Bank profits have soared across Europe but the outlook is darkening

Investors watching rising interest rates along with the wars in Israel and Ukraine

The headquarters of the Deutsche Bank in Frankfurt: The giant lender reports this week.

Bank profits in Europe likely reached their highest point since the financial crisis this year, climbing in lockstep with interest rates. As the economic outlook darkens amid unfolding geopolitical crises, the focus this earnings season could now turn to margin pressure and signs of souring loans.

“Banks are generating peak earnings. The third quarter will be a chance to take their pulse and see how this very positive situation is normalising, for example because they’re passing on higher rates to clients,” said Alexandra Annecke at Union Investment in Frankfurt.

Investors will be watching for forward-looking comments on greater competition for deposits and mortgages across Europe, which has been partly driven by central bank rates soaring from almost zero to the highest in decades to curb inflation.

Also on the radar are wars in Israel and Ukraine, China’s economic woes and more efforts to impose windfall taxes, as seen in Italy, Sweden and the Netherlands this year. 

Provisions for bad debts, particularly for commercial property loans, will be of interest too.

Barclays and UniCredit report this week, followed by Deutsche Bank, Lloyds Banking, Banco Santander, Standard Chartered, BNP Paribas, and NatWest. After that, HSBC updates markets next week and UBS is due in early November. 

The Israel-Hamas war has put higher energy prices on top of investors’ minds again, less than two years after Russia’s invasion of Ukraine raised the threat of oil supply shocks.

“Higher inflation could lead to higher wage growth and this could mean cost growth comes in higher than expected for FY24,” RBC analyst Benjamin Toms said, adding higher-for-longer interest rates could also hit asset quality and lending volumes at the banks. 

Most big European banks are expected to stash more money to cover credit losses than they did a year ago. Yet bankers have been relatively sanguine about the quality of their loan books.

Deutsche Bank chief executive Christian Sewing said earlier this month “there is a lot of resiliency in the portfolio”. Earlier this month, Bettina Orlopp, the finance chief of smaller German rival Commerzbank, made similar comments. 

Regulators, though, have warned of the effects of potentially higher-for-longer interest rates on credit quality. 

• Bloomberg