Most European bank stocks have pulled back in the past few weeks as the spectacular rally experienced earlier this year eased. In Spain, Banco Santander stock was trading at €4.25 on Wednesday, down by 13.6% from its highest point this year.
In Germany, Deutsche Bank (DBK) share price was trading at the crucial support level at €14, down by over 14% from the year-to-date high. In Italy, Unicredit (UCG) has fallen to €36, which is lower than the 2024 high of €39.30 while in France, BNP Paribas (BNP) fell to €62.
European Central Bank decision ahead
European bank stocks had a strong strat to the year, with many of them surging to their multi-year highs. Some, like Unicredit, is still hovering near the highest point since 2011, and is up by over 636% from its lowest point in 2021.
These banks jumped sharply in the past few years because of the European Central Bank (ECB) of higher interest rates. Like other central banks, the ECB started hiking interest rates in 2022 to fight the stubbornly high inflation rates.
Rates moved from zero and peaked at a record high of 4.35%, helping bring inflation to about 2.4% today.
These hikes were welcome by these banks, which had endured a prolonged period of low interest rates. At some point, interest rates moved negative, meaning that these banks had almost zero net interest margin.
With rates rising, many have managed to turn their businesses around and report strong financial results.
A good example of this is Unicredit, whose total interest income stood at over €13 billion in 2020. In the last financial year, the figure surged to over €34 billion. Net interest income rose from €9.7 billion to over €14.6 billion in the same period.
Similarly, Santander’s total interest income was €46 billion in 2020 to over €105 billion in 2023 while its net interest income rose from €32 billion to €43 billion.
Duetsche Bank’s interest income rose from €21 billion in 2020 to over €48.65 billion in 2023 while its net figure reached €15 billion. The same performance is repeated in other European banks.
ECB rate cuts ahead
Therefore, these European banks have, therefore, retreated because of the ongoing actions by the ECB. It slashed interest rates by 0.25% in its July meeting and analysts expect it to do the same on Thursday. That cut will bring interest rates to 3.50%, meaning that banks will see a lower net interest margin in the coming months.
The ECB is cutting rates for two main reasons: inflation has moved back to almost its 2% target while the bloc’s economy is slowing.
Recent economic numbers showed that Europe’s economy expanded by 0.3% in the second quarter. More data has showed that the manufacturing sector in the bloc is still contracting.
Most notably, the auto industry is not doing well, with Volkswagen planning to close factories in Germany for the first time in decades. Other automakers like BMW, Stellantis, and Renault are also under intense pressure as competition from Chinese companies rise.
As such, the ECB hopes that cutting interest rates will help to stimulate the economy by lowering borrowing costs for companies.
Slow growth and warning from Wall Street
European banks like Santander, Deutsche Bank, and Unicredit stocks have also retreated because of their ongoing slow growth, meaning that the impact of high interest rates has started to wane.
Santander’s results showed that its net interest income dropped by 4.2% in the first half of the year to €11.4 billion. Its profit for the period rose to €3.4 billion.
Unicredit also reported strong results, with its earnings growing for the 14th consecutive quarter. Its net revenue rose by 6% to over €6.3 billion in the second quarter while its net interest income rose by just 1.9% to €3.56 billion. Net profit jumped by 15% to over €2.6 billion, helped by banking fees.
Deutsche Bank’s revenue rose by 2% in the last quarter to €15.4 billion while its net interest income fell by 2% to over €1.3 billion.
Therefore, while these companies reported strong results, there are signs that the revenue and earnings growth has or is about to peak.
Just this week, several top Wall Street banks lowered their profit guidance. JPMorgan, the biggest bank in the US, warned that analysts were more optimistic about its performance. Daniel Pinto, the bank’s president, noted that the forecasts of NII to be $89.5 billion was not very reasonable.
Similarly, Goldman Sachs warned that its trading revenue would drop by 10% in Q3 while Ally Financial said that its profit would be smaller because of higher auto delinquencies and net charge-offs. Citigroup and other banks are also expected to trim their expectations.
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