In 4Q24, EU banks’ earnings dropped from the previous quarter (-3% QoQ) as positive developments in NII (+3%) and Commissions (+6%) were offset by a reduction in other income (-36%). Net interest margins were broadly stable QoQ at 2% albeit Peripheral banks (-5bp QoQ) underperformed Core peers (+5bp QoQ) which benefitted from a higher share of non-€ lending. Mgmt. guidance for 2025 remained upbeat in terms of total income with a moderately declining or stable NII being offset by higher fees and volume growth.
Credit metrics remain solid with non-performing assets -2.6% lower QoQ which resulted in the average NPL ratio to decrease c.8bp to 2.0% on average. Reported capital decreased by an average 19bp to 15.33% at 4Q24 (3Q24: 15.52%) mostly on the back of the ongoing shareholder distributions, while RWAs were broadly unchanged. CET1 buffers declined in line with the lower capital levels and the average buffer to the minimum requirements stood at 482bp (3Q24: 507bp) as of end-2024.
Despite the solid fundamentals, we conclude that investors should consider reallocating into higher quality names, including names that offer a compelling credit profile that is able to withstand a deterioration in the rates environment due to a diversified source of income. In the presentation you will find the full list of our current top picks and our views on individual credit profiles.
Looking at valuations, the gap between financials and Non-Financial Corporates (NFCs) has largely closed and the compression trade which represented the majority of 2024 might see a change in direction in 2025 with peripheral assets showing some underperformance YtD. We confirm our preference for Senior over Subordinated bonds mostly on the back of unfavourable technicals and unattractive risk premia. Also, we remain selectively positive on AT1s acknowledging the asset class still benefits from lower extension risk as well as an attractive all-in yield which supports investors demand.
Top trade ideas included in our report:
Senior Preferred:
- Buy SANTAN 3.5% ‘30
- Buy UCAJLN 3.5% ‘29
- Buy BACRED 1% ‘29
Senior Non-Preferred:
- Buy KBCBB 4.932% ‘30
- Buy BNP 3.583% ‘31
- Buy ACAFP 3.75% ‘31
Tier 2:
- Buy BACR 4.973% ‘36
- Buy CAJAMA 5.25% ‘31
- Buy DB 3.742% ‘33
AT1:
- Buy ABANCA 6% or ABANCA 10.625%
- Buy BCPPL 8.125%
- Buy SOCGEN 8.125%