2024 Euro Banks Outlook: Financial & Regulatory

Executive Summary

  • The operating environment will continue to be challenging in 2024 as economies in Europe stagnate, exacerbated by ongoing inflationary pressures and high, although probably declining, interest rates.
  • Rising interest rates have boosted European banks’ revenues to varying degrees, but the benefits are likely to moderate in 2024, with the spotlight shifting onto how higher rates affect debt affordability for households and businesses.
  • We expect credit losses to rise in 2024, but probably in moderation, and operating expenses to be flat or to increase slightly as a result of high inflation.
  • This means profitability is likely to be reduced in 2024 but looks set to remain higher than in recent years.
  • Overall, banks start the new year with strong balance sheets (capital, asset quality, liquidity) and look well-placed to manage the challenges.

Relative Value

In addition to this Fundamental & Regulatory Outlook, we will be publishing articles in the coming days on relative value and debt supply and a review of our recommendations.

Financial Metrics

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We expect profitability, asset quality and capital metrics to decline gently in 2024, but we think that overall fundamentals will remain strong. The boost from higher interest rates will fade as funding costs rise and central banks begin to cut rates, and profitability will decline but should remain well above the post-global financial crisis average. Cost of risk and impaired loans will probably normalise from levels that are well below the through-the-cycle average as certain sectors are affected by weak economic growth and higher rates. Capital ratios will continue to be managed down as banks increase shareholder distributions, but in a cautious manner given persistently high regulatory requirements. Funding and liquidity will be under pressure, but banks are likely to remain conservative. There will be no major regulatory developments, but regulators will continue to tinker with capital and liquidity requirements, while preparations for Basel 4 will be finalised.

Banking Turmoil 2023

It might not seem like it at the moment, but 2023 was the most turbulent year for the banking sector, on both sides of the Atlantic, since the global financial crisis. As the Basel Committee’s report on the 2023 banking turmoil noted, over the course of 12 days in March, four banks with assets totalling over $900 bn were shut down, put into receivership or rescued – 3 US regional banks plus Credit Suisse.

There were distinct causes for these failures, but the bottom line is that they were all idiosyncratic banks in terms of their business models or deposit bases. The common theme was massive and rapid deposit outflow. By some measures, the five largest bank deposit runs in history took place in 2023, and the speed and size of those outflows was unprecedented.

So what does that tell us? Well first of all, banks can be vulnerable to a catastrophic loss of confidence even if they are reporting apparently solid capital, funding or liquidity ratios. Second, online banking technology makes it easier and quicker to withdraw deposits – no more pictures of queues outside bank branches, as we saw with Northern Rock – while social media can fan the flames. Third, market sentiment around banks is fragile, and the reaction of depositors to falls in a bank’s share price or a widening of its CDS seems to be more extreme than we have seen before.

The more positive aspect of these failures was that they did not result in widespread contagion, at least not for very long, and there was no broader crisis of confidence. In fact, if you look at the sector today, there is not much sign of the disruption we saw back in March.

Setting the Scene

Our Outlook for 2024 is of course rooted in our view of the European banking sector at the end of 2023. In summary:

Macroeconomic uncertainty persists. Economic growth across Europe stagnated in 2023, and the outlook remains uncertain. While inflationary pressures have eased, inflation is expected to remain above central bank targets in 2024. Geopolitical risks are increasing, including the war in Ukraine, the crisis in the Middle East, hostility between China and Taiwan, and tensions between China and the US/Europe. Economic growth in the EU and UK is expected to remain weak, although the labour market has been resilient and the unemployment rate is forecast to remain at historically low levels.

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