An Earnings Beat Doesn’t Help Banks’ Bleak Outlook By Bloomberg

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(Bloomberg) — Once again, European banks tried hard in the latest earnings season, but ultimately failed to boost sentiment. Expectations were low and hence several lenders were able to post a beat, yet many banks warned of a challenging outlook as yields in Europe hit all-time lows.

Citigroup (NYSE:) notes that seven out of nine regional markets under their coverage were able to surpass estimates, with the strongest positive surprises from Spanish and Swiss lenders.

But the results were not enough to create a lasting positive impact overall as analysts pointed to low quality numbers driven by investment banking, which might not be sustainable, or lower provisions and other one-time effects.

Strategists at Deutsche Bank (DE:) say the past quarter’s pretax profit growth remained negative for a second time, representing a “significant inflection point” as the industry’s profitability seems to have peaked in 2018.

Revenue headwinds have accelerated since the ECB added a more dovish bias into its monetary policy outlook, while leaving the market waiting for any decision on tiering which would mitigate the effects of low rates on banks.

The outlook for net interest income and margins has deteriorated and Deutsche Bank’s analyst expects the rate pressure to intensify as forward-looking curves have significantly declined. Shaky markets also paint an unlikely scenario for investors to do a lot of trading or look for (high-fee) risky assets. The consequence: fees fell 6% from the previous quarter.

And the headwinds won’t stop with rates or fees as banks face the prospect of higher provisions as the trade spat’s marks on the global economy get bigger with the credit cycle at an advanced stage. After falling for eight consecutive periods, provisions rose in both quarters this year overall.

So it’s little wonder that the earnings consensus has dropped 7 percentage points for 2019 and another 10 points for 2020, according to Citigroup’s calculations. Hence bank shares are Europe’s worst-performing sector this year, with the SX7P down 10% YTD — and they might struggle to change that. In the meantime, are down 0.2% ahead of today’s open.

SECTORS IN FOCUS TODAY:

  • Watch Italian stocks, especially banks, as the country’s senate delays a no-confidence vote. Senate leaders on Monday failed to agree on a date for the confidence vote that could bring down the curtains on the country’s populist coalition, pushing back a decision until Tuesday. The full upper chamber will set a date at a session beginning at 6 p.m. in Rome.
  • Watch shares exposed to Argentina after the peso dropped to a record, stocks plummeted, CDS surged and bond yields jumped after President Mauricio Macri’s primary debacle, which sparked fears of a full-blown financial crisis. European stocks exposed to Argentina include steelmaker Tenaris, gaming firm Codere, Spanish lenders BBVA (MC:) and Santander (MC:), food retailers DIA and Carrefour (PA:) and telecoms group Telefonica (MC:).

COMMENT:

  • “Consensus earnings growth expectations for 2019 have fallen from around 4% to 2.6% currently. The consensus forecast for 2020 earnings growth remains close the 10%. We expect consensus for both years to be revised down further in the coming months,” Bernstein strategists write in a note.

NOTES FROM THE SELL SIDE:

  • Blue Prism has been an exceptional growth story since it listed but the U.K. software firm is facing emerging issues meaning its days of “hyper-growth” may be behind it, Berenberg says in a note initiating co. at hold with 1,200p PT.
  • InterContinental Hotels is now trading close to fair value, and with multiples toward upper end of historical range, Berenberg says in note lowering rating to hold from buy.
  • Wacker Chemie upgraded to buy at Citigroup as polysilicon prices are set to recover and following a recent drop in the shares, analysts including Thomas P. Wrigglesworth say in note.
  • Investors should consider a short position in U.S. technology stocks, according to Societe Generale (PA:). The analysts cite increasing regulatory scrutiny, new taxation rules and further pressure on earnings momentum as reasons for their bearish view.

COMPANY NEWS AND M&A:

  • Henkel Cuts 2019 Guidance as Quarterly Profit Misses Estimates
  • Swiss Life 1H Operating Profit, Net Income Beat Estimates
  • Aareal Bank Second Quarter Operating Profit Meets Estimates
  • DSV Says Panalpina Settlement Is Expected August 19
  • Muddy Waters Says It Welcomes FCA Scrutiny on Burford Capital
  • Sixt Second Quarter Revenue Beats Highest Estimate
  • Ceconomy Confirms Full-Year Outlook as Revenue Declines
  • Deutsche Wohnen First Half Ebitda EU381.9 Mln
  • Kendrion Second Quarter Ebitda EU11.1 Mln
  • Wienerberger Second Quarter Ebitda 1.6% Above Estimates
  • Scout24Second Quarter Revenue Meets Estimates
  • TKH Sees Full Year Adjusted Net EU106 Mln To EU112 Mln
  • Manz Cuts FY Revenue View; Sees Decline Instead of Rise
  • HelloFresh Sees FY Adj. Ebitda Margin -1% To 1%, Saw -2% To 1%

TECHNICAL OUTLOOK for index:

  • Resistance at 374.5 (61.8% Fibo); ~385 (uptrend); 395.1 (July high)
  • Support at 370.7 (200-DMA); 365.5 (50% Fibo, May low); 356.5 (38.2% Fibo)
  • RSI: 34.6

TECHNICAL OUTLOOK for :

  • Resistance at ~3,400 (uptrend) 3,403 (61.8% Fibo); 3,446 (50-DMA)
  • Support at 3,249 (June low); 3,298 (200-DMA)
  • RSI: 36.4

MAIN RESEARCH AND RATING CHANGES:

UPGRADES:

  • Aeroports de Paris upgraded to neutral at Goldman; PT 164 Euros
  • Austrian Post raised to equal-weight at Barclays (LON:); PT 35.50 Euros
  • Bakkafrost upgraded to hold at DNB Markets; PT 520 Kroner
  • Grieg Seafood upgraded to buy at DNB Markets; PT 140 Kroner
  • LafargeHolcim upgraded to buy at Goldman; PT 59 Francs
  • Leroy upgraded to buy at DNB Markets; PT 74 Kroner
  • Mowi upgraded to hold at DNB Markets; PT 220 Kroner
  • Norway Royal Salmon raised to buy at DNB Markets; PT 230 Kroner
  • Rentokil upgraded to reduce at AlphaValue
  • Salmar upgraded to hold at DNB Markets; PT 440 Kroner
  • Symrise upgraded to buy at Goldman; PT 96 Euros
  • Takeaway upgraded to hold at Deutsche Bank; PT Set to 77 Euros
  • Wacker Chemie upgraded to buy at Citi; PT Set to 77 Euros

DOWNGRADES:

  • Buzzi Unicem cut to equal-weight at Morgan Stanley (NYSE:); PT 21 Euros
  • Croda downgraded to sell at Goldman; PT 44 Pounds
  • Demant downgraded to hold at Handelsbanken; PT 210 Kroner
  • Evonik downgraded to sell at Goldman; PT 21 Euros
  • InterContinental Hotels downgraded to hold at Berenberg
  • Sioen downgraded to hold at Berenberg
  • Symrise downgraded to hold at Baader Helvea; PT 85 Euros
  • ThyssenKrupp downgraded to sell at AlphaValue

INITIATIONS:

  • Blue Prism rated new hold at Berenberg; PT 12 Pounds
  • Vidrala rated new neutral at Citi; PT 83.90 Euros

MARKETS:

  • MSCI Asia Pacific down 1.1%, down 1.2%
  • S&P 500 down 1.2%, down 1.5%, Nasdaq down 0%
  • Euro down 0.19% at $1.1193
  • Dollar Index up 0.17% at 97.55
  • Yen down 0.07% at 105.37
  • down 0.3% at $58.4/bbl, WTI down 0.3% to $54.8/bbl
  • LME 3m down 0.1% at $5738/MT
  • Gold spot up 0.6% at $1519.9/oz
  • US 10Yr yield down 1bp at 1.64%

ECONOMIC DATA (All times CET):

  • 8am: (GE) July CPI MoM, est. 0.5%, prior 0.5%
  • 8am: (GE) July CPI YoY, est. 1.7%, prior 1.7%
  • 8am: (GE) July CPI EU Harmonized MoM, est. 0.4%, prior 0.4%
  • 8am: (GE) July CPI EU Harmonized YoY, est. 1.1%, prior 1.1%
  • 8:30am: (EC) Bloomberg Aug. Eurozone Economic Survey
  • 9am: (SP) July CPI Core MoM, prior 0.2%
  • 9am: (SP) July CPI Core YoY, prior 0.9%
  • 9:30am: (UK) Bloomberg Aug. United Kingdom Economic Survey
  • 10:30am: (UK) June ILO Unemployment Rate 3Mths, est. 3.8%, prior 3.8%
  • 10:30am: (UK) June Employment Change 3M/3M, est. 60,000, prior 28,000
  • 11am: (GE) Aug. ZEW Survey Current Situation, est. -6.3, prior -1.1
  • 11am: (GE) Aug. ZEW Survey Expectations, est. -28, prior -24.5
  • 11am: (EC) Aug. ZEW Survey Expectations, prior -20.3

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