Europe bank shares up on better earnings

A picture taken on August 5, 2014 shows the logo of French bank Credit Agricole in Lille, northern France. The quarterly accounts of Credit Agricole, a shareholder of Portuguese Banco Espirito Santo (BES), were deeply affected after the Portuguese bank was plunged into crisis when allegations of fraud exposed a huge debt hole in its parent group. The situation of BES, saved from bankruptcy over the last weekend at the cost of a total loss of their investment for shareholders, led Credit Agricole to reduce its 14.6% value of participation in the Portuguese bank to zero, and to assume a portion of the quarterly loss record (3.57 billions of Euros) wiped by BES. AFP PHOTO / PHILIPPE HUGUEN (Photo credit should read PHILIPPE HUGUEN/AFP/Getty Images)©AFP

French bank Crédit Agricole was among the European lenders to beat earnings expectations

Some of Europe’s largest banks reported better than expected financial performances on Wednesday morning, providing a rare ray of light for an otherwise gloomy sector.

French lenders Crédit Agricole and Société Générale both topped earnings expectations and posted stronger capital than analysts had pencilled in, while Dutch group ING was a big winner, soaring 8.5 per cent after quarterly results smashed expectations.


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After a wide-ranging sell-off at the start of the week, the strong results gave shares in European banks their first boost since EU authorities published stress tests aimed at reassuring investors that the sector was returning to financial health.

The Euro Stoxx banks index, which broadly reflects the European banking sector, advanced 1.6 per cent on Wednesday. This followed sharp falls on Monday and Tuesday, when it fell 2.8 per cent and 4.9 per cent, respectively.

Monte dei Paschi, the troubled Italian lender that finished last in the EU stress tests and collapsed 16.1 per cent on Tuesday despite a private-sector rescue plan, rebounded 1.9 per cent on Wednesday.

European banks have become one of the biggest concerns among European investors and policymakers following June’s vote in Britain to leave the EU. The result sent shockwaves through European markets and exposed existing weaknesses in some eurozone banks, particularly in Italy, which has borne the brunt of the post-Brexit sell-off.

Ronit Ghose, Citi’s global head of banks research, said share price rises on the back of Wednesday’s earnings announcements had been “magnified” because of the falls earlier in the week. He stressed that even though shares were doing well, European banks were not out of the woods.

“European banking and global banking to an extent remains a very difficult industry,” said Mr Ghose. “With negative or low interest rates, it’s going to be a challenging time.”

Kinner Lakhani, an analyst at Deutsche Bank, said the results showed that higher volatility was helping some banks. “Against low expectations, the more diversified universal banking model is providing greater resilience in a challenging backdrop,” he added.

Not all major banks reporting on Wednesday provided good news, however. Britain’s HSBC and Standard Chartered both missed analysts’ top-line earnings forecasts and pulled back from previous commitments on return on equity, blaming the faltering global economy.

“It is evident that we are entering a period of heightened uncertainty where economics risks being overshadowed by political and geopolitical events,” said Douglas Flint, HSBC chairman.

But markets took the news on the chin, and analysts said the old profit goals were long seen as unrealistic. HSBC’s shares rose 4 per cent — largely because of its announcement of a $ 2.5bn share buy-back and promises of more to come. Standard Chartered’s shares jumped 5.8 per cent after the bank’s mid-morning results announcement.

Bill Winters, Standard Chartered chief executive, said although his bank was very focused on Asia, the Middle East and Africa, there were “lingering concerns on whether protectionist actions will be taken, of which Brexit may be one catalyst, but it’s way too early to call that.”

He said most banks, especially in Europe, were “trading below their net asset value right now”.

“That’s a statement about a lack of confidence but also a very high level of uncertainty.”

The recent decline in European bank stocks has only deepened a year-long plunge sparked by a combination of low interest rates, disappointing earnings, anaemic economic growth, poor asset quality and stringent regulation. On Tuesday, investors were spooked by weak results from Commerzbank, which warned on the “interest rate environment” as part of its earnings report. The bank’s shares hit an all-time low.

Despite the rebound elsewhere and more positive earnings, broader concerns about the viability of banking business models remain. In early trading on Wednesday, Deutsche Bank shares hit their lowest level on record, although they have since rebounded slightly.

“Europe’s problem is simple: too much debt on bank balance sheets at too low a margin,” analysts at Berenberg wrote in a note published this week. “In a highly levered sector, equity valuation becomes little more than guesswork if you have no confidence in asset values. A rounding error of 1 per cent on European asset values would wipe out more than a third of European bank equity.”

Additional reporting by Emma Dunkley

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