European banks: Are tailwinds about to fade?
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EUROPEAN BANKS: ARE TAILWINDS ABOUT TO FADE?
With higher interest rates boosting banks' profitability in the last two years, the market is wondering how much an expected softening in monetary policy could dampen their margins and encourage investors to seek fortune in other assets.
The U.S. Federal Reserve is likely to join the European Central Bank and the Bank of England's easing cycle in September with steady reductions expected forward, toward a 2% to 3% range for terminal rates.
Does it mean that banks' strong profitability is about to fade? The net interest income could have peaked in many cases, but an acceleration of fee income and loan growth may soften the decline, Deutsche Bank analysts said.
"Thanks to structural hedges and replicating portfolios we expect rate cuts to have a smaller impact than rate hikes initially," they added.
In any case, the headwinds seem not to be too scary for the sector, for now, as some European lenders such as Spain's Santander SAN.MC and Dutch ING INGA.AS have raised their profitability goals during the second-quarter reporting season.
That's a move that the market interpreted as a signal of strength as the European banks are on track to outperform the broader European market for the forth consecutive year, with the STOXX banks index .SX7P gaining more than 17% year-to-date and more than doubling the pan-European benchmark .STOXX.
"Euro area banks are much more resilient than they used to be", said Deutsche, which continues to stay constructive on the sector.
However, in a less favorable environment it prefers more diversified banks with exposure to higher growth regions, material fee income opportunities, and significant excess capital such as BNP Paribas BNPP.PA, Lloyds LLOY.L, Monte dei Paschi di Siena BMPS.MI, Erste ERST.VI, Commerzbank CBKG.DE and Santander.
(Matteo Allievi)
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