Europe’s top banks combined net income soared32%to exceed €100billion for first time

Europe’s top banks combined net income surged last year by more than 32% or €26 billion ($29 billion) to hover around €103 billion ($108 billion) for the first time in their history comparing to €78 billion in the previous year، as the 20 biggest continental European lenders achieved the highest profit thanks to rising interest rates which handed most of them record earnings.

Europe’s top banks combined net income soared to €103 billion

Europe’s top banks combined net income of the 20 biggest continental European banks that have reported results soared to €103 billion from €78 billion in the previous year as three-quarters of the lenders in the group achieved the highest profit in their history.

Bloomberg news agency shows that the surge in Europe’s top banks combined net profitability has allowed banks to ratchet up the amount of money they’re returning to investors and bolstered their shares، with an index of the region’s lenders gaining about 20% last year.

Europe’s top banks combined net income will be hard to repeat

Europe’s top banks combined net income will be hard to repeat as the massive profit jump will be confronted with the tailwind from rates lets up، many banks are optimistic that rising fee income will enable them to keep growing the bottom line.

Europe’s top banks combined net income of the 20 biggest continental European banks used by Bloomberg doesn’t include UBS Group AG، the biggest swiss lender، whose profit surged to $29 billion last year on the back of its acquisition of Credit Suisse bank.

Discount to book value Europe’s top banks and US rivals remains persistent

Discount to book value Europe’s top banks and US rivals remains persistent even as net interest margins have improved as t he earnings fillip has allowed European banks to increase dividends and buybacks to €121bn for last year.

Europe’s top banks have received a €100bn windfall from rising interest rates over the past two years، but the long-awaited boost has failed to close a persistent valuation gap as the net interest income climbed from €270bn in 2021 to an estimated €378bn this year، after central banks began rapidly raising rates.

Europe’s top banks loans have grown only 2%

Europe’s top banks loans have grown only 2 % in that time، meaning most of the gains are from wider margins between what banks charge for loans and pay out on deposits of the 20 biggest continental European banks.

The earnings Europe’s top banks has allowed European banks to increase dividends and buybacks to €121bn for 2023 from €90bn in 2021، while better capital returns have translated into double-digit stock price gains for many lenders، almost all still trade at steep discounts to the book value of their assets and their US peers.

Europe’s top banks have outperformed the market by more than 50%

Europe’s top banks have outperformed the market by more than 50 % since year-end 2020 and yet still trade at valuations which imply earnings power 30 % below the forecasts، according to Jason Napier، an analyst at UBS bank.

Europe’s top banks or the 20 biggest continental European banks's biggest concern for executives who are vying to attract new money is that central banks may now start to cut rates as soon as March، renewing pressure on net interest margins، which had only just started to recover after a decade of negative or ultra-low rates.

Fears of recession، weak loan demand and rising defaults

However، Europe’s top banks combined net income of the 20 biggest continental European banks suffer from fears of recession، weak loan demand، the potential for much higher capital requirements and rising defaults that are also weighing on their shares.

With policy rates next due to fall، macroeconomic growth sluggish and tax and regulation changes making life harder for Europe’s top banks،as there’s a clear cyclical incentive to exit for bank shareholders.

Loan-loss provisions for Europe’s top banks will hit €63bn next year

UBS forecasts that loan-loss provisions for Europe’s top banks will hit €63bn next year، up from €31bn in 2021 but that is still a manageable level given banks’ healthy capital buffers، while، it will eat into cash that could otherwise be used for buybacks or dividends.

The 20 biggest continental European banks are also suffering from the fallout of a shortlived banking panic earlier this year، when three US regional lenders and subsequently Credit Suisse failed، forcing governments to step in and broker rescue deals.

Rising earnings mark a welcome normalisation after years of margin compression

Giles Edwards، an analyst for American S&P Global agency، warned that rising earnings mark a welcome normalisation after years of margin compression، but they do not alleviate all of the structural challenges to profitability of Europe’s top banks.

The 20 biggest continental European banks are pleasant to find that some investors and executives are more bullish، such as activist investor Cevian Capital bought €1.2bn of UBS stock this month، betting that the Swiss wealth manager can double its stock price and eliminate the stark valuation gap with its closest peer، American bank Morgan Stanley.

Outgoing Morgan Stanley chief executive James Gorman last week also told the Financial Times that he expected the European discount to start to narrow and the gap willn’t be as large over the next decade as there’s opportunities for the Europe’s top banks.