Since the 2008-09 financial crisis, the health of major European banks has been good; driven by years of capital accumulation, restructuring, cost reduction, and central bank supportive policies, share buyback plans have boosted bank profits, with bank stocks achieving double-digit increases this year.

But now, with interest rate declines and economic deterioration in the eurozone, the biggest source of revenue for commercial banks - net interest income - is facing pressure, with investors hoping to see these banks maintain long-term profitability.

Deutsche Bank (DB.US), Lloyds Banking Group (LYG.US), and Barclays Bank (BCS.US) will report third-quarter earnings this week, while UBS Group (UBS.US) and HSBC Holdings (HSBC.US) will report earnings next week. The reports are expected to demonstrate the continued profitability of these banks, with strong investment banking activities offsetting the decline in profit margins and weak demand for loans from consumers and businesses.

But investors need more confidence. Beyond looking for evidence of asset quality resilience, they are also seeking sharper strategies, lower costs, and the potential to outperform the market in a slow-growth global economy.

European banking industry welcomes a wave of mergers and acquisitions for survival.

In the past three months, merger and acquisition deals have captured the imagination of bank boards. BNP Paribas (BNPQY.US) acquired AXA Investment Managers, while UniCredit increased its shareholding in Commerzbank, sparking rumors of cross-border integration.

Federated Hermes' Crediting Financial Manager Filippo Maria Alloatti stated: "Estimates indicate that if the European Central Bank cuts interest rates as expected, there may be as much as 600 billion euros (652 billion US dollars) in net interest income at risk in the first half of 2025. The management team is actively taking steps... exploring opportunities to strengthen through acquisitions in the asset management, wealth management, and even niche financial technology sectors."

For example, National Westminster Bank in the United Kingdom (NWG.US) acquired Metro Bank's residential mortgage business; in addition, media reports suggest that HSBC's newly appointed CEO Georges Elhedery's impact on the bank's structure may be much larger than previously imagined.

Credit rating agency Scope Ratings believes that the government's sale of bank shares held during the crisis eliminates one obstacle to achieving a deal, but other obstacles still remain.

McKinsey analysts state that executives need to reach "escape velocity" to differentiate themselves from their peers and increase attractiveness to investors. McKinsey, in its "2024 Global Banking Annual Review," states that in order to maintain return on tangible equity profits at current levels, banks need to cut costs at a speed 2.5 times faster than the decline in revenue.

McKinsey states that globally only 14% of banks have a PB ratio exceeding 1, a PE ratio exceeding 13, which is more than four times lower than companies in all other industries.

Pacific Investment Management Company (PIMCO) Asset Research Director Philippe Bodereau stated that European banks are splitting into two camps: those with the potential to emulate their American counterparts and achieve sustained double-digit return on assets, and those stuck in single-digit growth levels. He said: "I think these institutions should engage in some strategic self-reflection."

Interest rate cuts are putting pressure on net interest income, benefiting investment banking operators.

UBS Group and Barclays are expected to report a rebound in third-quarter investment banking revenue, particularly in stock and advisory fee income. Previously released financial reports showed that the performance of American competitors JPMorgan, Morgan Stanley, and Goldman Sachs exceeded expectations.

Ratings agency Moody's said that like the American banking sector, the asset quality of the European banking sector is not expected to deteriorate significantly, but the market is concerned that commercial real estate (CRE) may erode capital. However, stress tests on 21 European banks show that even in cases of severe loan quality shocks, the capital adequacy ratio of banks with the highest CRE risk exposure compared to common equity Tier 1 (CET1) capital is higher than the minimum threshold of CET1 capital levels.

HSBC analysts remain cautious about the unexpected negative growth in net interest income. Net interest income is an indicator of profitability, reflecting the difference between the income a bank earns from loans and the interest it pays to depositors. HSBC prefers asset distribution-oriented stocks such as Credit Agricole and Belfius Bank over French banks like BNP Paribas and ING Group (ING.US), with the latter's net interest income momentum seen as the weakest.

Barclays analysts stated that improved prospects in lending, especially mortgages, should boost net interest income growth for Lloyds Banking Group and NatWest in the third quarter.

Concerns about potential increases in bank taxes in the UK Budget on October 30 are weighing on market sentiment. However, UBS said that if the UK government chooses to maintain the current arrangement, stock prices of domestically focused banks could rebound by over 5%.