Large European bank earnings, capital above pre-pandemic levels
Large European bank results will exceed targets for 2021, helped by strong revenue, improved cost control and loan impairment charges (LIC) trending below pre-pandemic levels, Fitch Ratings says. We expect this will help banks start 2022 with recovered earnings generation amid cyclically high capital buffers.
Diverse business models and strong franchises helped the sector’s revenue rebound in 2021. Supportive capital markets trends provided a cyclical boost to revenue from corporate and investment banking and asset and wealth management in 2021. Retail banking also performs decently despite tight net interest margins.
However, the revenue momentum of 1H21 slowed in 3Q21, which is expected to continue as tailwinds expire. The banks are well-positioned to benefit from interest-rate increases but trends could diverge in the case of decoupling of monetary policies.
Continued cost savings initiatives are expected to be announced in 2022 as banks update strategic plans. Further cost/income improvement may be challenged by upward inflationary pressures and increased regulatory costs amid continued investment in technology and selective business growth.
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Government support measures, improved macroeconomic prospects, high loan recoveries and proactive stock management helped reduce impaired loans and resulting LICs.
However, we believe LICs will normalize with the sunset of these measures but that pickup in LICs will be manageable and gradual. Most bank reserves remained stable and are commensurate to respective credit risks, providing buffers against moderate asset-quality deterioration.
Capital ratios will gradually decline as banks deploy excess capital in future quarters. Banks’ median common equity Tier 1 (CET1) was 15.1% at end-September 2021, with capital buffers significantly exceeding requirements.
This should support banks’ ability to absorb potential asset-quality deterioration, while pursuing additional capital distributions, and to finance organic growth or M&A transactions in areas such as asset management, consumer finance or payments.
