European Banks Just Did What They Do Before Every Crisis...

Jeff Snider · Atlas FinancialBearish

HSBC's interest-income miss shows higher rates won't reliably lift bank earnings; its caution matters.

HSBC's pretax profit rose 32% to nearly $10 billion, but that was still below analyst expectations, and banking interest income of $11.9 billion also missed estimates. Investors had expected a more bullish outlook from the rate backdrop, and the shares fell as much as 7.5%. Goldman Sachs called the result slightly disappointing and warned that the rate environment may offer less benefit than expected. Snider argues this undermines the common view that higher rates unambiguously expand bank margins and income. Banks need viable projects, growing cash flows, reliable collateral and borrower confidence, and higher rates can reduce loan demand and raise default risk when conditions weaken. Because HSBC is a global institution with exposure across major economies, its caution is more significant, which is why he treats it as a warning against the simple rates-to-bank-profits story.

“If even HSBC can't deliver the expected benefit from higher rates, the simple story about rates and bank profitability, it has to be missing something.”at 2:52

Jeff Snider · Atlas Financial

France's economy is deteriorating despite positive GDP: jobs are shrinking and confidence is collapsing.

Snider argues that a slightly positive French GDP figure hides deteriorating conditions. France has shed jobs for two years, hiring has nearly disappeared, and businesses have become more defensive. Business activity unexpectedly contracted in October. INSEE's consumer confidence index fell five points to 80, its lowest since 2013 and below every Bloomberg forecast. Assessments of past living standards hit their lowest since the series began in 1972, unemployment expectations rose to their highest since the pandemic, and household finance expectations were the gloomiest in four years. Snider links these to the protests and riots about the government's surging debt, six months before a presidential election. He sees the political crisis as a match igniting economic stagnation that had built up for years.

“What has happened is France has been shedding jobs for two years.”at 1:40

Jeff Snider · Atlas Financial

Europe has suffered a persistent growth shortfall since 2008; crisis-era policies have not repaired its credit mechanism.

Europe entered 2008 heavily dependent on bank financing, with fewer alternative channels such as deep corporate bond markets and securitization than the US. When European banks were impaired by the global financial crisis, the main credit mechanism was impaired with them. The 2011 European sovereign debt crisis was a second Eurodollar-style banking crisis, in which banks and governments weakened each other, and Europe fell back into recession without a strong recovery. The ECB's LTROs, negative rates, asset purchases, targeted lending and repeated QE were each labelled stimulus, but Snider argues that a policy that must be restarted, enlarged and renamed repeatedly probably is not repairing the mechanism it claims to fix. Europe has not had an uninterrupted official recession since 2008, but a persistent depression-like shortfall compounds into an enormous loss of living standards over fifteen or eighteen years, which underlies both French unrest and bank reluctance to lend.

“Europe fell back into recession and never established a strong recovery afterward. In fact, the recovery that everybody talked about has been one of the worst we've ever seen.”at 13:14

Jeff Snider · Atlas Financial

French sovereign spreads at their widest since 2011 threaten banks indirectly through funding, valuations and defaults.

French government bonds have suffered historic turbulence, and the spread between French and German yields reached its widest since the 2011 euro crisis. BNP, Societe Generale and Credit Agricole together hold about $60 billion of French sovereign debt. Most analysts see the direct danger as limited, and Snider agrees that the bonds are not about to default. The larger risk is indirect: falling bond prices pressure bank portfolios, higher sovereign yields affect funding conditions and asset valuations, and political turmoil and weak consumer confidence reduce spending. A softer economy then damages borrower cash flows and raises future default probabilities. He argues French banks understand that their sovereign exposure cannot be separated from the surrounding economy, and that the higher yields reflect the premium investors demand for instability.

“That affects banks even without an immediate credit event. Falling bond prices pressures portfolios.”at 9:15

Jeff Snider · Atlas Financial

European banks are turning defensive: tightening credit and buying sovereign bonds, reflecting a credit-cycle downturn.

The ECB's access-to-finance survey shows a net 46% of firms reporting higher bank interest rates, but loan availability deteriorated faster than demand: a net 5% of firms reported reduced access to bank loans versus 1% the prior quarter, while only a net 2% reported lower financing needs. This widens a financing gap in the real economy, affecting both small and large firms. The ECB's bank lending survey shows banks tightening credit and citing worsening risk perceptions and lower risk tolerance, not just the policy rate. Meanwhile, euro-area banks bought nearly €30 billion of government bonds in September after July and August sales, and the buying likely understated because bond prices fell. Snider reads this as banks preferring liquid, collateral-eligible sovereign debt over private loans with credit risk, which is balance-sheet protection rather than deflationary behavior. He frames it as the same environment causing borrowers and lenders to reinforce each other's pullback, a credit cycle downturn that is also visible in the US and China. The French banks BNP, Societe Generale and Credit Agricole hold about $60 billion of French sovereign debt, and he argues they face scrutiny for this exposure.

“Europe's banks are seeing the opposite. They're tightening lending standards. They're reducing loan availability. They're reporting weaker demand and buying more sovereign debt. It's not deflationary behavior. It's balance sheet protection.”at 11:35

Jeff Snider · Atlas Financial

ECB rate hikes are misguided: higher rates destroy loan demand and borrower quality rather than fixing Europe's credit problem.

Central bankers keep insisting higher rates are needed because energy costs might generate renewed inflation, but banks are looking past that because they see higher costs already damaging demand, margins and borrower quality. Snider argues the ECB administers a short-term benchmark rate and does not command banks to finance a factory or approve a mortgage. Those lending decisions depend on expected repayment, collateral values, liquidity, funding markets and confidence. Higher rates can raise some interest income but can also destroy loan demand, raise funding costs, reduce asset values and create future problems. He argues the ECB's rate hikes reflect inflation-fighting credibility while a bank sees weaker cash flow, poor collateral and another reason to reject a marginal borrower. He also argues that central banks treat policy as if they control economic conditions, raising rates to slow the economy and cutting to speed it up, while the actual speed of the European economy never changes.

“Higher rates don't create good borrowers. They can increase interest income that's earned on some assets, but they can also destroy loan demand for other things.”at 15:06