Off the back of the recent European Bank earnings season, Peggy Lin from FIIG’s Research Team, provides an update on key themes and opportunities for bond investors to come out of the recent reporting period.
The 1H25 earnings season for European and UK banks reinforced the sector’s strong fundamentals, despite headwinds from lower reinvestment yields, macro uncertainty, and rising credit provisions in select segments. Major banks delivered solid results, underpinned by diversified income streams, prudent credit risk management, and robust capital buffers.
This backdrop supports a constructive view on bank bonds—both senior and subordinated—particularly for investors seeking defensive income, sector diversification, or relative value across the capital structure. While net interest income (NII) has begun to plateau, fee-based revenues and cost discipline continue to drive earnings resilience, and asset quality remains sound.
Key Themes from 1H25
1. Resilient earnings driven by diversification
Banks with broader income bases across trading, insurance, wealth, and corporate banking performed more consistently amid volatility. Fixed income, currency and commodities (FICC) trading and fee-generating services played a critical role in offsetting overall margin pressure. NatWest, Barclays, and Santander posted double-digit returns on tangible equity (RoTE), reflecting earnings stability across both retail and institutional segments. The French banks—BNP Paribas, Crédit Agricole, Société Générale (SocGen) and Groupe BPCE (BPCE)—also benefited from their diversified business models. BPCE reported strong revenue growth across all divisions, with particularly robust performance residential mortgage lending and insurance. SocGen showed continued momentum from its transformation program, while Crédit Agricole remained fundamentally strong but faced ongoing pressure in its French retail franchise. Deutsche Bank’s results were supported by strong trading income and tight cost control, while ING’s solid retail and fee performance was partially offset by weaker wholesale banking and margin compression.
2. Net interest income stabilising at elevated levels
Although the tailwind from rate hikes is fading, NII held up well for most banks. Those that had locked in structural hedges, repriced deposits early, or actively managed product mix, such as Lloyds, NatWest, BNP, and Santander, were better able to preserve net interest margins (NIMs). Among French banks, Crédit Agricole’s NIM was impacted by the high cost of regulated savings products and shifts in deposit mix, but early signs of improvement emerged in Q2. Livret A (a government-regulated, tax-free savings account that significantly affects deposit funding costs in France) saw its rate increase during 2022 amid rising inflation, which in turn elevated funding costs for French banks. In 2025, however, the government implemented two rate cuts from 3.0% to 2.4% in February, and further to 1.7% in August. These reductions are expected to support margin recovery in 2H25 for the French banks. BPCE’s NII benefited from the easing in regulated rates and showed solid growth, further supported by a sharp rebound in residential mortgage production. Meanwhile, ING and HSBC faced greater pressure due to intense deposit competition and lower reinvestment yields, though both expect a modest rebound through volume growth and improved asset mix in the second half.
3. Credit quality remains sound amid normalisation
Loan impairments rose slightly, mostly in commercial real estate (CRE) and unsecured consumer lending, areas previously supported by pandemic-era stimulus. These increases reflect a return to normal, not systemic stress. Stage 3 (non-performing) loans remained stable or declined at BNP, ING, NatWest, SocGen and BPCE, signalling healthy underwriting. Deutsche Bank, HSBC, and Lloyds remained cautious on office-sector CRE and have built forward-looking provisions. Provisioning levels across the sector remain well below pandemic peaks and are supported by additional management overlays, reflecting prudence rather than distress.
4. Capital and liquidity buffers remain robust
European and UK banks continue to operate with strong balance sheets. Common Equity Tier 1 (CET1) ratios averaged above 12% with overall capital level comfortably above regulatory requirements, providing a key cushion for bondholders and ensuring access to wholesale funding. Liquidity positions were equally strong. Most banks reported Liquidity Coverage Ratios (LCRs) exceeding 130%, well above the 100% threshold. Ample holdings of high-quality liquid assets, combined with stable deposits and diversified funding sources, further enhance liquidity resilience. Many banks also reaffirmed capital return programs, including dividends and share buybacks, underscoring management confidence in earnings durability.
Implications for Bond Investors
From a credit perspective, 1H25 results reaffirm the strength of European and UK banks. Stable earnings, sound credit quality, and high capital and liquidity buffers provide strong support for both senior and subordinated bonds. While margin compression and modest increases in provisions are expected in 2H25, the sector appears well positioned to absorb these pressures. We continue to see selective opportunities remain across the capital structure:
- Senior preferred bonds offer secure income with low credit risk.
- Tier 2 capital instruments benefit from strong buffers and continued profitability.
- AT1 securities, while structurally riskier, are supported by healthy fundamentals and offer attractive yields for well-capitalised issuers. As always, selectivity matters. Focusing on banks with strong provisioning, robust capital, and high reset margins is critical, particularly in the AT1 space.
Despite tighter spreads versus prior years, the overall risk-adjusted return profile for high-quality European bank debt remains compelling.
Conclusion
Following strong 1H25 results from European and UK Major banks, we see a supportive backdrop for bank bonds and believe they offer portfolios a defensive income, sector diversification, and relative value across the capital structure.