S&P report on European G-SIBs says rising margins offset higher inflation
Europe’s largest banks are on track to meet their performance targets, except for cost efficiency, S&P Global Ratings said in a report titled “European G-SIBs Monitor H1 2022: Rising Margins Offset Higher Inflation.” The report, updated semi-annually, compares the credit profiles and main credit trends of the 13 European banks that the Financial Stability Board has classified as global systemically important banks (G-SIBs).
Improving interest margins boosted the returns and thus the profitability of many European G-SIBs in the first half of 2022, moving them closer or even substantially ahead of management guidance. Despite earnings improving, cost efficiency remains a key area in need of improvement. However, cost efficiency (cost-to-income ratio) targets vary substantially, between 45% for Santander and over 70% for UBS. After years of capital build-up, most European G-SIBs have met or exceeded their capitalization targets, although recent market turbulence has affected some.
Most banks posted high-single to double-digit revenue growth in the first half of 2022, with the notable exception of Credit Suisse. Steady loan growth and rising interest rates boosted net interest income, and banks expect this to continue. Investment banking activities saw a more mixed picture, with trading activities performing particularly well on the back of increased client flows, while advisory businesses suffered from declines in fees, especially compared with a very high base in the first half of 2021.
Operating costs were slightly up for most banks, but less than revenues, barring exceptional litigation or restructuring costs, meaning positive jaws and rising operating income for most. Banks are pursuing cost-discipline programs, compensating for inflationary pressures on wages and other noninterest expenses for now. Banks did not report any notable rise in defaults. Stage 3 loans remain at historical lows relative to total loans, especially after UniCredit’s clean-up exercise.
Looking ahead, banks remain cautious about the macroeconomic outlook (rising inflation, lower growth) and therefore continue to build or maintain provision buffers against performing loans, albeit less assiduously in the second quarter than in the first. A further deterioration in the outlook could lead to new provisioning decisions later this year.
Most European G-SIBs have stable outlooks, but primary outlook drivers differ across banks. For some, efforts made to restructure operations in the past few years have been sufficient to stabilize the ratings, but future rating prospects largely hinge on the ongoing delivery of their strategies. For others, future rating drivers revolve more around the evolution of the macroeconomic environment.
