(Bloomberg) -- Europe’s banks and pharmaceutical giants propelled European earnings ahead of expectations in the first quarter, signaling potential guidance upgrades ahead.

Financials and healthcare were the only MSCI Europe Index sub-sectors to have posted earnings growth despite expectations of a decline, Bloomberg Intelligence data shows. Overall, the MSCI Europe Index’s 6% earnings drop is less than consensus forecasts for an 11% fall, with almost all members having reported. 

AstraZeneca Plc, Novartis AG, GSK Plc, and Novo Nordisk A/S all outperformed on first-quarter earnings thanks to higher-than-anticipated sales and lower operating costs, while keeping a “low bar” on full-year guidance to allow for potential upgrades, according to Bloomberg Intelligence analysts Michael Shah and John Murphy. 

Europe’s most valuable company Novo Nordisk could hike its outlook further when it gets more visibility on GLP-1 manufacturing capacity, Shah and Murphy said. GSK could also update guidance once the opportunities that the RSV vaccine market presents become a little clearer following a June meeting of the US pharmaceutical regulator, Citi analyst Peter Verdult wrote in a note. 

On the banking side, 71% of European lenders beat their first-quarter net interest income consensus, Bloomberg Intelligence data shows, with Spanish, Italian and British banks exceeding estimates while Nordic peers trailed. In the UK, Barclays Plc topped estimates supported by an increase in its net interest margin, with similar resilience seen among peers NatWest Plc and Lloyds Banking Group Plc.

In Germany, CommerzbanK AG lifted its outlook while Deutsche Bank AG also came out on top, having delivered a 7% jump in fixed income in the first quarter, more than analysts had expected and ahead of most of the biggest US investment banks.   

“Banks are slowly proving that profitability gains are largely here to stay,” KBW analysts led by Andrew Stimpson wrote in a note.

About 85% of European lenders also undershot loan loss provision expectations in the first quarter, reporting total provisions of €9.5 billion ($10.3 billion) compared with an expected €11.3 billion. This was because credit risk did not deteriorate from the second half of last year as previously anticipated. 

Combined with better-than-expected lending income, lower-than-expected loan losses suggests earnings estimates remain conservative and could be upgraded, BI analyst Kaidi Meng said.

To be sure, profitability expectations must take into account the challenges of the year ahead. Full-year loan loss provision estimates of €48.3 billion — down from €49.4 billion at the beginning of the year — are implying a rise in provisions in following quarters, which could be a “source of earnings surprise for banks,” BI’s Laurent Douillet said. 

Net interest income is also expected to decelerate in 2024 as the Bank of England and European Central Bank prepare for possible rate cuts, with full-year consensus of just 1% growth compared with first-quarter growth of 5%. 

--With assistance from Michael Msika and Macarena Muñoz.

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