Points to note

A bull and bear sculpture in front of the Deutsche Boerse in Frankfurt, Germany.

Kai Pfaffenbac | Reuters

The European corporate earnings season began in earnest last week, and analysts consensus predict that earnings per share in the second quarter will increase 140% year-over-year.

Earnings per share is an important indicator used by traders to measure the value of a stock or a broader index, increasing 87% annually across Pan-Europe. Stoxx 600 First quarter index.

Sellside analysts have raised their second-quarter EPS growth forecast by more than 50 basis points over the past six months. Bank of AmericaEuropean Equity Quants Strategic Team.

Meanwhile, the overall consensus EPS growth forecast for 2021 rose from 35% in March to a new high of 48%.

Analysts expect EPS to peak in the second quarter and decline for the rest of 2021, with growth of 32% year-on-year in the third quarter and 21% in the fourth quarter.

Due to the Covid-19 pandemic, there was a sharp decline in the second quarter of 2020, so overall second-quarter earnings for this year’s European Equity Index remained 2% below its pre-pandemic peak. Become.

Bank of America analysts said in a Friday note, “Our macro forecast shows that 12-month futures EPS will rise another 9% by the end of 2021 and could rise 11% by mid-2022. It suggests. “

“This brings an overall increase of 50% from last year’s valley, almost in line with the recovery of EPS after the global financial crisis.”

On the sector, analyst consensus shows that automotive, retail, and resources showed the strongest revenue growth in the second quarter. Consumer discretion, energy and finance have jointly contributed 29 percent to the 48 percent revenue growth of the STOXX 600 this year, according to BofA analysts.

“The 12-month futures EPS for resources has been revised upwards by almost 60% in the last 6 months. This is the highest earnings momentum ever and the relative EPS momentum for energy is the highest in 25 years. It’s close to 45%, “they said. ..

“Despite strong earnings improvements, relative prices in the resource sector have declined, energy has fallen below the market by 15% since March, and mining has fallen by 12% since May.”

The latter trend has led to the lowest price-earnings ratio in the energy sector in history, emphasized by BofA, but the mining industry is the lowest since 2008.

Deployment of cash reserves

Based on a systematic analysis of post-revenue communication of companies in the previous quarter BNP Paribas We anticipate more capital investment announcements, share buybacks and M & As in the second quarter.

Buybacks occur when a company buys its own shares on the stock exchange, reducing the proportion of shares in the hands of investors. They provide a way to return cash to shareholders, along with dividends, which is usually consistent with a company’s stock being pushed up as it runs out of stock.

Viktor Hjort, Global Head of Credit Strategy and Analyst Team at BNP Paribas, said companies appear to be taking care of both bondholders and stockholders as the reporting season begins.

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Leverage continues to decline and the liquidity ratio (the ability of a company to repay its current debt without raising additional capital) remains close to record levels, Hjort said in a Friday note. did.

Meanwhile, full-scale management has shown more risk-taking in earnings communications in the first quarter in the form of fixed investments, share buybacks and M & A plans.

“Last quarter, cash reserves fell for the second straight quarter. Companies shifted their capital expansion gear from a pandemic defensive stance to an offensive stance, which ultimately led to a decline in the liquidity ratio. “Mr. Hyort said.

Investment Banking: Notable Points

During the pandemic, major lenders have significantly boosted investment bank profits amid rising volatility and significant increases in trading volume. However, investment banking is expected to cool in the next report round.

State side, Goldman Sachs It is unique in that it strengthens historical earnings forecasts against the backdrop of strong investment banking contributions from the strong IPO market.other JP Morgan And Citigroup They are also better than expected, and their plunge is manifested in a decrease in the provision for non-performing loans.

UBS We launched the second quarter report of European banks on Tuesday. Exceeded expectations of recording net income attributable to shareholders of $ 2 billion, An increase of 63% from the same period last year.

Barclays Amit Goel, co-head of the European Equity Survey, said before the earnings report that Swiss lenders could benefit from risk-reduction efforts by domestic rival Credit Suisse.

Goel said Credit suisse In addition to risk mitigation efforts following a series of high-profile governance failures, the subsidence of pandemic volatility will suffer the “double pain” of normalizing fixed income, currency and commodity trading returns. ..

Banks have been exposed to the collapse of supply chain finance company Greensill Capital and the collapse of US family hedge fund Arquegos Capital so far this year, resulting in a review of wealth management leadership.

“Therefore, Q221’s revenue is likely to shrink significantly from the underlying level of Q121, which is below the latest consensus,” Goel said.

“Still, I think investors are downplaying these issues. The real fundamental question is how the group will be restructured in the future. We consider potential IBs. To do. [investment bank] Leverage elimination scenario. “

The trade sector is also focused Deutsche Bank, And Goel expects German lenders to show a “substantially better” year-over-year trading return trend than their peers.

“It will be important to determine how market share will evolve and whether we can maintain (year-round) guidance,” he said.

“We will also look at cost trends that are at risk of deviation from the group’s goals.”

Points to note

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