Breakingviews - EU bank surge masks discrete capital soap operas
Lenders across Europe used to trade miles below book value due to a vicious cycle of negative rates and insufficient capital ratios. Second-quarter results from France's $106 billion BNP Paribas, opens new tab(BNPP.PA), opens new tab and $65 billion Deutsche Bank, opens new tab(DBKGn.DE), opens new tab on Thursday show how rising rates and European rearmament plans have flipped the script. BNP made a return on tangible equity of 11.6%, while Deutsche managed 10.1% - both ahead of year-end targets. Stripping out the unhelpful effect of the stronger euro, the banks' fixed income and currency trading operations rose in line with or above the 15% year-on-year jump Wall Street rivals managed.
The upshot is a stark re-rating: Deutsche shares have jumped from around half of expected tangible book value in January to above 80%. Yet both the German bank and BNP lag $134 billion Spanish rival Banco Santander's (SAN.MC), opens new tab 1.2 times multiple. One potential driver is the three banks' different capital situations.
Neither BNP boss Jean-Laurent Bonnafé nor Deutsche Chief Executive Christian Sewing have a solvency headache: the French bank's 12.5% common equity Tier 1 (CET1) ratio is over 200 basis points above its minimum level as stipulated by the European Central Bank, and Deutsche's 14.2% ratio is similarly comfortable. But investors in a utility-like sector are laser-focused on share buybacks, and anything that could conceivably diminish them.
By selling, opens new tab her Polish assets in May for 7 billion euros and flagging a 13% CET1 ratio, Santander boss Ana Botín has nixed lingering fears that her bank lacks enough capital for its Latin American-heavy business. That raises investor confidence that a 10 billion euro buyback programme will be maintained.
In contrast, BNP and Deutsche's capital outlooks appear fuzzier. A recent ECB interpretation may mean Bonnafé can't fully use the so-called Danish Compromise capital wheeze to bed down last year's AXA Investment Managers deal, which could reduce the bank's CET1 ratio by up to 35 basis points. Meanwhile Deutsche's risk-weighted assets might balloon, opens new tab by over 100 billion euros by 2033 if reforms reducing the flexibility in calculating these RWAs aren't watered down.
Neither of these count as real capital angst – especially as Deutsche is confident it can mitigate most of the pain. But now that banks are a defensive sector again, they're held to a higher bar. To hurdle that and trade above tangible book value, investors need more than hopeful words.
Follow George Hay on Bluesky, opens new tab and LinkedIn, opens new tab and Pierre Briancon on Bluesky, opens new tab and LinkedIn, opens new tab.
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