European banks: rate rises are going to be a tightrope walk

Commerzbank closed the curtain Bank in the first quarter Earnings Carefully on Thursday. The second largest bank in Germany surprised with operating profits of 544 million euros, almost double market expectations. Profits were due to higher revenues between divisions, including higher net interest income. This may be as good as it gets for Commerzbank and its regional counterparts.

Overall, European banks reported pre-tax earnings about one-fifth above analysts’ expectations. It has continued a good run for the sector since the end of 2020. Plenty of monetary and fiscal government support have created the potential for economic recovery and the desperately high interest rates desired by the sector.

These wishes came true. Rates will go up, but earlier than expected. Worse, investors expect the economic downturn from rising inflation to sting lenders. The Stokes Bank Index has fallen 28% since its February high.

Analysts’ earnings estimates have not yet reflected this concern. Earnings per share for next year may have fluctuated after Russia first attacked Ukraine, but they have remained close to a two-year high. Indeed, a third of analysts’ corrections this month were positive.

With just over seven times the gains ahead, close to a decade low, the sector looks cheap. However, this only underscores the fact that the forecasts did not catch up with reality. already, Corporate debt in Europe is sold Fast-paced, with the high-yield euro index now offering well over 5%, compared to 3% last fall, ahead of the ECB’s expected rise in interest rates in July.

Expect to increase provisions for loan losses as the economy shrinks. The cost of this credit (versus total lending) to the sector is expected to stand at 30 basis points this year, City says, less than half the average of the past 15 years.

However, a return to this average will lower the net profit by a quarter, thinks Andrea Filteri at Madiobanka. This may give banks a pause for thought before they welcome too many interest rate hikes.

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