European Banks Face Uncertainty in Fourth-Quarter Earnings Season

European banks are entering the fourth-quarter earnings season with concerns over whether their recent strong performance, fueled by high interest rates, can be sustained. Investors will closely watch for signs of earnings resilience and the potential impacts of expected interest-rate cuts, as well as the possibility of an economic soft landing. At the same time, analysts anticipate that banks will increase returns to shareholders.

What to Watch

Shareholder Returns

According to analysts at Bank of America, European banks are expected to announce final dividends totaling €56 billion ($60.96 billion) as part of their fourth-quarter results. This presents an opportunity for many banks to initiate share buybacks. Bank of America predicts that European banks could repurchase €38 billion worth of shares by the end of the year, in addition to an anticipated €76 billion in dividends for 2024. Furthermore, Berenberg analysts believe that total shareholder returns, including dividends and changes in stock prices, could reach 30% to 35% over the next two years, even without a more optimistic outlook for the sector. In comparison, Berenberg estimates that the sector achieved a total shareholder return of 28% in 2023.

2024 Outlook

According to Citi analysts, the net interest margin, which is a key measure of lending profitability, is expected to have reached its peak for almost every European bank by the fourth quarter of 2023. Looking ahead, the focus of investors’ debate is likely to shift towards banks’ top-line resilience, as stated by Citi. The Citi analysts also anticipate that European bank earnings will demonstrate more resilience this year compared to the previous decade, with manageable risks related to asset quality and liquidity. Barclays analysts estimate that the sector’s return on tangible equity, a closely monitored profitability metric for banks, will be 12.6% in 2024, down from 13.8% in 2023. They also anticipate a 1% increase in revenue year-over-year, with costs rising by 4% and cost of risk increasing by 5 basis points.

Monetary Policy

During the Davos summit, some policy makers at the European Central Bank expressed opposition to the idea of significant interest rate cuts in the current year. ECB President Christine Lagarde highlighted the likelihood of the first rate cut taking place in the summer, which contrasts with market expectations of a cut in April. Jefferies pointed out that geopolitical tensions, extreme weather events, or changes in wages could still trigger inflationary pressures.

Banking Announcements

The following are the scheduled dates for upcoming banking announcements:

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