Heightened policy uncertainty in France and the threat of political instability after parliamentary elections have exposed the country’s banks to significant market volatility and challenged their ability to improve profitability relative to peers.

A sustained period of higher interest rates will present a challenge for many borrowers worldwide, as economies adapt to a new era of comparatively tight monetary policy amid a recovery in growth and enduring inflation.

This year has seen a rise in large bank M&A, reigniting speculation that a wave of consolidation may be imminent. The case for large cross-border mergers remains weak but there is potential for domestic activity in Italy, Spain, Germany and the UK.

Spanish banks saw record net interest income in Q1 while the cost of deposits likely reached its peak. BBVA’s bid for Sabadell could herald a period of consolidation in a dynamic economy offering growth opportunities that could benefit pricing power.

Scope Ratings requests comments on its Covered Bond Rating Methodology by 27 June 2024. The proposed changes to the methodology are not expected to have an impact on outstanding covered bond ratings assigned by Scope.

With better-than-expected operating conditions, 2024 looks favourable for Italian banks. However, latent risks persist, as evidenced by developments around eco tax credits.

With our negative CRE outlook persisting and the collateral values of CRE loans volatile, covenant breaches are also driving up NPLs. Regulators are seeking to address value volatility, but Pfandbriefe are shielded because of cover-pool eligibility caps.

BBVA’s determination to pursue Banco de Sabadell and Sabadell’s confidence in its standalone strategy align with our view of the supportive banking environment in Spain, which remains an attractive market to deploy capital.

Significant efforts have been made since the GFC to improve the supervision of systemically important banks and address the issue of too-big-to-fail. But on this and the effectiveness of AT1s in supporting G-SIB recovery, there is room for improvement.

EU supervisors remain concerned that banks’ real-estate exposure is vulnerable, and US contagion risk is an issue. But while German banks’ CRE portfolios are unlikely to have endangered the safe-haven status of Pfandbriefe, office exposure is a worry.