Spotlight: European bank earnings Q4 2020 – The slow path to normalisation

While earnings have been under pressure, as expected, bank solvency has exceeded estimates and European Central Bank (ECB) projections, with capital ratios ending the year higher. This is supportive for bondholders. Moreover, while 2020 proved to be a real-life stress test, the banking sector has been resilient beyond expectations. As such, February’s full year 2020 earnings season has confirmed that from a credit standpoint, everything is on-track. Finally, we note that Q4 2020 marked a gradual path back to normalisation with lower credit losses and shareholder pay-outs being put back on the table.

Key takeaways:

  1. Solvency continues to be the bright spot of bank earnings with capital positions having consistently improved from Q1 2020 showing that bank resilience has clearly been above expectations. The average CET1 ratio increased to 14.2% from 13.4% pre-Covid-19. 
  2. Asset quality remained robust in Q4 2020 with credit losses now trending back to pre-Covid-19 levels with a cost of risk of just under 60 bps, which is less than half of peak levels in Q1 / Q2 of around 120 bps of loans.
  3. Outlook for profitability remains challenging in the short term, which is mostly an equity story. However, the key takeaway from a bondholder’s perspective is that banks have demonstrated their ability to remain profitable despite a real-life stress test scenario in 2020.

Implications for the fund: We maintain our positive stance on the banking sector underpinned by robust solvency and the ability to absorb Covid-19 related uncertainty. We believe investors will continue to focus on asset quality this year, closely monitoring non-performing loan formations as well as confirmations of a normalisation of loan loss provisions. Stress tests will also be a key element of the calendar, with the European Banking Authority (EBA) expected to provide granularity on the resilience of individual banks in July. Given residual uncertainty, we believe it is appropriate to focus on banks with capacity to absorb a prolonged Covid-19 scenario without jeopardising credit fundamentals. For this reason, we remain focused on the top European banks, either global systemically important banks (G-SIBs) or national champions.

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    220,240,618GAM Star Crdt Ops EUR InvIE00B50JD354-0.00190.05960.5789-0.195.9657.89
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    420,240,618GAM Star Crdt Ops USD InvIE00B57693100.00070.05090.77200.075.0977.20
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