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European Financial and Healthcare Titans Surpass Earnings, Hinting at Economic Resilience


Lauren Miller

May 20, 2024 - 08:10 am


European Banks and Pharma Giants Exceed Earnings Forecasts, Signaling Upward Revision in Outlooks

Amidst a challenging economic landscape, European banks and pharmaceutical giants have delivered an unexpected boost to the European market with robust earnings in the first quarter, foreshadowing potential guidance upgrades in the near future. This article delves into the performance dynamics of these industries, based on recent findings.

Banks Defy Expectations with Strong Growth

Financial giants in Europe paved the way for a brighter earnings season, surpassing the gloomy projections placed upon them. According to Bloomberg Intelligence data, two key segments of the MSCI Europe Index—the financial and healthcare sectors—not only averted the predicted decline but managed to register earnings growth. Contrary to the anticipated 11% diminishment, the MSCI Europe Index as a whole experienced a less severe drop of 6% in earnings, following the reports almost all the member companies have submitted.

In the United Kingdom, Barclays Plc took the lead, exceeding estimates by leveraging an improvement in its net interest margin, a resilience mirrored by colleagues NatWest Plc and Lloyds Banking Group Plc. A similar scene unfolded in Germany where Commerzbank AG raised its outlook, while Deutsche Bank AG triumphed with an unexpected 7% surge in fixed income in the first quarter, surpassing projections and outshining the performance of many top U.S investment banks.

The financial sector displayed remarkable results, with 71% of European banks beating their first-quarter net interest income consensus estimates. Spanish, Italian, and British banks notably surpassed expectations, although their Nordic counterparts lagged behind. This fortitude could indicate that the profitability gains previously made by these banks are sustainable, as the analysis by KBW suggests.

Moreover, these firms showcased financial prudence with regard to loan loss provisions. Approximately 85% reported provisions totaling €9.5 billion ($10.3 billion), a figure significantly beneath the €11.3 billion guesstimate. This discrepancy arose because the deteriorating credit risk anticipated from the second half of the previous year did not materialize, mitigating the expected financial strain.

Coupling impressive lending income with the undervaluation of loan losses points to conservative earnings predictions that may be subject to upward revisions, a potential reality supported by BI analyst Kaidi Meng. However, it's important to acknowledge that the envisioned profitability must be tempered with a recognition of forthcoming challenges.

As for the pharmaceutical industry, AstraZeneca Plc, Novartis AG, GSK Plc, and Novo Nordisk A/S stand out as prime examples of this earnings season’s unexpected victors. These companies have exceeded first-quarter earnings estimations, thanks in large part to sales that surpassed anticipations and streamlined operating costs. Despite these accomplishments, they maintain conservative full-year guidance—a strategic posture that affords them the flexibility to adjust forecasts upwards if conditions warrant.

Among the brightest of these performers is Novo Nordisk, Europe's most valuable company, which offers the prospect of further elevating its outlook when the clarity on its GLP-1 manufacturing capacity improves, as remarked by Bloomberg Intelligence analysts Michael Shah and John Murphy. GSK potentially follows suit, with the promise of an updated guidance contingent upon a clearer understanding of the Respiratory Syncytial Virus (RSV) vaccine market post the June assembly of the U.S. pharmaceutical regulator, as per Citi analyst Peter Verdult.

Predicting Financial Stability Amid New Challenges

Moving into the rest of the year, 85% of the European lenders also submitted loan loss provisions below market expectations, with the total provisions amounting to €9.5 billion, when an expected figure was around €11.3 billion. The remarkable fact is that this came to be when many were bracing for a worsening credit risk scenario, a downturn that did not happen as previously thought likely.

However, the road ahead may not be free of obstacles. According to BI’s Laurent Douillet, full-year loan loss provision estimates have been set at €48.3 billion, down from €49.4 billion at the start of the year, suggesting an increase in provisions in subsequent quarters. These changes could potentially bring earnings surprises for banks.

The anticipated deceleration of net interest income gains into 2024 is another factor to watch out for. As central banks such as the Bank of England and the European Central Bank ready themselves for potential rate cuts, the full-year consensus suggests a tepid growth of merely 1% compared with the robust 5% growth in the first quarter.

Optimism Tempered by Caution

This cautiously optimistic narrative surrounding European banks and pharmaceutical companies stands testament to their ability to navigate through economic uncertainty. The superior earnings reports signify more than just a fleeting moment of success; they point to an intrinsic resilience and adaptability that bode well for their continued performance.

Moreover, the remarkable surge in earnings points to a wider trend of financial resilience across the European corporate landscape. Despite headwinds such as geopolitical tension, fluctuating interest rates, and persistent uncertainty, these stalwarts of the European economy have demonstrated a remarkable capability to not only endure but thrive.

In summary, the first quarter has laid the groundwork for what could be a year of strategic successes—a year where prudent guidance could lead to further upgrades as companies gain better visibility on the economic horizon.

For further details, click here for an overview provided by Bloomberg.

The industrious efforts of Europe's financial and pharmaceutical sectors to overcome predictions of decline are not just a testament to their resilience but also a beacon of hope for the broader market. As industries grapple with an atmosphere of uncertainty, these companies stand as exemplars of the power of strategic planning and operational efficiency.

In closing, the recent results delivered by these sectors offer a compelling narrative of endurance and potential growth. Analysts and investors alike will closely monitor both sectors in the coming quarters for further signs of guidance upgrades, an indication that the positive trend is here to stay and could be signaling a newfound robustness in the European economic fabric.

The Bloomberg Intelligence analysts, Michael Shah and John Murphy, have been instrumental in analyzing and interpreting the data that sheds light on this remarkable economic phenomenon. With assistance from Michael Msika and Macarena Muñoz, Bloomberg has been pivotal in reporting these developments, providing investors and market watchers with essential insights.

In conclusion, while challenges still loom on the horizon for European markets, the strong performance of banks and pharmaceutical companies in the first quarter has provided a glimmer of hope. It underscores that with the right strategies and a focus on efficiency and innovation, sectors can not only weather economic storms but can indeed flourish amidst them.

©2024 Bloomberg L.P.