Ukraine Hangover Makes European Banks Look Rougher than They Are
Summary
Following Russia’s invasion of Ukraine last year, many European investment-bank clients scrambled to hedge against the risk of oil and gas supplies being cut off. Now, trading revenues are normalizing.
European investment banks don’t tend to fare well when compared with their more profitable U.S. peers. But the war in Ukraine makes some comparisons unfair.
Investors have been disappointed with the third-quarter results published by top European banks so far, with the stocks collectively down more than 3% this week. This is despite the fact that most of the companies have actually beaten analysts’ profit forecasts by a decent margin.
One stock that rose was Deutsche Bank, which managed to dispel a bit of skepticism regarding its recovery plan Wednesday. But markets have found things to dislike in most other reports. Barclays’ earnings Tuesday were particularly badly received, as the U.K.-based lender warned that competition for deposits is heating up and will reduce net interest margins. On Thursday, shares in French bank BNP Paribas bell roughly 4% in morning trading, as a result of executives highlighting weakness in their domestic retail business.
When banks reported earnings that were actually bad, the response was brutal. Standard Chartered plunged about 10% in the London stock market Thursday after it reported a big impairment charge on Chinese commercial real estate.
This is a change in sentiment compared with two years ago, when rising interest rates appeared to set the stage for an enduring recovery in banks’ profitability. Now, those gains are looking temporary, while hard-to-shake problems seem to be affecting all business lines: A slowing economy is depressing lending, and a cocktail of rising interest rates, bank failures, inflation and wars has all but obliterated merger and acquisition fees.
All of this affects U.S. firms too: Shares in big banks are down about 5% relative to the start of the earnings season.
Yet one factor is making the investment-banking side of European lenders look particularly bad. Following Russia’s invasion of Ukraine last year, many bank clients scrambled to hedge against the risk of oil and gas supplies being cut off. Of course, markets were too busy worrying about the fate of the global economy to give banks any credit at the time.
“Commodities and related products had a very high price and a very high volatility," Lars Machenil, chief financial officer at BNP Paribas, told analysts Thursday. “Now we have come back to a very normalized level."
BNP Paribas said Thursday that revenues from fixed income, currencies and commodities, or FICC, fell more than 14% in the third quarter. Though corporate-bond trading is still doing well, everything else has cratered. Barclays and Deutsche Bank reported a 26% and 12% drop in FICC revenues for the period, respectively. This compares to a 1% average increase for U.S. investment banks, according to RBC Capital Markets.
Ultimately, markets may need perspective: Trading desks are reporting good numbers when compared with the prepandemic period, when they appeared to be in a secular slumber. That suggests that at least part of the improvement could be permanent.
The same applies to net interest margins: Even though depositors are now shopping around for better returns, all the evidence suggests that European banks should benefit from an environment of higher borrowing costs. The region’s lenders have generally insulated their books from the type of interest-rate risk that has saddled U.S. regional banks.
To boot, European banks’ loan books are doing far better than lackluster economic data for the continent would imply, with no significant increase in provisions. It is yet another sign that, even in Europe, a “soft landing" is very much a possibility.
Bank investors have had a bad time in the region. Hangovers aside, though, the companies aren’t in such rough shape.
Write to Jon Sindreu at jon.sindreu@wsj.com
