Pressure on French banks’ core profitability from tighter credit conditions is not denting their credit profiles. The recent round of results was solid and the prospect of better macroeconomic conditions in Europe is credit positive for the rest of 2023.

Tuesday, June 13th 2023 - 3:30 PM (CEST)

With yet another reassuring set of results behind them, Europe’s large banks look remote from resolution so now is a good time to reassess whether the existing resolution framework is still capable of delivering what it is expected of it.

The updated methodology, now final following a call-for-coment period, will apply to all covered bonds ratings.

US banking turmoil and Credit Suisse’s sale to UBS have highlighted how vulnerable banks still are to bank runs. Supervisors are increasingly focusing on banks’ liquidity risks.

Spanish banks reported a strong set of first-quarter results, driven by year-on-year growth of 40% in net interest income, which more than offset the impact of the bank levy. Scope expects NII to be the main tailwind for stronger earnings in 2023.

Prospects for 2023 earnings at Italian banks have improved. Latest projections point to year-on-year growth in net interest income of around 27% at the same time as cost of risk guidance was confirmed despite record-low levels in the first quarter.

Recent events regarding Credit Suisse and US regional banks have a direct read-across to covered bonds in that it was not credit quality but liquidity that led to the banks’ downfall, plus the crystallisation of market-value losses on high-quality assets.

We expect non-performing loans to rise in 2023 as inflation and higher interest rates weigh on demand and profits. This will reverse the trend of the past decade but banks are well prepared to face any deterioration in asset quality.

The uncertain economic environment continues to push European house prices lower. But challenges are also crystallising in net residential mortgage lending, which nosedived to almost zero in the half year to February 2023, only slowly reverting in March.