Investors dumped European banks for a second day on April 4 as concern around US tariffs spread. The 22 banks we cover have declined by 11% over the last two days. Italy’s Unicredit UCG and UK bank Barclays BARC led the decline, while Sweden’s Handelsbanken SHB and France’s Credit Agricole ACA also lost ground.
Why it matters: Although European banks aren’t directly affected by the tariffs, investors worry about the indirect impact on their clients’ solvency and potential compression of net interest margins. Additionally, some investors may be using European banks as a proxy to short the broader European economy.
• The decline in US demand for European exports will claim casualties among exporters, raising unemployment. Banks are expected to increase loan loss provisions, anticipating defaults from struggling exporters and their newly unemployed workers.
• The anticipated economic slowdown could compel European central banks to cut interest rates more aggressively than expected. This, all else being equal, would likely compress net interest margins, further squeezing banks’ profitability.
The bottom line: Our primary concern is credit quality. European banks’ loan loss provisions have remained below mid-cycle levels since the pandemic. However, many banks prudently locked in higher rates in their hedging books, mitigating worries about margin compression.
• Despite recent volatility, European banks’ share prices are up about 8% on average year-to-date, trading near our fair value estimates. Our top picks no moat BNP Paribas BNP and narrow moat Lloyds Banking Group LLOY are both trading 11% below our fair value estimates.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
