European Banks Set for Profit Lift as Earnings Season Opens

UniCredit and Santander kick off European bank earnings tomorrow, followed by BNP Paribas on Thursday. Next week brings results from Barclays, Deutsche Bank, UBS, BBVA and Ireland's three lenders.

Goldman Sachs forecasts an 11% jump in second-quarter pretax profit year-on-year for European banks. The gains come from higher loan volumes, wider margins from elevated rates, rising non-interest income and lower costs. Goldman analysts told clients this month they see a "better-for-longer" backdrop, underpinned by volume-led revenue growth and improving efficiency.

European banks have been on a more than two-year run of rising profitability, powered by higher lending margins and contained credit losses. The EURO STOXX Banks index has doubled over the past two years to its highest level since the 2007-2008 financial crisis. The recovery follows a decade of weakness during which more profitable US rivals took market share.

Volatility from the Iran war has boosted trading floors. Blockbuster M&A deals and IPOs have fuelled investment banking revenues. The European Commission last week outlined plans to limit political interference in EU banking mergers and remove cross-border obstacles.

Concerns about rising bad debt provisions and struggling European economies hang over the sector. Year-on-year gains are expected to be smaller than recent quarters. Investors will watch for any signs the Iran war is clouding the outlook for Europe, analysts said.

US banks continue to outperform European peers, using the scale of activity in the US while also taking more market share in Europe. Morgan Stanley forecasts second-quarter investment banking revenue growth of 21% for UBS, which is strong in equities trading. It expects just 7% for BNP Paribas and 2% for Societe Generale. That compares with revenue rises of more than 30% reported by several Wall Street giants. Morgan Stanley analysts recommend clients buy Deutsche Bank shares, calling it "the cheapest bank in our coverage." They are underweight UBS, partly because of uncertainty about the impact of new Swiss regulations.

French banks' trading divisions will be closely watched after they reported subdued numbers in April.

For Iberian banks, the second quarter "should reinforce the view that the earnings reset from lower rates is largely behind the sector," Deutsche Bank analysts said. Positive net interest income and strong loan growth mean "the focus is increasingly shifting towards the pace of recovery."

BBVA, reporting next week, carries an Alpha Score of 68, reflecting a moderate outlook. BBVA stock page.