Research Briefing | Jul 19, 2023

Eurozone bank profits surge, but doubts about the outlook remain

Our estimates suggest that the surge in aggregate bank profitability may continue in the near term, but the outlook remains very uncertain and subject to downside risks. Banks unable to capitalise on higher rates need to be particularly scrutinised as pockets of weak profitability could reinforce the tightening of credit standards, further weighing on growth. However, the EBA data continues to support our base case that Europe will avoid a systemic banking crisis.

What you will learn:

  • We think three areas will be key going forward. Despite some improvement in Q1, high credit risk continues to point to a potential spike in credit losses. Second, deposit rates have so far only risen slowly, but competition for deposits is now increasing rapidly. A faster than expected rise in deposit rates would narrow interest margins and add to pressure on weakest-performing banks.
  • Finally, banks with a high proportion of fixed-rate loans will struggle to generate much higher net interest income because that would require strong growth in new loans, which is unlikely. A renewed focus on addressing structural issues, such as cost inefficiencies, is needed.
  • Overall, our assessment broadly concurs with the modest recovery in bank share prices from March’s turmoil and analyst profitability expectations that indicate recent performance is close to or at the peak. Of course, a relatively bearish view creates some upside potential, but a sharp shift in market sentiment would likely require a clear easing of some of the risks mentioned above.
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