The DBRS expects lower profitability for banks in 2024

Below are DBRS’s prospects for European banking in 2024, which are continued good performance, but with increased pressure on financial margins, due to higher interest on deposits and a lower balance sheet, as well as with deteriorating asset quality.

Commenting on the outlook for European banks in 2024, DBRS Morningstar highlights the expectation that “European bank profits will remain strong in 2024, albeit at lower levels than in 2023, due to some pressures on margins and a slowdown in lending growth, as well as… about higher expenses and credit costs.”

The agency highlights that bank liquidity should remain strong, despite pressures on deposit rates, as demand for credit declines in the context of rising interest rates and weak economies.

Capital ratios continue to benefit from banks’ strong earnings, which largely offsets pressure to increase dividends and buy back shares, DBRS highlights.

In the classification of basic EPS (return on common shares) in the first half of 2023, the DBRS analyzes banks from 14 European markets and Portugal appears in third place alongside Italian banks with an average ratio of 13.6%, after Swedish banks, which average ​Its return on common shares is 17.5%; Among British banks, the average ratio is 14.8%. After Portugal comes Belgium with an average of 13.5%, followed by the Greeks with an average of 12.8%. Interestingly, French and German banks are at the bottom of the table with rates of 6.8% and 6.7% respectively.

The expansion in net interest margins since mid-2022 has been the main driver of banks’ profitability in Europe. “However, we also note significant variation in net interest margins between countries. In line with these differences, depending on the country, we expect to see a range of results, from moderate declines to moderate increases in net interest income in 2024.”

In the financial rating agency’s analysis, the countries that in the first half of the year reported a higher rate of fiscal margin (the difference between interest paid and received) are Greece and Portugal. In third place comes Ireland. Why? “Because these banks operate in markets with a high proportion of variable rate loans and have already repriced a significant portion, if not their entire loan portfolio,” DBRS says.

The agency says asset quality is expected to deteriorate. “Banks’ asset quality has continued to improve in recent years, as a result of a generally benign credit environment and monetary and fiscal support measures in periods of stress, as well as the ECB’s proactive policy aimed at reducing non-performing loans (NPL)… However, we are seeing the emergence of We expect a moderate increase in non-performing loans and associated credit costs in 2024. We expect the corporate sector to be affected more than the household sector,” the agency’s commentary said.

Portugal appears here, after Greece, with the highest proportion of credits in Phase 3 (with depreciation), but with an improving trajectory since 2019.

“Banks have benefited from strong earnings in recent quarters, but we expect asset quality to gradually deteriorate due to rising interest rates and continued weakness in most European economies, with the impact on banks’ corporate credit portfolios becoming more pronounced,” says Sonia Forster. , vice president of global financial institutions at DBRS Morningstar.