Despite the meteoric performance of EU banking stocks, the sector may encounter difficulties in the run-up to the European elections, with the joint deposit guarantee policy still unresolved.
The large European banks have experienced solid growth thanks to the resurgence of negotiation of agreements and the high income of the investment banking. The banking index Euro Stoxx (SX7E) has gone up a 19%while the index Euro Stoxx 600 (SXXP) has risen almost a 9% this year. The index has also beaten its US counterpart, the SPDR Select Sector Fund (XLF), which is up 9% so far this year.
The main reason that led the sector to obtain better results was that the profits of the large banks in the first quarter exceeded the lowest bar of market expectations, which may also provide opportunities for further valuation improvements. However, the imminent elections to the European Parliament They can generate uncertainty in the sector. The new leaders have not yet addressed the issue of the joint deposit insurance policy, raised again by the ruling party in power.
The European banking union is not yet complete
In April, the European Parliament approved a plan to create a common deposit insurance fund for banks in the European Union (EU). This is a response to growing risks in the banking system following the collapse of US regional banks and the bankruptcy of Credit Suisse last year. The measure aims to establish a European Deposit Guarantee System broader to implement joint deposit protection.
Indeed, European leaders recognized the need to establish a banking union in response to the global financial crisis (GFC) of 2008, with the aim of improving the stability and integrity of the banking system within the EU, especially within the eurozone. The common deposit guarantee scheme, introduced in 2015, was one of the three pillars within the framework of the European Banking Union. These three pillars encompass the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the European Deposit Insurance System (EDIS).
While the first two parts were launched in 2013 and 2014, the joint deposit insurance system has been subject of controversy and has been an obstacle to the unity of cross-border banks. Joint deposit insurance is intended to provide liquidity to participants in the system, and all other contributors are required to lend funds if requested by the board. Grants authority to the single resolution board to use and manage the fund.
The system faced the opposition of member countries, with particular concern on the part of banking lobbies, which expressed concern that a shared insurance system would reduce the incentives of banks and national regulators to manage risks prudently, since they could rely more on the collective safety net. This certainly poses problems amid the resurgence of right-wing parties, which are often critical of the European Union.
Spanish banks, at the head
European banks have come a long way since the European debt crisis between 2008 and 2012. According to a Bloomberg report, 71% of European banks They exceeded market expectations in their results for the first quarter of this year.
Los Spanish banks have shown special strength in benefiting from the rise in interest rates, which has boosted its loan income. In the last decade, the country’s banks have managed to increase their efficiency by reducing staff and branches.
The income of the main Spanish bank, the Santanderincreased 10% year-on-year in the first three months of this year, driven by the increase in credit income due to the high interest rates. His national counterpart, the Banco Bilbao Vizcaya Argentaria SA (BBVA), also posted an 18% increase in its top line during the same quarter. Both banks said they were on track to meet their targets for this year, with their shares up 22% and 14% respectively so far this year. Santander surpassed its French counterpart, BNP Paribas, in market valuation, regaining the crown of largest bank in the EU.
Other large banks, including Italy’s largest, Intesa Sanpaolo SpA, also reported an 18% annual increase in net income, thanks to increased commissions from the wealth management and insurance divisions. Intesa shares are up 32% this year. Furthermore, the German lender’s net profit Deutsche Bank It increased 10% year-on-year, driven by the recovery of its investment banking, and its shares have advanced 21% so far in 2024.
On the contrary, French banks have only recorded modest profits due to their dependence on fixed rate mortgages. The largest financial institution in France, BNP Paribasrecorded a decrease of 2.2% in its net profit and 0.4% in its revenue during the first quarter.
However, the results exceeded analysts’ expectations. Meanwhile, its investment banking segment, which comprises the advisory and deal finance teams, is seen as a key driver of its growth. The division posted a 6.1% increase in global banking revenue. BNP is the biggest laggard among the EU’s big lenders, with its shares only up 5% so far this year.
Future risks
In conclusion, even if banks maintain their bullish momentum, the outcome of the EU elections may pose a potential risk. The systemic stability of banking may be threatened at a time when there is no integrated solution in response to a “banking” type crisis.
