European Bank Revival Under Threat From War-Dented Lending

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(Bloomberg) — After cementing their spot as top earnings performers in the fourth quarter, Europe’s biggest banks are entering this reporting season with a shakier outlook as the conflict in the Middle East roils markets. 

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“The scope for positive surprises appears limited,” said Roberto Scholtes, head of strategy at Singular Bank. That’s as net interest margins are “plateauing at best,” credit losses are at cyclical lows, loan growth remains subdued, capital markets activity in Europe was muted in the quarter and the steepening of yield curves came late in the quarter.

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The industry’s recovery may be derailed as the war threatens to impact provisions and loan demand, even if trading volatility offers some respite. While resulting inflationary pressures may result in higher interest rates later this year, which can boost lending income, it would also dent consumer and business spending. 

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The sector’s total revenue expectations of €660 billion ($777 billion) for 2026 have little upside, Bloomberg Intelligence analysts Lento Tang and Philip Richards said, as “softer lending and flatter yield curves offset the jump in the short-term interest-rate outlook.”

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Loan growth targets may be lowered as soaring energy costs hurt consumer sentiment. “The Iran war clouds the pace of any recovery in lending and assets under management, as higher energy prices, market volatility and a more cautious European Central Bank risk delaying the improvement in borrower and investor risk appetite,” Tang and Richards wrote. 

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Large European lenders report first-quarter earnings later this month, with the busiest days on April 29 and April 30 featuring heavyweights including Deutsche Bank AG, UBS Group AG, Banco Santander SA and BNP Paribas SA. 

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While European banking is still the second-cheapest sector in the region after autos, they aren’t cheap anymore by historical standards. The sector’s price-to-earnings ratio stands at about 10, above the 20-year average. As for their forward price-to-book metric, it’s hovering near levels seen before the global financial crisis.

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Some analysts are more optimistic. Higher rates should support UK banks’ net interest income, “more than offsetting potential lower growth in loans” and resulting in high-single digit lending income growth in 2026, Morgan Stanley’s Alvaro Serrano said.

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Citigroup analysts led by Andrew Coombs also expect higher rates to be supportive for earnings, noting that banks are one of the few sectors still seeing upgrades for earnings per share. 

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While trader bets on ECB rate increases surged at the onset of the war, expectations have come down as tensions eased. 

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A de-escalation scenario would benefit banks with “solid fundamentals” that have recently derated, like Societe Generale SA and Santander, Barclays Plc analysts led by Flora Bocahut said. If tensions escalate, retail-oriented and rate-sensitive banks would be better positioned, as well as lenders exposed to countries with fiscal headroom to support consumers and businesses. That includes DNB Bank ASA, Danske Bank A/S and CaixaBank SA.