We have seen a slight correction in spreads since President Macron announcement a snap election on June 9th, with French assets in our index (exc. AT1s) widening by 10bp (from a peak of ~30bp) followed by Italian at +8bp and Spanish +3bp.
From a pure fundamental perspective, we see peripheral European banks as well positioned for the YE24, with trimmed ECB rate cut expectations and a stable macroeconomic outlook as the main supporting pillars for banks’ ability to retain current peak profit levels for longer. On the other hand, we will need to wait until after the summer before we start to see the rebound in French banks which, after two years of stagnation, will be one of the sectors that should benefit the most from the decline in funding costs, although political risks surrounding the fixing of their regulated saving rates in the near term and macroeconomic stability in the medium term may still act as a drag on the pace of the recovery.
The market expects peripheral banks to report a slight QoQ decline in profits in the next few weeks from the record-high levels posted in 1Q, which will still leave them at comfortable +7.2% level YoY. Spanish banks will likely outperform their Italian peers in retaining current profitability levels with an expected pre-tax income decline (without the positive supporting element of the banking tax) of only -1.8% QoQ (but still +19.6% YoY) versus -9.7% QoQ for the latter, both driven by a general decline in revenues and an expansion in operating expenses. On the other hand, next quarter French banks are expected to grow their bottom line by 4.1% QoQ on average thanks to a significant reduction in op. expenses (-8.8% QoQ) driven by cyclicality at BNP and SocGen.
Asset quality is also expected to remain solid with the average CoR deteriorating by only 6bp in 2Q24 and NPLs remaining generally in line QoQ (mostly due to further reductions in France). On the capital front, we expect management to maintain shareholder remuneration at healthy levels and, together with RWA inflation, to be offset by organic generation. Market consensus is for a modest build up in the upcoming quarter of c.10bp on average to a 13.7% CET1.
For these reasons, going into the next reporting season we remain better buyers of European banks with a preference for Spanish banks versus Italian banks considering the higher expected growth in P&L as well as the compression in RV reported for the latter YTD (although partly reversed in the last month). Similarly, we have a positive view on French risk post elections with a preference for more diversified and global banks such as BNP or ACAFP (France accounting for only 25% and 41% of revenues respectively) which we consider as less exposed to a slowdown in the French economy.