The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee Donnellan

DUBLIN, April 29 (Reuters Breakingviews) - European bank bosses are looking relatively chillaxed when it comes to the Iran war. Santander SAN.MC, Deutsche Bank DBKGn.DE and peers have barely raised provisions, despite the growing risk that weaker credit demand and rising impairments collide with AI job destruction. Surging profits help explain the calm, but are unlikely to last if the conflict drags on and growth stalls.

C.S. Venkatakrishnan has more immediate things on his mind. On Tuesday, the Barclays BARC.L boss did not increase the bank’s loan loss provisions in relation to the conflict in the Middle East even as he set aside millions of pounds to manage the cost of a collapsed UK lender as well as a motor finance scandal. On Wednesday, Santander’s Ana Botin upped the bank’s loan loss provisions by 5% to 3.2 billion euros in the first quarter, roughly the same level as last year, when there was no regional war pushing oil above $100 a barrel. Meanwhile Deutsche Bank’s total expected credit losses included an 86 million euros allowance for economic uncertainties mainly caused by the conflict. Still, total provisions equated to just 43 basis points of the bank's loans, only modestly above the 39 basis points recorded in the same period last year.

There are a number of reasons for bank bosses’ confidence. To start, many may still be living in hope that the war in Iran will come to an end in the coming weeks or months and therefore the economic hit from oil shortages will be limited. They may also be cheered by current high levels of profits and the expectation that higher energy costs will cause central banks to hike rates, which usually fattens lending margins. In 2021, before the Ukraine energy crisis, Santander, Deutsche Bank and Barclays average return on tangible equity was just 10% but this year it is expected to be 14%, as per Visible Alpha estimates.

Investors appear to agree that the good times will last. Since Feb. 27, the day before the U.S.- and Israel-led attack on Iran, shares in Europe's largest banks - including those lenders, plus UniCredit CRDI.MI, BBVA BBVA.MC and ABN AMRO ABNd.AS - have fallen by only 5% on average.

That is a muted reaction given the risks. A sustained jump in oil prices would hit the economy through higher inflation, weaker consumer spending and lower corporate confidence. And higher rates are not a free lunch: dearer borrowing may curb demand for credit and make it harder for households and companies to keep up with mortgages and loans. All of these pressures will come as the disruption from artificial intelligence gathers pace.

Amid these rising risks, European bank valuations are expensive. Many lenders like NatWest NWG.L, Santander and Intesa trade now trade comfortably above book value, implying they will continue to earn outsize profits above their cost of capital. Back in April 2022, the region's largest lenders on average traded at just 60% of book. A return to that level looks unlikely, but a lasting crisis will not leave the banks unscathed.

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CONTEXT NEWS

Santander on April 29 said its underlying first-quarter net profit rose 12.5% year-on-year as higher revenues and lower costs helped offset higher provisions partly related to a motor finance compensation scheme in the UK. Santander on April 29 increased its loan loss provisions by 5% to 3.2 billion euros.

Deutsche Bank on April 29 recorded a record net profit of 1.912 billion euros and set aside an extra 86 million euros for "uncertainties in the macroeconomic environment" which it described as being "primarily as a result of the Middle East conflict".

Barclays on April 28 posted profit before tax of 2.8 billion pounds for the quarter ending March, up from 2.7 billion pounds a year earlier. The bank also announced a 228 million pound provision for its exposure to MFS, a London-based lender which collapsed in February. It also set aside a further 105 million pounds for the UK motor redress scheme. Barclays has not increased its loan loss provisions due to the conflict in the Middle East.

Shares in Deutsche Bank were down 1.85% by 0933GMT on April 29. Barclays fell 0.6% and Santander’s shares were up 1%.