Despite already muted expectations, the beginning of the third quarter bank reporting season in Europe can be best described as underwhelming, says Filippo Alloatti, Senior Credit Analyst, Hermes Credit.
Market conditions have dampened fee growth across the sector, while lower rates taken a toll on margins. Any ‘excess capital’ is likely to be accrued for regulatory purposes, not handed back to shareholders. Ultimately, this is positive for credit spreads of the sector.
All this followed on from a rather subdued third quarter for US banks. Most large institutions and brokers either beat or met expectations, but the bricks and mortar lenders largely missed on declining asset yields.
Round-up: A difficult quarter for European banks
Profit warnings and missed expectations were commonplace over the quarter. Deutsche Bank was the highest profile casualty, forecasting a €5.8bn potential loss on various write-downs.
Even the Scandinavian banks, which almost never fail to meet earnings expectations, missed in Q3. DNB was the exception, but its ECB-mandated Supervisory Review and Evaluation Process is likely to result in higher core capital requirements than previously anticipated.
Credit Suisse missed expectations, particularly due to poor performance in fixed income, currencies and commodities trading. It also confounded the market with its new strategic plan.
Lloyds reported an underlying before tax profit of £1.97bn, which was 8% lower than consensus expectations. The miss was attributed to other income and net interest income (NII).
Spanish giant Santander saw net profits in-line with consensus, at €1.68bn. However, there are fears over the quality of these numbers, as earnings were driven by a tough-to-repeat strong trading result, and lower NII. Its capital build was also disappointing.
Barclays’ main profit and loss miss was due to costs of £3.84bn, with the company raising cost guidance in 2016 to account for higher structural reform costs related to the implementation of the ring-fence.
BNP Paribas is reporting on Friday, with expectations of weak trading income. Capital could also disappoint, as management seems to be in denial of the tougher regulatory regime. An update on its broader commodity and EM exposure – especially Asia – will be useful, if only to dispel any misconceptions. However, the bank remains proficient in cost efficiency, with a more than 15-year track record of initiatives.
BBVA’s funding cost benefits may be coming to an end, increasing pressure on net interest margins. On the positive side, BBVA’s international earnings may not be fully appreciated by the market. Mexico is an important outpost for the bank. BBVA was boosted in the first half of the year by capital gains and continues to consolidate acquisitions, such as the CatalunyaCaixa deal, while competitor Santander de-risks in Brazil. Meanwhile, provisions remain high and the elevated costs are taking a toll on group profitability.
For RBS, its key issue is litigation costs. The size – likely significant – and timing of the FHFA redress remains unclear. RBS’ income statement has been distorted by litigation and recurring restructuring charges, as well as the impact of deleveraging. However, we are witnessing solid progress in strengthening the balance sheet, with CET1 for the first half of the year coming in at 12.3%. The group’s underlying performance continues to be offset by legacy costs, but RBS' capital ratios are strengthening on the back of strong progress in 2014. The sale of Citizens will provide a significant boost, with guidance pointing to a 300bp gain to CET1 on a full deconsolidation of its US bank. RBS, led by its capable CEO, is saying and doing all the right things from a credit perspective – which is consistent with recent history. Assuming a deconsolidation of Citizens, with its £70bn of risk-weighted assets (RWA), RBS is now well ahead of its £300bn RWA target for FY15.
Finally, there has been an unusually high level of turnover at some of the global European banks – including Deutsche Bank, Barclays, Standard Chartered and Credit Suisse. Historically this points to further restructuring, goodwill impairments and capital raisings.
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