Judging by the latest earnings figures, banks are operating more efficiently than they have in years. But the industry could soon be heading into rough terrain, not least Credit Suisse.
Banks in Europe are for the most part humming along nicely at a brisk pace and with relatively full tanks. This is evident from capital buffers, which, according to financial analysts at UBS, are more than sufficient to withstand an impending rise in borrowing costs. In an industry analysis, they point to government credit guarantees and fiscal interventions, which act as proverbial airbags.
In addition, the study under the helm of Jason Napier sees further increases in profits before provisions, concluding the banks are reasonably valued from an investor's point of view at 5.8 times normalized earnings.
Braced for Credit Risks
There were no particular signs in the second quarter figures that banks were bracing themselves for particular difficulties such as credit risks in a recession or energy risks, the analysts observed.
European banks' loan losses averaged 1.8 percent, which was below the level before the Corona crisis. In addition, the industry could absorb almost three times the loan losses accepted during the Corona crisis before falling below target levels, according to the report.
Limited Maneuverability
But the analysts did raise some question marks over Credit Suisse, saying it is unclear which guiding principles will be used to steer the hobbled bank. In the past, the link between investment banking and asset management had always been of central importance to the institution.
But with the announced downsizing of investment banking, UBS experts believe that new focal points should emerge, in the areas such as digitalization, back- and mid-office, or asset management. But a structure of high and inflexible bonuses limits the institute's maneuverability, they say. Given this scenario, UBS maintains its «Neutral» on Credit Suisse with a price target of 5.40 francs ($5.55).
Transformation Progress
After years of sluggishness, the transformation programs in Europe for greater efficiency are generally having an effect. According to a study by Bearingpoint, European banks achieved an average cost-income ratio (CIR) of 62 percent, the best figure since 2013.
Scandinavian banks performed best with a CIR of 49.1 percent, while German institutions brought up the rear with 70.4 percent. This is to some degree attributable to the high costs of some institutions' restructuring programs. German banks also ranked last in the comparison in terms of return on equity, which averaged 4.5 percent.
Bubbling Profits
According to the authors, key drivers for the improved efficiency were not only the extensive transformation and digitization programs but also a stable earnings situation during the pandemic. Since the feared wave of bankruptcies did not materialize, many institutions were able to release large parts of the provisions set aside for this purpose. As a result of this progress, European banks were able to report their highest profits since the analysis began in 2018.
In the study, Bearingpoint analyzed the financial statements of 122 European banks from 2013 to 2021 that are supervised by the ECB or national regulators. The dataset covered around 70 percent of the aggregated total assets of all financial institutions in the EU.
