A 10 bp ECB rate cut is manageable (and priced in), but further cuts become less so
10 bp cut expected at March 10 meeting…
Our economists expect a 10 bp deposit rate cut, accompanied by a tiering system and expansion of QE.
…this is negative for banks’ earnings
We estimate a 2%-3% EPS decline for each 10 bp deposit rate reduction, in aggregate. The spread, however, is wide, with an impact of up to c.10% on certain banks. The large, geographically diversified banks are least affected. Smaller, domestically focused and deposit-funded lenders (e.g. savings banks) stand to be affected more.
Negative rate policy = incentive to shrink?
The magnitude of share price declines suggests that the market has incorporated further rate cuts in the future. For the banks’ share prices to stabilize, and potentially reverse, this expectation needs to change. This could be achieved by communication of rate “floors”. Without this, the already depressed profitability levels will be expected to decline further – the incentive to shrink, rather than grow, will rise meaningfully.
4Q results picture is weak
Post 4Q, we cut our net income estimates by an average 4%-6% for 2016-18. Primarily, the declines are top-line driven, as revenues missed by 2% on average. The weakest results were reported by the IBs, a trend we believe has continued to some extent in 1Q. Elsewhere, capital formation and distribution have driven share price performance.
CL-Buys: BARC, BNP, BPER, CS
Among the European banks, our CL-Buy stocks fall into two categories: (1) “self-help” potential aided by a clearer regulatory outlook (BNP, BARC, CS), and (2) restructuring of the Euro area banking sector, especially among smaller Italian banks (BPER). On this point, we expect the recent market turmoil to add to policymakers’ sense of urgency.
Among banks reporting thus far, we find BNP to have had the more encouraging 4Q15 performance. In a European sector-relative context, we see BNP as offering positive capital formation, low and falling NPL ratios, strategic optionality and cash dividend. We revise our price targets and estimates for a number of banks in our coverage.