European banks may find it tough to repeat strong end-of-year performance

By Tommy Reggiori Wilkes and Jesús Aguado

LONDON/MADRID (Reuters) - European banks are expected to report a sharp rise in profits for the final three months of last year, helped by still-robust margins from lending and bumper investment banking revenues.

But lenders will be quizzed for evidence on whether the good times can continue, with analysts warning that falling interest rates will make it harder to beat forecasts this year.

Thanks to a run of rising profits and shares trading at their highest since 2010, banking executives are generally ebullient and some are using the extra cash to bid for rivals - potentially the start of a long-awaited consolidation wave.

"More confident in their financial standing and bolstered by positive market repricing, some European banks are levelling up their ambitions," S&P said.

The ratings agency said this could be diversifying their product lines or building scale, while inorganic growth and partnership opportunities were back on the agenda.

Some of that ambition was on display with UniCredit buying a stake in Commerzbank last year and unsolicited takeover offers in Spain and Italy, including last week's surprise offer by Monte dei Paschi for larger rival Mediobanca.

The banks' M&A specialists are preparing for increased corporate dealmaking activity too as the U.S. economy surges ahead. But they also worry that Donald Trump's new government will slash red tape for its banks, potentially disadvantaging European institutions faced with economic weakness at home.

Christian Edelman, managing partner for Europe at Oliver Wyman, told Reuters he expected "solid results" from European banks, with buybacks and dividends remaining at elevated levels in 2025.

"However, the gap to US banks is likely to grow as European banks' franchises are less skewed towards Investment Banking which will benefit from M&A and deregulation as well as Markets businesses which will benefit from higher volatility," he said.

Germany's Deutsche Bank and Spain's BBVA report on Thursday, France's BNP Paribas and Societe Generale and Switzerland's UBS next week, and Britain's Barclays and HSBC among others later in February.

Analysts have been revising up fourth-quarter forecasts on expectations that net interest income - the difference between what banks earn on loans and pay on deposits - is declining more slowly than predicted.

U.S. banks this month reported surging investment banking revenues, raising expectations for European banks with large trading divisions.

But European banks must contend with the likelihood that the European Central Bank and Bank of England will cut rates faster than the U.S. Federal Reserve.

Earnings last week from Spain's Bankinter showed lower rates eating into lending income, although it was offset by a rise in fees.

Outperforming targets this year will be harder.

JPMorgan said French banks' 2024 net profits targets "are well within reach, but the bar is increasing for 2025". BNP Paribas's 12.8 billion euro net profit target "looks particularly challenging due to weaker top line trend," JPMorgan said.

Deutsche Bank is expected to report fourth-quarter net profit attributable to shareholders of around 380 million euros, down from 1.26 billion euros a year earlier, based on a consensus forecast.

The German bank has said that the quarter was dented by legal provisions, restructuring costs and other one-off measures.

Analysts expect BBVA to report higher fourth-quarter lending income growth in Turkey and South America, offsetting a slowdown in Spain and Mexico. Investors will also be listening for any update on BBVA's offer for Sabadell, including potential competition commitments.

(Additional reporting by Tom Sims. Editing by Jane Merriman)