European Banks Blow the Roof Off, For Now

For some, it was countries outside Europe that drove performance. In Europe itself, higher interest rates will help income to a limited extent, while consumers have less of a post-Covid savings cushion than in the US or UK, so debt-payment problems could arise sooner as inflation bites. The sector faces big challenges as economies slow and worries increase about rising costs of living and the threats to energy supplies from Russia.

However, European bank stocks trade at huge discounts to book value and for some that looks unwarranted. BNP, for example, has been reshaping itself to become more balanced, which has helped it weather market storms. Having sold Bank of the West in the US, BNP also has $16 billion cash coming due when the deal closes later this year; that will be split between a 4 billion euro ($4.1 billion) special payout to shareholders and investment in future growth. That investment will not include buying another European bank, scotching the rumored interest in ABN Amro of the Netherlands.

BNP has bulked up its equities-trading business, after taking over Deutsche Bank’s hedge-fund focused prime brokerage and buying out Exane. This has moved it away from a historical reliance on equity derivatives and helped lift stock-trading revenue by 16% in the second quarter over the same period last year in euros, better growth than most global rivals. Calculated in dollars, growth was less than 3%, but BNP does more non-US business than many Europeans, so its true performance is likely somewhere in between.

Also strong was its Global Banking division, which houses investment-banking activities like advising on deals and fund raising, but also corporate lending and transaction banking. A lack of detail makes it difficult to compare this with rival investment banks, although BNP did say second-quarter revenue in European capital markets was down about 26% year-on year, or about half the fall seen by peers.

The fact that this unit’s revenue was flat overall illustrates another theme among US and European banks this quarter. While capital markets have been closed and bond issuance almost entirely non-existent in recent months, companies still needed funding for trade and investment. Deutsche Bank, Barclays and BNP in Europe and JPMorgan Chase & Co. and others in the US have stepped in to lend directly to companies rather than helping them with bond sales.

The pendulum is likely to swing back toward market-based financing once it becomes clearer where international interest rates are going and both borrowers and investors settle on what costs of financing each are comfortable with. That will likely be a theme for next year. For now, however, big universal banks that have corporate and capital markets businesses have been able to defend their revenue by lending more while markets slumber. When bond issuance wakes up, there’ll be more fees available for investment banks, but loan growth will suffer.

There is very little to connect the forecast-beating profits of the likes of Standard Chartered and Banco Santander. So if investors take any lesson from the sector this year, it is likely to be that balance and diversity are the best defense against economic storms.  

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• Junior Bankers Deserve Their Bonuses. Really: Jared Dillian

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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