As anticipated, European banks’ earnings are receding from their very high 2024 levels, as monetary policies have caused contractions in financial margins at many banks, stated the financial rating agency in a release today.
This trend in financial margins — resulting from the difference between interest charged on loans and interest paid on deposits — was recorded in the first quarter, primarily in Portuguese, Nordic, Greek, and Dutch banks.
Despite this, European financial institutions have reported strong revenues from commissions and capital market activities, leading the financial rating agency to expect these revenue trends to remain intact for the rest of the year.
Morningstar DBRS also noted that asset quality remained solid, though the outlook varies by country, also citing impacts from U.S. policies.
Potential U.S. tariffs and geopolitical uncertainty may moderately pressure asset quality in the medium term; however, banks in countries with stronger economic growth prospects and less exposure to the U.S. may not require additional provisions, the commentary’s authors added.
Despite lower results than last year and increased geopolitical instability, Morningstar DBRS’s forecast for the European banking sector remains positive, with a positive trend in 26% of the agency’s rated banking portfolio.
The commentary also noted that merger and acquisition activity has “gained momentum” in recent months, highlighting the purchase of Novo Banco by the BPCE group.
In a scenario where these transactions represent a search for higher earnings through commissions or access to new technologies, the purchase of Novo Banco by the French group also demonstrates the potential for greater geographical diversification through cross-border acquisitions.
Nevertheless, this is an exception, given what the agency views as a still fragmented regulatory landscape in Europe, citing political challenges in transactions in Italy (Unicredit’s purchase of BPM), Spain (BBVA’s purchase of Sabadell), and Germany (Unicredit’s potential purchase of Commerzbank).
The Portuguese banks analyzed by Morningstar DBRS included Caixa Geral de Depósitos, Millennium BCP, BPI, Novo Banco, Caixa Económica Montepio Geral, and Santander Totta.
