European Banks, good news from 2017 results

European Banks, good news from 2017 results

5 aprile 2018

Massimiliano ColucciaMario Bernasconi

Profitability looks robust, thanks to a decrease in credit risk and pervasive cost control


Profitability of major European banks looks robust in 2017, thanks to a decrease in credit risk and pervasive cost control. Net interest income is still weak, given the low interest rates environment, but fees and commissions are still on an upward trend. Solvency improved thanks to retained earnings and capital increases as well as decreasing RWAs. On average capital buffers on the SREP requirements are higher than 300 bps making the forthcoming regulatory changes and new accounting standards easier to face.


Net income has increased for the majority of the banks

European leading banks reported a growth in profits in 2017. Net income has increased for the majority of the banks, driven in particular by higher fee and commission income and a significant improvement in the cost of credit risk, while the net interest income is still affected by low interest rates (with the exception of banks operating also overseas, in South America or the Usa). Nevertheless, operating costs increased due to higher personnel expense (mainly due to new companies included in the scope of the consolidation) [1] or to one-off restructuring costs and IT investments (in particular for digitalization processes). Loan loss provisions decreased for most of French, Dutch and German banking groups, driven by improved loan quality. On the contrary, Spanish banks registered an increase in loan loss provisions as a result of new acquisitions and of a decrease for loans granted in Europe offset by an increase in those in Latin America. Overall, the profitability of European banks looks robust, with a ROE above 6% on average (excluding the two German and the four Italian banks), and mainly unchanged from 2016.

Fig. 1: ROE (%)
European Banks, good news from 2017 results
Source: Prometeia calculations on presentations, press releases and annual reports
*ROE of BBPM 5.7% (excluding the badwill following the completion of the Purchase Price Allocation process deriving from the merger between the Banco Popolare and BPM Groups). ROE of BISP 6.6% (excluding the public contribution of 3.5 billion euro and 363 million euro deriving from the badwill related to the acquisition of assets and liabilities and certain legal relationships of Banca Popolare di Vicenza and Veneto Banca).

Profitability improved for the four main Italian banks

The CET1 ratio of German and Dutch banks, which was already high, increased further thanks to both retained earnings and a decrease in RWAs. The capital ratios of Deutsche Bank and Rabobank also benefited from the capital issuance completed in the first half of 2017.

The four main Italian banks reported similar trends to those of the other major European banks. Profitability has generally improved, supported by a strong fee income increase and a decline in loan-loss provisions, which in 2016 had been affected by the decision of some banks to increase the NPL coverage. In addition, operating costs went down in both personnel (headcount reduction) and other administrative items, as a result of actions taken to contain expenses put in place over the last few years. The average CET1 ratio reached 13.37%, +316 bps than in 2016, mainly as a result of Unicredit’s capital issuance and the precautionary recapitalization and burden sharing measures for Monte dei Paschi (MPS).

Fig.2 CET1 ratio phased-in (%)
European Banks, good news from 2017 results
Source: Prometeia calculations on presentations, press releases and annual reports

Focusing on CET1 ratio (Tab.1), on average Dutch and German banks show the higher ratio, followed by Italian, French and Spanish banks. Looking at the SREP results for 2018 (of the banks who disclosed them), Pillar 2 requirements are higher for Italian banks (2.25% on average) and for Deutsche Bank with 2.75%, a value near to the requirement imposed on Monte dei Paschi. The request of extra buffers is mainly stemming from concerns on risk management and governance as illustrated by ECB in the report about SREP results [2]. Major European banks have a high capital buffer above the SREP requirement: more than 450 basis points for the banks located in Italy and Netherlands, and around 350-400 basis points on average for the other banks.

These buffers are important for banks in view of the forthcoming regulatory changes and new accounting standards (IFRS9) [3]. The table below shows the preliminary impacts of the IFRS9 first time adoption (without taking into account transitional arrangements) on fully loaded CET1 ratio, as declared by the banks themselves: they range from a few basis points to more than 150 bps for some Italian banks [4].

Tab. 1: CET1 ratio 2017 phased-in, IFRS9 impacts* and SREP req. phased-in (as from 1/1/18)
European Banks, good news from 2017 results
Source: Prometeia calculations on presentations, press releases and annual reports
*Preliminary IFRS9 impacts estimated on CET1 fully loaded.

In their year-end results many banks also disclosed estimates of the impact of other regulatory changes, such as the adoption of the EBA guidelines on the estimation of PD and LGD of defaulted assets and the so-called “Basel 4” regulatory framework. They are far from negligible and highlight the need for solid capital buffers above regulatory minimum thresholds.

[1]  The main changes in the consolidation perimeter with respect to the previous year are: the acquisition of Banco Popular by Santander in June 2017 (following the resolution of Banco Popular by European and Spanish authorities); the inclusion of Pioneer Investments in the scope of consolidation of Credit Agricole as a subsidiary of Amundi (July 2017); the acquisition of the Portuguese bank BPI by Caixa (February 2017). 
[3] The European Union has formally endorsed IFRS 9 (the new accounting standard for the classification and measurement of financial instruments), with the Commission Regulation 2016/2067 of 22 November 2016. The IFRS 9 mandatory adoption date is 1 January 2018. Banks will be allowed to phase in the impact of the first time adoption of the impairment requirements to own funds until 2023.
[4] The Impact of the IFRS9 FTA on Italian banks is largely driven by the level of impairments on stage 3 credit exposures related to asset disposal plans.