Southern European banks outperform in H1 as lending income outlook strengthens

Italian and Spanish bank stocks performed better than their European rivals in the first half of 2024, driven by upward revisions to estimates for net interest income, their largest source of revenues.

Lenders from the two southern European countries made up 8 of the 11 strongest performing European bank stocks by total return between the end of 2023 and June 19, 2024, S&P Global Market Intelligence data shows, based on a sample of the 35 largest European lenders.

The southern European banks' strong stock performance in the period was mirrored by the degree to which analysts' estimates for banks' net interest income (NII) — the difference between what a bank earns from loans and pays for deposits and other funding — was revised upward over the six months. Seven of the top 11 banks that enjoyed the largest upward revisions to NII were from Italy or Spain, the data showed.

Southern European banks have been the biggest beneficiaries of the rapid rise in interest rates across Europe since 2022. Italian and Spanish banks' loan books have a larger proportion of variable-rate loans compared to many other European banks, while they also derive a larger portion of their revenues from net interest income rather than fees.

Spain's Banco de Sabadell SA enjoyed the largest increase in total shareholder returns in the first half of the year, at 63.5%, the data shows. The stock's performance has been largely driven by a boost to its share price from domestic rival Banco Bilbao Vizcaya Argentaria SA's takeover bid. The bank's shares have risen by almost 18% from April 24, a few days before BBVA's bid was reported, compared to a 0.34% increase during the same period for the S&P Europe BMI Banks Index.

Sabadell's NII estimates saw only a 0.41% upward revision between Dec. 31, 2023 and June 20, 2024, the smallest increase of the 20 banks that enjoyed estimates upgrades.

Northern European banks made up all of the nine worst-performing European banks stocks during the six-month period, the data showed. Banks from northern Europe also comprised all of the 15 banks with the smallest upward revisions to NII during the period.

Northern European lenders tend to have a larger portion of fixed-rate loans on their balance sheets, meaning they benefit less from higher interest rates than their southern European neighbors.

Some northern European lenders, such as those in France, have even seen domestic NII fall since interest rates began to rise due to regulated savings schemes causing a rapid rise in deposit costs and limits on how fast they can pass on higher rates on new loans to customers.

Several of the larger northern European lenders also derive a larger proportion of their revenues from fee income.