European banks' strong run faces major test with earnings

investing.com:

By Tom Sims, Jesús Aguado and Valentina Za

FRANKFURT/MADRID/MILAN (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 (BME:BBVA) reports fourth-quarter numbers on Tuesday, Santander (BME:SAN) on Wednesday, Deutsche Bank and BNP Paribas (OTC:BNPQY) 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.

PAST THE PEAK

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% 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% 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% drop in NII for 2024 according to the consensus forecast, Jefferies analysts said, although they expect the bank to beat expectations. It has