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It’s not just for bondholders that it’s worth taking a look behind the facade of the brilliant financial statements and key figures of European banks. Many are still not profitable enough. The shadow banking sector and especially private debt also pose risks. The liquidity of internationally active banking groups is often tied up in foreign financial centers. The credit rating watchdogs at I-CV have little concern about a takeover of Commerzbank by Unicredit.
The fact that large European and US banks are currently in good shape based on indicators such as the quality of loans granted, profitability, capitalization and liquidity was one of the findings of the Swiss Bond Congress 2024 in mid-September, which was also reported finews.ch reported.
In the meantime, the organizer, Independent Credit View (I-CV), which specializes in credit ratings, has also sent its customers a detailed study on the health of the big banks finews.ch also available. Recommendations can also be found there.
Market leader instead of niche provider
From a bondholder’s perspective, the credit rating specialists generally recommend giving preference to market-leading, broadly diversified banks with robust business and financial profiles over niche providers. For example, institutions that only operate in the market for commercial real estate financing are described as unattractive for normal bondholders (without collateral).
From a fundamental perspective, JP Morgan Chase and Bank of America are preferred over Citigroup and Wells Fargo in the US.
Differentiation is worth it
In Northern Europe, according to I-CV, the Norwegian DNB, the Danish Nykredit and the Swedish Skandinaviska Enskilda Banken (SEB) offer potential. In Western and Southern Europe, favorites include the Dutch ING Groep, the Belgian KBC, the British Lloyds, the Swiss UBS, the Austrian Erste Group Bank, the Italian Unicredit and Intesa SanPaolo, as well as the Spanish Banco Santander and BBVA. In France, BNP Paribas, Crédit Agricole and Crédit Mutuel are given preference over Groupe BPCE and Société Générale.
The quality of assets is at a high level thanks to the friendly economy, stricter regulation and better risk discipline of the banks, which is reflected in a historically low ratio of problem loans; Even in the weakest quarter of the banks examined (all 163 banks supervised by the European Banking Authority EBA) it is below 3 percent.
Trickery and migration into the shadow banking sector
However, it is worth taking a close look at how the value was created in each individual case. I-CV speaks, for example, of “trickery” by domestically oriented Spanish banks that transformed problem loans into securities or investments. The banks now held well-known minority stakes in real estate companies owned by financial investors, who took over large parts of their problem loans.
In addition, as a result of well-intentioned regulation, a lot of traditional lending business has moved from banks to the shadow banking sector. “Banking supervisors and investors only have an imperfect insight into the volumes, structures and risks of private debt investments and into the interdependencies of banks and other weakly regulated lenders,” warns I-CV and fears that in a sharper recession the demand for Private credit and thus the supply of credit for companies will decline significantly, which could also lead to losses for the banks.
Shareholder skepticism towards European banks
In terms of profitability, the banks benefited from the fact that they had improved their cost discipline after the long dry spell in the interest business due to the low interest rates. However, there are major differences in efficiency measured using the cost-income ratio, which can also be attributed to the structure of the national markets.
In addition, many institutions still do not manage to cover their imputed equity costs, complains I-CV. This is also reflected in the lower stock market valuation of European banks compared to their peers from other regions of the world. The bondholder should use this skepticism from the shareholders for guidance.
