The Road to Recovery for European Banks: A Year After Credit Suisse Collapse
After Credit Suisse teetered on the brink of collapse a year ago, European bank shares plummeted and insuring against default became costly. Investors expressed concern about the stability of lenders during a tumultuous period among U.S. regional banks. However, UBS’s intervention to rescue the struggling Swiss peer brought stability back to the market. Since then, European banks have seen a notable, albeit delicate, recovery, marked by record profits and significant gains in share prices.
Stocks See Impressive Gains
In March of last year, European bank stocks experienced a sharp decline, with Deutsche Bank leading the losses at over a fifth for the month, and the European banking index suffering its worst month since the pandemic began. Fast forward to today, share prices have surged, with UBS seeing a 60% increase and UniCredit nearly 70%. Even BNP Paribas and Deutsche Bank, despite underperforming, have seen gains. The STOXX Europe 600 banks index has been on an upward trajectory for the past five months, reaching its highest point since 2019.
Profitability on the Rise
The recovery in bank profitability can be attributed to higher interest rates, which have bolstered banks’ net interest income. Several banks, including Santander, UniCredit, and British institutions like NatWest, have reported significant profit growth due to increased net interest income. This has allowed many banks to distribute substantial dividends and carry out buybacks. However, as interest rates reach their peak, analysts anticipate a plateau and subsequent decline in earnings.
Resurgence of AT1 Bonds
Additional Tier 1 bonds garnered attention following the write-down of 16 billion Swiss francs ($18 billion) worth of Credit Suisse bonds to zero during the UBS bailout. Although other bank AT1 bonds plummeted in price, some dropping below 80 or even 60 cents on the euro in late March, major banks’ AT1s have since rebounded. Concerns surrounding exposure to commercial property have led to a decline in certain German banks’ bond prices, particularly Deutsche Pfandbriefbank and Aareal AT1 bonds.
Potential Risks in Commercial Property
Commercial property poses a potential vulnerability for banks, as prices have stagnated, vacancy rates have surged, and higher borrowing costs have added pressure to indebted developers. European banks collectively hold 1.4 trillion euros ($1.5 trillion) in commercial property exposure. S&P Global estimates that European bank assets, excluding the United Kingdom, totaled nearly 28 trillion euros last year. Despite efforts to reduce exposure to commercial property, European banks may still face challenges if prices weaken further.
Investing.com provides further insights into the bumpy road to recovery for European banks in the aftermath of the Credit Suisse collapse.