Rates Party Almost Over for European Banks, JPMorgan Says

(Bloomberg) — An 18-month cycle of earnings upgrades for European banks is set to end this year, according to analysts at JPMorgan Chase & Co. 

The peak in interest rates implies earnings growth at lenders in the region will draw to a close, as increases in lending revenue will now be capped, analysts including Kian Abouhossein and Sofie Peterzens wrote in a note Tuesday. They downgraded their recommendation on the shares of four banks including Banco Sabadell SA and ABN Amro Bank NV.

“We are at the point where earnings-per-share downgrades will gather pace,” the analysts wrote. “We see earnings growth coming to an end in 2024 and after a stellar 22% net interest income growth in 2023, we expect limited NII growth in 2024-2025.”

Lenders were the worst performing equity sector in Europe Tuesday, with the Stoxx 600 Banks Index down 1%. The gauge gained 20% last year.

Speculation has been mounting on when the European Central Bank starts to reverse its biggest monetary-tightening campaign, with traders betting on six quarter-point rate cuts, starting in April. Economists, meanwhile, anticipate a first of four moves in June.

JPMorgan analysts now estimates rate to be roughly 1% lower in the long-term than previously modelled, prompting them to cut European lenders’ earnings-per-share forecasts by 4%-5% on average for the 2025/2026 period. 

While the analysts downgraded four banks —  Spain’s Sabadell, Dutch ABN Amro, Italy’s Banco BPM SpA and Bank of Ireland Group Plc — they highlighted several lenders where earnings cuts are less of a risk and which have lower reliance on interest income. 

Their top picks comprise UBS Group AG, Deutsche Bank AG, Intesa Sanpaolo SpA, Banco Bilbao Vizcaya Argentaria SA and NatWest Group Plc.

–With assistance from Joe Easton and Michael Msika.

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