outside Europe that drove performance. In Europe itself, higher interest rates will help incomes to a limited extent, while consumers have a smaller post-Covid savings cushion than in the US or UK, so that debt repayment problems could arise sooner when inflation bites. The sector faces big challenges as economies slow and concerns grow over rising costs of living and threats to energy supplies from Russia.

However, shares of European banks are trading at huge discounts to book value and to some this seems unwarranted. BNP, for example, has reshaped itself to become more balanced, which has helped it weather the market storms. After selling Bank of the West in the US, BNP also has $16 billion in cash to come when the deal closes later this year; which will be split between a special payout of 4 billion euros ($4.1 billion) to shareholders and an investment in future growth. This investment will not include the purchase of another European bank, stifling supposed interest in ABN Amro of the Netherlands.

BNP has strengthened its equity trading activity, having taken over the prime brokerage specializing in hedge funds from Deutsche Bank and acquired Exane. That moved it away from a historic reliance on equity derivatives and helped lift trading revenue 16% in the second quarter compared to the same period last year in euros, better growth than most. global rivals. Calculated in dollars, growth was less than 3%, but BNP does more non-US business than many Europeans, so its true performance is likely somewhere in between.

Its Global Banking division was also strong, which combines investment banking activities such as transaction advisory and fundraising, but also corporate lending and transaction banking. A lack of detail makes comparisons with competing investment banks difficult, although BNP said second-quarter revenues in European capital markets were down around 26% year-on-year, or around half of the decline noted by its peers.

That this unit’s revenues were broadly flat illustrates another theme among US and European banks this quarter. While capital markets have been closed and bond issuance has been almost entirely non-existent in recent months, companies still needed trade and investment finance. Deutsche Bank, Barclays and BNP in Europe and JPMorgan Chase & Co. and others in the United States stepped in to lend directly to companies rather than helping them sell bonds.

The pendulum is likely to swing back to market-based financing once the direction of international interest rates becomes clearer and borrowers and investors agree on the financing costs with which each is at risk. comfortable. This will probably be a theme for next year. For now, however, the big universal banks that have businesses and capital markets have been able to defend their earnings by lending more while the markets slumbered. When bond issuance wakes up, there will be more fees available to investment banks, but loan growth will suffer.

There is very little connection between the better-than-expected earnings of companies like Standard Chartered and Banco Santander. So if investors are learning one lesson from the sector this year, it’s probably that balance and diversity are the best defense against economic storms.

More from this writer and others on Bloomberg Opinion:

• JPMorgan’s bad earnings news really isn’t that bad: Paul J. Davies

• China’s mortgage boycott brings back strange memories: Shuli Ren

• Junior bankers deserve their bonuses. Really: Jared Dillian

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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