Since the invasion of Ukraine, European banks have encountered major share price falls. Investors were concerned that the close operations with neighboring Russia would face severe major losses. So far, EU banks trading only cover two-thirds of their tangible book value. Based on the analysis from Deutsche Bank, the offering is only the average dividend yield of 6.4%.
Scope Ratings’ head of financial institutions team, Marco Troiano, however argued that instead of the trouble the banks could still hang in there. Although the credit provisions are not in a good condition, they will remain profitable. He also added that the capital requirements also remain large. Facing pandemics, the banks typically buffer below 300bp. But the typical figure now is 500bp.
Based on the above’s analysis, it signifies that the banks could still reach their target standard. They have added flexibility to organic growth. M&A as well as the capital distribution. Among many other banks, he argued that Nordic banks are more resilient to the possibility of credit losses. They have built up high profitability before lowering the levels of credit risk.
Meanwhile, German banks were the most vulnerable during this situation. This is because they have lowered earning capacities. In other words, they are subject to capital buffers. Among many of Troiano’s choices, KBC and UBS are also resilient. He noted that both banks could survive the situation. They could even withstand a tenfold increase especially in credit provisions but still be profitable. He hopes that the situation should remain supportive for bank credit. The better interest-rate environment with more than offsetting a mild deterioration in credit quality should soften. Although inflation could somehow help the banks, they are still subject to pitfalls.
