European banks' strong run faces major test with earnings

FRANKFURT, Jan 29 (Reuters): European banks' run of soaring profits and record shareholder payouts faces a big test this week when investors assess how fast the boost from higher interest rates is fading, and if a weak economic outlook will make life tougher.
Spain's BBVA reports fourth-quarter numbers on Tuesday, Santander on Wednesday, Deutsche Bank, opens new tab and BNP Paribas, opens new tab on Thursday and UniCredit the following Monday. Other euro zone banks and Switzerland's UBS follow.
The STOXX Europe 600 banks index hit its highest since mid-2018 this month, propelled by a recovery in profitability thanks to higher rates, record shareholder payouts and little provisioning for bad loans.
Yet as banking executives bask in the good times, investors are concerned that the tide is turning.
Retail-focused lenders which earn most of their money from the difference between loan income and deposit costs have benefited most from rising rates, but bigger, diversified banks such as Deutsche and BNP Paribas have also seen profits.
Investors appear jittery, however, with a small miss in fourth-quarter net interest income (NII) from Spain's Bankinter last week causing a 6 per cent drop in its stock price and dragging down rivals' shares.
JP Morgan analysts warn that lower rates will lead to a "downgrade cycle" across the sector. After an estimated 22 per cent net interest income (NII) jump in 2023, the bank expects European lenders to show limited NII growth this year and zero earnings growth.
UniCredit is expected to project a 4 per cent drop in NII for 2024 according to the consensus forecast, Jefferies analysts said, although they expect the bank to beat expectations. It has excess capital - 10 billion euros ($10.9 billion) worth - that it needs to decide what to do with.
Analysts will also be listening closely to BNP Paribas' results and what management decides to do with the excess capital it still has from the sale of Bank of the West.
Not everyone believes falling margins are such a concern. The average 2024 European interbank lending rate should be higher in 2024 than in 2023 and interest income will only "be down a bit", said Sebastiano Pirro, chief investment officer at Algebris Investments, which holds shares in banks.
"What you are looking at for European banks is a 10-year inflection point," he said, referring to a decade of negative euro zone rates that destroyed bank profitability.