Spotlight: Improving macro picture provides boost to bank earnings

European banks have started the year on a strong footing, releasing earnings that on average handsomely beat analysts’ expectations. Strong earnings were driven by improving macroeconomic scenarios, resilient credit quality of bank lending books and resilient pre-provision profits, despite rates headwinds. Capital ratios continue to remain strong at near all-time high levels, providing bondholders with abundant excess capital. Using Barclays as an example, the group delivered a 14.7% return on equity in Q1 2021, close to a threefold increase year-on-year. Revenues benefited from another strong quarter for the firm’s investment bank, which offset weakness in retail banking due to low interest rates. The bright spot of the results was that Barclays took a charge for loan loss of only GBP 53 million compared to GBP 2.1 billion in Q1 2020. Looking in more detail, the bank released some macro provisions as macro forecasts for the UK and US have improved thanks to strong vaccination campaigns. This shows that provisions have been front-loaded in 2020 and made based on conservative assumptions (likely too much taken). The group’s common equity tier one (CET1) ratio declined slightly to a still strong 14.6%, or GBP 11 billion / 3/5% of excess capital / headroom above the maximum distributable amount (MDA) hurdle. We continue to see strong results as a positive driver for subordinated debt markets, with strong and resilient credit quality as the catalyst for performance.

Sustainability has also been at the heart of bank results – driven by mounting pressure from regulators, investors and other stakeholders. We have seen new commitments to becoming net zero by 2050, more granularity on environmental strategies and environmental, social and governance (ESG) more broadly, including increased targets on green financing. The creation of the Net Zero Banking Alliance, founded on the back of the UN Climate Change Conference of the Parties (COP26) in Glasgow, and regrouping 43 banks representing close to USD 30 trillion in assets reflects the trend towards setting credible net zero targets. As an example, Barclays announced its net zero strategy (covering lending and capital markets) with a granular sector approach and committing to GBP 100 billion of green financing by 2030. 

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