European Banks Face Profit Challenges Amid Trade Tensions
According to S&P Global Ratings, European banks might see their profits decline if trade tensions with the US escalate, potentially leading to problematic corporate loans.
Credit ratings analysis indicates that institutions like French Credit Agricole, BPCE, Commerzbank from Frankfurt, Dutch Rabobank, and Denmark’s DLR Kredit will likely bear the brunt of these challenges. Interestingly, S&P noted that all 91 banks surveyed are not expected to incur annual losses based on their stress test results.
There’s a fair amount of uncertainty surrounding the US’s approach to tariffs, making investors question how significantly Europe will be affected. Nevertheless, banks in this region, often viewed as indicators of the broader economy, are reportedly facing the recent upheavals with relatively manageable levels of bad loans, bolstered by rising interest rates.
Last month, reports surfaced indicating that the European Central Bank and European Banking Authority are likely to reveal lower capital ratios in their upcoming biennial stress tests compared to previous assessments.
S&P’s testing included three hypothetical situations reflecting the escalation of trade conflicts. In the worst-case scenario, banks could see a median profit decline of 29%, according to a report released on Tuesday.
The five banks mentioned stand out due to several factors: higher potential loss rates, larger loan portfolios, significant total assets, expected dips in profitability, and increased exposure to sectors facing greater economic risks.
A spokesperson for DLR Kredit expressed skepticism, stating that the S&P stress test exaggerates possible losses. They pointed out that only a small fraction, around 4%, of Danish agricultural exports go to the US, suggesting resilience in the sector against economic downturns.
In an email, a BPCE representative acknowledged the concerns raised by S&P while also highlighting their robust banking model. They also noted that S&P recently reaffirmed BPCE’s rating at A+ Stable, one of the highest in the sector.
A spokesperson for Commerzbank chose not to comment, and neither Credit Agricole nor Rabobank responded to requests for input.
S&P analysts, including Nicolas Cernay from Paris, maintained that European banks have significantly bolstered their resilience against credit risks, which they believe is supported by their stress test findings. They are hopeful that upcoming regulatory stress tests will yield similar positive assessments.
The EBA and ECB are slated to publish their test results in early August. These results will aid regulators in determining the capital banks should maintain as a buffer, which will, in turn, influence how much capital is available for investor returns.
