Key highlights include:
- 1Q25 earnings: European banks reported another strong quarter, with median profits 7% above consensus. The strength was largely driven by cost control, solid trading income, and low provisions. Capital positions remain robust, with CET1 ratios stable or improving across most banks.
- Macro backdrop & market view: Financials outperformed Non-Financial Corporates in 2024 and continued to show resilience in 1H25 supported by the positive fundamentals and positioning. We continue to favour an overweight on the sector on the basis that financials should outperform in a soft landing scenario.
- Preferred positioning: We continue to favour Senior over Subordinated debt but are adjusting our stance within the Senior segment with Senior Non-Preferred now upgraded to Overweight, while Senior Preferred is downgraded to Market Weight following YTD performance. We maintain a selective Marketweight view on both Tier 2 and AT1 instruments, where valuations remain stretched in our view. Within Senior Preferred, we still see value in select regional issuers offering more attractive spreads compared to national champions.
- Supply dynamics: As of the end of May, total European banks supply stood at €205bn, which is up +5% vs the same period in 2024. However, amongst our core Western European coverage, only 58% of MREL-eligible losses for 2025 have been replaced, a notable slowdown compared to 73% by this time last year, reflecting higher refinancing needs but also a more cautious issuance pace amid a volatile 1H25.
Top trade ideas into 2H25 included in our report:
Senior Preferred:
- Buy BPEIM 4% ’31
- Buy BACRED 1% ’29
- Buy CAJAMA 4.125% ‘30
Senior Non-Preferred:
- Buy BNP 3.583% ‘31
- Buy HSBC 3.313% ‘30 & Sell STANLN 0.8% ‘29
- Buy RABOBK 5.71% ‘33 ($)
Tier 2:
- Buy UCGIM 7.296% ’34 ($)
- Buy EUROB 4.25% ‘35
- Buy DB 3.742% ’33 ($) & DB 7.079% ‘34 ($)
AT1:
- Buy ABANCA 6% & ABANCA 10.625%
- Sell DB 8.125%
- Buy SOCGEN 8.125% ($)