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 But even though the banks' assets are growing as a result of lending
money or doing deals, their profitability remains below target, loan
losses are still a burden and many businesses across Europe still
find it tough to borrow cash.
Europe's 30 largest listed banks, battered by the crisis and
regulatory demands that followed, shrank their balance sheets by 10
percent from 2008 to 2014, shedding about 2 trillion euros of assets
by selling businesses or chunks of loans.
This process has contributed to a squeeze on lending which has not
helped Europe's weak economies revive growth. The European Central
Bank last week stepped in with a new plan to get more money flowing
from banks into the flagging euro zone economy.
"We are on an improving and healing trend across Europe, but there
are degrees of healing," said Vincent Montemaggiore, Boston-based
portfolio manager at Fidelity, one of the world's largest investment
houses.
"Generally, in the northern part of Europe you're starting to see
some early signs of asset growth and loan growth, and in the
southern part you're still seeing declining assets but at a more
moderate pace."
Montemaggiore said he was not expecting bank assets to grow very
robustly in either the north or south of the region over the next
couple of years.
Data compiled by Reuters shows the 30 banks - which include the
likes of Deutsche Bank, Bank of Ireland and Santander - added 530
million euros of assets in the six months to June, taking the total
to 23.1 billion euros.
In the first half, the growth rate of 2.2 percent was flattered by
an accounting change as Santander consolidated its U.S. results,
helping the Spanish lender come in as the third fastest growing bank
with a 54 million euros rise in assets.
The fastest growing was France's Societe Generale, with an increase
of 108 million euros as it acquired full ownership of derivatives
brokerage Newedge and expanded its global banking and investor
solutions business. BNP Paribas followed with an increase of 96
million euros.
MUTED GROWTH
Politicians and regulators have been pushing banks to lend more, but
as Europe struggles to grow and flirts with deflation, or falling
prices, the incentives for companies or households to borrow are
less. The European Commission expects the EU to grow by just 2
percent this year, with economies such as Spain, Germany and France
expected to expand more slowly.
The banks themselves are under pressure to hold more capital to
support loan books, deterring them from making new loans.
"Asset growth is expected to remain muted until economies
sustainably recover (prompting a rise in demand for credit) and
until capital (in particular leverage) rules are clarified," Justin
Bisseker, European Banks analyst at Schroders, said.
"We are certainly not in a 'normal growth phase'."
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Guy de Blonay, fund manager at Jupiter, said banks must view any
expansion through a profit lens. "They have one point in common,
they are all pushing for improvement in their ROE (return on
equity)," he said, referring to a measure of bank profitability.
"Whether it is buying more businesses or bolting on acquisitions, or
by getting rid of non performing or under performing business (that
is the aim)."
De Blonay pointed to Caixabank's recently-announced purchase
of Barclays' Spanish retail arm as an example of banks sticking to
the areas where they already lead, to increase the chances of
improving returns.
ROOM FOR IMPROVEMENT
The 25 banks which reported return on equity for the first half of
the year managed an average of just 7.1 percent, according to
Reuters' data, well below the double-digit figures they are aiming
for.
The weakest performer, Austria's Erste Bank, had a return on equity
of minus 16.8 percent as a result of unusually high losses on its
eastern European businesses.
"You'd expect below normal RoEs at this point in the interest rate
cycle and at this point in the provisions cycle," said Montemaggiore.
He pointed to the record-low central bank rates which make it harder
for banks to make money.
He said profits should naturally improve as bad debts fall and banks
get better at controlling costs.
In the first-half, the top 30 banks' cost/income ratios, a measure
of what percentage of income goes on costs, improved marginally to
58.6 percent from 59.3 percent.
Loan losses remained a problem across the group, wiping 27.7 billion
euros off their earnings and sucking up 10.5 percent of their total
income. But they were less of a problem than in the first half of
2013, when the tally was 40.2 billion euros, or 15 percent of total
income.
Bissiker said some banks could enjoy write-backs, clawing back money
they had set aside for loan losses, and that while litigation losses
were a threat, other exceptional losses should be smaller from 2014.
"Tolerance of low RoEs is improved at present as risk-free rates
have fallen to generational lows," he said. "Ultimately, however,
banks need to generate returns above cost of capital to justify
growth."
(Additional reporting by Olivia Hardy; editing by Jane Merriman and
David Clarke)
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