Banks’ nonperforming loan (NPL) formation remained low in the recent quarter, the analysts noted in their coda to the recent reporting season.
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While surprises over levels of bad loan provisions are “viewed as low quality by the investment community”, the analysts said “we think they matter nevertheless and must not be underestimated”.
This is because they flow directly into the bottom line “and therefore into capital generation, TBV growth and potential distribution to shareholders”.
Should the macroeconomic environment and NPL formation remain more benign than expected, the Jefferies banking team said Barclays and NatWest appear “best positioned for potential reserve releases in our view”, among the UK lenders.
Overall, Q1 of this year was the third consecutive quarter the European banking sector beat consensus earnings expectations by no less than 50%, driven by the revenue beat accelerating and provision beats stronger than the previous two quarters.
Revenues are “resilient”, the analysts said, with net interest income (NII) under pressure but higher non-NII revenues.