On Tuesday, the ECB warned banks of a range of financial, inflation, geopolitical and economic concerns associated with the slowing economy. Concerns are compounded by market disappointment over measures that could impact banks’ profitability, including taxes on the sector.
In his final press conference as president of the ECB’s (European Central Bank) Supervisory Board, Andrea Enria said banks will face challenges from more restrictive financial conditions, persistently high inflation, geopolitical tensions and macroeconomic forecasts that point to a sharp slowdown in economic activity.
Enria argues that in a context of rapid macroeconomic adjustment and heightened uncertainty, investors are looking beyond regulatory metrics and standard key performance indicators, examining “the economic value of banks and looking for any signs of weakness in their model businesses.”
During the presentation of the results of the review and assessment process for supervisory purposes for 2023, he said that the normalization of monetary policy is likely to further impact banks’ funding costs and interest margins in the future.
Profitability will also be threatened by emerging downside risks, including credit risk and fair value losses, he added.
“These concerns – along with investor frustration that some governments are imposing taxes, fees or other government policies that negatively impact banks’ bottom lines – are also reflected in the fact that current market valuations of banks in the eurozone have not risen significantly higher than before. level. -pandemic level,” Enria said.
“Despite progress in recent years, the persistence of low price-to-book ratios indicates that investors remain skeptical about the long-term sustainability of banks’ strong earnings,” he said.