European bank stocks surged 20% year-to-date, facing a test in the earnings season

According to the Smart Finance app, several of Europe's largest banks will announce their second-quarter earnings this week. Everyone is watching to see if the income from interest rate hikes has weakened and whether recent political turmoil will impact market sentiment.

The market expects the European Central Bank to cut interest rates for the second time in September. However, so far, banks have unexpectedly shown strong profitability, and their stock prices have continued to rise.

Analysts at JP Morgan stated that European banks still have a low sensitivity to interest rates, and the proportion of customers transferring cash to accounts with higher interest rates is also low. Analysts expect that the banks' Net Interest Income (NII) will remain strong.

However, the analysts added that in a situation of high expectations and stock prices nearing a nine-year high, the recent financial reports of U.S. banks this month have shown that the market "will not tolerate NII below expectations."

Intensive Bank Financial Reports

On Wednesday, the two largest banks in the Eurozone - Santander Bank (SAN.US) in Spain and BNP Paribas in France, as well as Deutsche Bank (DB.US) in Germany and UniCredit in Italy, will announce their quarterly reports for April to June.

Spanish bank Sabadell will release its financial report on Tuesday, with competitor BBVA in a hostile takeover bid. Sabadell's performance will be closely watched as the bank tries to convince shareholders that operating independently would be better.

On Thursday, Lloyds (LYG.US) will kick off the UK bank earnings season, while NatWest (NWG.US) will announce its financial report on Friday. Barclays Bank (BCS.US) and HSBC Holdings (HSBC.US) will report their earnings next week.

Last week, Banco Santander said that its loan income remained strong in the second quarter due to rates being higher than expected. The bank raised its 2024 NII expectations, and its stock price surged.

Elena Iparraguirre, who tracks European banks for Standard & Poor's, said, "We expect these banks' profitability to remain robust."

Iparraguirre stated that she will focus on "the extent of NII contraction and its quarterly changes" to better understand the banks' prospects for 2025.

Thanks to a commitment of €120 billion ($130 billion) in dividends and stock buybacks, European bank stocks have risen by 20% this year, while the Euro Stoxx 600 index has risen by 7%.

However, due to concerns about the sustainability of profits, most bank stocks are still trading below their tangible book value.

JP Morgan analysts pointed out that based on the two-year forward price-to-earnings ratio, European bank stocks are trading 43% lower than U.S. bank stocks, compared to a historical average of 27%.

In June this year, as support for populist parties in Europe surged, French President Macron announced early parliamentary elections, causing the stock prices of BNP Paribas and Societe Generale to plummet.

Given investors' concerns about the potential for a less market-friendly left-wing government in Paris, they will be eager to hear the banks' views on the outlook Investment Banking Department Takes the Lead

European banks with large investment banking departments are expected to benefit from increased investment banking activities, including higher underwriting and advisory fees.

Following the announcement of better-than-expected performance by Wall Street banks, analysts predict strong quarterly results from the investment banking departments of Deutsche Bank and UBS. UBS will release its financial report on August 14th.

Analysts suggest that equity trading revenue will exceed the same period in 2023, while fixed income, currencies, and commodities (FICC) revenue will remain subdued.

However, Deutsche Bank may report a loss in the second quarter, reversing a trend of 15 consecutive profitable quarters, due to investors filing lawsuits against its subsidiary, Postbank