(Bloomberg) -- Europe’s biggest banks are about to kickoff their earnings season, testing the resilience of a market-leading stock rally that’s pushed their shares to a nine-year high.
Deutsche Bank AG gets the ball rolling on Wednesday and investors are waiting to hear how lenders across the region are dealing with sluggish economic growth and interest-rate cuts. Executives will be quizzed on how they are responding to a pick-up in M&A as the sector pursues its next leg of growth.
The Stoxx 600 Banks Index has advanced 22% this year, more than any other sector in Europe, and closed last week at the highest level since August 2015. Even so, valuations remain low relative to the broader regional benchmark, suggesting to some that a strong earnings season can unlock further gains.
“We believe European bank equities remain too cheap and will gradually earn a re-rating higher as profitability gains are proven to be more sustainable than the market currently assumes,” Keefe, Bruyette & Woods analysts led by Andrew Stimpson wrote in a note.
Major Wall Street banks have given their European peers a tough act to follow, reporting surprisingly strong profits due to lending and rising deals activity. That positive showing has pushed the US’s KBW Banking Index to a two-year high.
In Europe, the expectation is that the broad financial sector will provide the main support to third-quarter earnings-per-share growth in the region, according to strategists at Bank of America Corp.
For Roberto Scholtes, head of strategy at Singular Bank, European lenders are poised to withstand the pressure from central bank rate cuts.
“Net interest incomes are plateauing in the second half of 2024, but will only fall moderately in 2025,” he said. “Besides, new loan production is expected to accelerate, fees should grow on improved activity in financial markets, and costs are relatively contained.”
According to Bloomberg Intelligence, net interest income should largely meet third-quarter estimates, though management teams are likely to strike a more cautious tone than in the previous period. As rate cuts take hold, revenue growth looks increasingly reliant on fees, BI said.
Meanwhile, dealmaking has raced up the earnings-season agenda thanks to UniCredit SpA aggressively building a stake in Commerzbank AG and the pursuit of Spain’s Banco Sabadell SA by larger domestic rival BBVA SA.
Deutsche Bank’s managers may face questions about a potential UniCredit takeover of Commerzbank, which could create a new German banking No. 1. Analysts have said an alternative outcome where Deutsche Bank combines with Commerzbank would be in the best interests of Deutsche Bank — and Germany.
But Deutsche Bank has effectively ruled out getting involved in the deal, with Chief Financial Officer James von Moltke saying it remains focused on its own strategy. UniCredit and Commerzbank are due to report on Nov. 6.
BBVA’s hostile takeover move on Banco Sabadell — the first in Spanish banking since the late 1980s — has dominated discussion domestically for six months. Other Spanish banks have been questioned during industry events and earnings presentations on their views of the deal and whether they see potential growth opportunities, given the reduced competition should their rivals combine.
BBVA and Banco Sabadell both report earnings on Oct. 31. And talk of acquisitions will likely extend far beyond their earnings calls, given the view in the industry that deals beget deals.
“Banking sector M&A historically has been triggered by momentum from deals being announced,” JPMorgan Chase & Co. analysts led by Kian Abouhossein wrote in a note last month. “We would expect more newsflow on European bank M&A going forward, which could be a positive for valuations for banks that have historically been seen as targets.”
--With assistance from Michael Msika, Farah Elbahrawy and Chloé Meley.
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