Some global banks have posted bumper profits — but don’t buy their shares yet, strategist says

Published Wed, Oct 26 202211:21 PM EDTUpdated Thu, Oct 27 20222:11 AM EDT

"I would certainly not invest in European banks right now." Those are comments from one investment advisor despite lenders on the continent posting bumper third-quarter results this week. Beat Wittmann, chairman of Porta Advisors, told CNBC that lenders are in a tough trading environment as the region is facing a recession over the next three to six months. Corporate clients at lenders are themselves struggling as rising inflation eats into their profits. According to Wittmann, this is likely to hurt banks' bottom line. "Investment banking, M & A, IPO, financing is much, much less — a fraction of last year," he added. Wittmann said even private clients in the wealth management divisions — normally a very lucrative portion of the bank — are also "de-risking" their portfolios leading to smaller fees for the lenders. Earlier in the week, UBS said it earned $1.7 billion for the quarter. Despite the results, the equity research team at Barclays Research maintained their 'sell' rating on the bank's shares. "In wealth management there were still deposit outflows, and some deleveraging, and AuM [assets under management] finished lower than anticipated despite higher net new money," they said in a note to their clients. Barclays on Wednesday reported net profits of £1.5 billion ($1.73 billion), while Deutsche Bank revealed a net income of 1.12 billion euros ($1.11 billion). Both banks beat analyst expectations for the quarter. Wittmann is not alone in cautioning equity investors, though. Luke Hickmore, investment director at Abrdn, told CNBC that although the banks appear to be well prepared for an economic downturn, it may take until spring to gauge whether those measures have been sufficient. Barclays said it had set aside £381 million for potential loan losses, which is an increase of more than 200% from last year. The lender said it was expecting a "deteriorating macroeconomic outlook." "We need to see them get through this period. We need to see their modeling actually come through correct," Hickmore said. Profits from net interest margin — the difference between what a bank earns in interest on loans and pays on deposits — has risen for many European lenders thanks to central banks raising rates. "We are seeing the benefit of interest rates come through in our corporate bank and private bank," James von Moltke, CFO of Deutsche Bank, told CNBC's Joumanna Bercetche. Deutsche Bank's net interest margin grew to 1.5% in the quarter, up from 1.4% in the prior quarter and from 1.2% in the year-ago period. But this income source for banks is unlikely to be long-lived as European capitals debate imposing a "windfall tax" on banks' profits. Spain has already imposed a temporary levy on banks and large energy companies for two years and is now proposing extending those taxes. The country aims to raise 7 billion euros in 2023 and 2024 to help ease cost-of-living pressures. "There is a risk that the more profitable banks get, the more regulators, central banks and politicians start focusing on those profitability numbers and thinking actually, 'this is a source of revenue,'" Hickmore added. Christian Sewing, CEO of Deutsche Bank, said in a statement that Germany's largest lender was "well on track" to meeting its 2022 goals but only expects to achieve returns on tangible equity above 10% by 2025. ROTE below 10% poses "another problem," according to Hickmore, as rising rates mean investors have other investment options, like corporate debt, that offer a better return. "That whole push towards better returns is only happening. We're not there yet," he added. Hickmore said that senior debt from European banks is more attractive now as they are immune to many risks banks face. "You're taking on a lot less risk with earnings, a lot less risk with the future, and [loan loss] provisioning than the equity investors."

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