LIVE MARKETS-EU banks' earnings outlook sturdier than share prices

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EU BANKS' EARNINGS OUTLOOK STURDIER THAN SHARE PRICES

European bank shares have taken a hit from geopolitics and macro angst since the outbreak of war in Iran, but Barclays argues the underlying earnings picture is far less dramatic.

In a fresh scenario analysis, the UK bank finds profits remain broadly protected, even if the outlook worsens, because higher interest rates would do much of the heavy lifting.

The analysts run both "defensive" and "de-escalation" scenarios and conclude earnings-per-share risk is limited.

The key reason is that higher rates boost net interest income almost immediately, offsetting weaker loan growth or higher loan‑loss provisions.

"Overall, we continue to see earnings risk as manageable for European banks, assuming the conflict de‑escalates within the next month," say analysts at including Flora Bocahut and Paola Sabbione. "Higher rates provide support to NII from year one, offsetting most of the adverse macro effects

A cumulative 50 basis point rate rise lifts average pre-tax profit by around 3% in year one. By contrast, provisions would need to jump by roughly 30 to 40% to fully offset that benefit.

Even a downside scenario combining slower loans, softer fees, higher costs and a 30% rise in provisions only knocks about 5% off profits, they calculate.

That resilience contrasts with sharply lower valuations. The sector has de-rated as investors worry about conflict risk and themes such as private credit and software exposure.

Yet Barclays sees little threat to dividends or buybacks, with average yields of 8–9% offering downside protection.

European banks .SX7P have fallen by as much as 19% from their pre‑war peaks, but including Wednesday’s rally they have recouped more than half of those losses.

European banks .SX7P have fallen by as much as 19% from their pre-war peaks, but including Wednesday’s rally they have recouped more than half of those losses.

(Danilo Masoni)

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