European banks are expected to post another quarter of resilient earnings this week, supported by higher interest rates, improving loan growth and steady trading and investment banking activity, following a strong earnings season for major U.S. lenders, Reuters reported.
Analysts expect European banks to report healthy second-quarter results, although headline year-on-year profit growth is likely to be more modest than in previous quarters. Investors will also watch management commentary for signs that geopolitical tensions, particularly the Iran conflict, have begun to weigh on economic activity or business confidence across the region.
Goldman Sachs forecasts an 11% year-on-year increase in second-quarter pretax profit for European banks. Reuters reported that the investment bank expects earnings to be supported by stronger loan volumes, improved lending margins as interest rates remain elevated since the start of the Iran conflict, rising non-interest income and continued cost discipline.
The earnings season begins on Wednesday with Italy's UniCredit and Spain's Santander, while France's BNP Paribas is scheduled to report on Thursday. Next week, Britain's Barclays, Germany's Deutsche Bank, Switzerland's UBS and Spain's BBVA will announce their quarterly results.
Strong run continues
European banks have enjoyed more than two years of improving profitability, driven by wider lending margins following higher interest rates and relatively low credit losses. Reuters reported that the strong earnings momentum has helped banking stocks become some of Europe's best-performing equities.
The EURO STOXX Banks Index has doubled over the past two years, reaching its highest level since the 2007-2008 global financial crisis. The rally marks a significant turnaround after years of subdued profitability, during which European lenders struggled to compete with larger and more profitable U.S. rivals.
Adding to the sector's positive outlook, the European Commission last week unveiled proposals aimed at reducing political interference in European Union banking mergers and easing barriers to cross-border consolidation, a move intended to strengthen the region's banking industry.
Despite the optimism, analysts remain cautious about potential increases in bad loan provisions and the impact of sluggish economic growth across Europe.
Investment banking gap remains
Trading desks are expected to benefit from heightened market volatility linked to the Iran conflict, while merger activity and initial public offerings have supported investment banking revenues.
However, Reuters reported that U.S. investment banks continue to outperform their European counterparts, benefiting from stronger domestic market activity and continued gains in market share.
Morgan Stanley forecasts investment banking revenue growth of 21% for UBS in the second quarter, reflecting its strength in equities trading. In comparison, BNP Paribas is expected to post growth of 7%, while Societe Generale is projected to record a modest 2% increase, well below the more than 30% gains reported by several major Wall Street banks.
The brokerage has recommended Deutsche Bank shares, describing the German lender as the most attractively valued bank in its European coverage. It remains underweight on UBS due to uncertainty surrounding proposed Swiss banking regulations.
French banks' trading businesses will also be closely monitored after delivering weaker-than-expected results in the previous quarter.
Focus shifts to recovery
For lenders in Spain and Portugal, analysts believe concerns over lower interest rates have largely eased.
According to Reuters, Deutsche Bank analysts expect positive net interest income and continued loan growth to reinforce confidence in the sector, with investor attention increasingly turning toward the pace of earnings recovery rather than the impact of declining rates.
As Europe's largest banks prepare to report, investors will be looking not only at quarterly profits but also at management outlooks for lending demand, credit quality and the broader economic environment amid ongoing geopolitical uncertainty.
