(Bloomberg) -- If you thought U.S. bank earnings were worrisome, wait for the Europeans.
As top Wall Street banks warn of zero Treasury yields and falling income from lending, their European peers have been dealing with negative rates for half a decade, with an end looking increasingly far off. The drought has left them without a cushion to fall back on when income from trading dries up, as it did in the first half, and it’s one reason why once-mighty Deutsche Bank AG (DE:DBKGn) just announced the most radical cuts yet to its investment bank.
The second quarter will probably provide more evidence how damaging zero or negative rates are for an industry that at its core depends on clients paying to borrow money. Revenue at eight of Europe’s top lenders is set to decline 2.7% on average from a year earlier, according to filings and analyst estimates. That compares with a 0.5% gain for the top U.S. peers, many of which still managed to post record earnings after nine interest rate increases by the Federal Reserve since late 2015.
“The focus for European banks is really on revenue,” said Jonathan Tyce, an analyst at Bloomberg Intelligence. “Rates are set to go down, which means lower loan loss provisions, but that doesn’t make up for the loss in revenue. All this keeps bringing you back to costs.”
Here’s a guide to what investors will be looking for when the top lenders start to report on Tuesday:
Switzerland
UBS Group AG (July 23) will give investors a first look into European bank earnings. It has indicated that trading conditions improved from what CEO Sergio Ermotti called “one of the worst” first quarters in recent history. The world’s largest wealth manager is less dependent on trading revenue that peers, but trade worries and market swings still affect how much money it attracts from rich clients. Attention will also be focused on the business of advising on deals as well as stock and bond issuance after a poor run and last year’s departure of rainmaker Andrea Orcel.
Credit Suisse (SIX:CSGN) Group AG (July 31), the second-largest Swiss bank after UBS, is coming off a strong first quarter that showed CEO Tidjane Thiam’s painful three-year restructuring is bearing fruit. But after the surprise loss of a key wealth management executive, Iqbal Khan, investors will be looking at whether the growth momentum in a key pillar of the bank will continue. The main trading unit, which managed to outperform peers in the first quarter, will have to show that it wasn’t just a one-off.
Swiss banks could disappoint, should Julius Baer Group Ltd. be any guide. The lender said on Monday that it saw net new money in the first half hurt by the exits of some clients, as it purges risky accounts, and by a wider application of negative interest rates to large cash holdings.
Germany
Deutsche Bank (July 24) unveiled its biggest overhaul in decades this month, including a plan to exit its underperforming stock trading business. The move was partly driven by low interest rates and the company now assumes that European short-term rates will rise to just 0% in 2021. Deutsche Bank also offered insight into second-quarter earnings with a 5.9% slide in revenue. Costs and profit figures fell short of expectations, even before the bank said it expects 3 billion euros of restructuring charges in the period. Deutsche Bank says about 75% of the investment banking businesses it wants to keep will have a top five market position, and the release this week will give investors a glimpse of how they’re holding up.
Commerzbank AG (DE:CBKG) (Aug. 7) explored a merger with Deutsche Bank earlier this year, but talks fell apart. That didn’t make the bank’s challenges go away: Germany’s second-biggest listed lender is one of the banks hit hardest by the European Central Bank’s rate policy because it holds a large amount of deposits and is heavily reliant on lending income. Commerzbank plans a strategy update this fall after scrapping several financial goals earlier this year. The company is seen as a takeover target because it offers a foothold in Europe’s largest economy. While negative rates should accelerate consolidation, a lack of confidence within the industry is now the biggest impediment to necessary cross-border mergers, according to Casper von Koskull, the CEO of Nordea Bank Abp.
France
BNP Paribas (PA:BNPP) SA (July 31) seemed poised to benefit from Deutsche Bank’s woes after striking a preliminary agreement to take on the hedge fund and electronic trading clients of the German lender’s equities business. But transferring balances is said to be difficult, and investors will be looking for updates on the transaction. They will also want evidence that BNP’s existing equities-trading business is turning the corner after embarrassing losses late last year. Analysts at JPMorgan Chase & Co (NYSE:JPM). expect a 26% drop in equities revenue in the second quarter from a year earlier.
Societe Generale (PA:SOGN) SA (Aug. 1) is shrinking parts of its investment bank and cutting 1,600 jobs globally in an attempt to boost profitability. Investors will keep a close eye on the bank’s capital buffer, which has been among the weakest of the region’s large lenders. Analysts at JPMorgan say SocGen should reduce its dividend by two-thirds to ease concern about a possible capital shortfall by 2021. CEO Frederic Oudea has said he’s comfortable he can meet the capital goals while maintaining his dividend policy.
Natixis SA (Aug. 1) has had its own string of issues to contend with. After losses from exotic derivatives and a slump at the bank’s fixed-income unit, last quarter brought a meltdown at one of its boutique asset management businesses. London-based H20 Asset Management suffered $9 billion of redemptions after it emerged that one of its funds invested substantial amounts in the debt of a controversial German financier. Investors will want to see evidence that flows at Natixis’ broader asset management business are resilient, according to Bloomberg Intelligence.
Italy
Low rates haven’t been all bad. In Italy, banks have been able to draw some benefit from lower funding costs from long-term rates as well as help in reducing a mountain of bad debt, though low short-term rates are still a burden on income. UniCredit SpA (Aug. 7) is taking steps to put itself in a stronger financial position as CEO Jean Pierre Mustier prepares a growth plan to follow a three-year cleanup. Italy’s biggest bank by assets is now emerging as one of the few firms in position to consolidate, and is among lenders said to have been interested in a potential takeover of Commerzbank. Mustier, in an interview published over the weekend, told Milano Finanza that the new business plan will have organic growth as “precondition.” Investors will be looking for any update on the options the CEO is eyeing.
U.K.
While trading revenue at Barclays (LON:BARC) Plc’s (Aug. 1) investment bank fared better than its U.S. rivals earlier this year, the picture for the second quarter looks bleak. JPMorgan analysts have predicted a 22% slump in equity revenue. The analysts also see “negative implications” for the U.K. economy from Brexit. A scandal dating back several years related to the sales of payment protection insurance will probably continue to hurt earnings at most British banks.
HSBC Holdings Plc (LON:HSBA) (Aug. 5) investors will be looking to see whether Europe’s largest lender was able to keep revenues growing at a faster pace than costs, after the bank hit the key target in the first quarter. Several hundred jobs are being cut in the global banking and markets division and poor trading performance could see HSBC trim this year’s $4 billion investment budget. Shareholders are also looking for signs of management is returning excess capital, for example in the form of buybacks.
Spain
Banco Santander (MC:SAN) SA (July 23) is less dependent on its home market than competitors after expanding in regions like Latin America. Still, Europe plays a big enough role to drag on earnings, and it’s the focus of much of a cost drive that includes thousands of job cuts. Of the group’s largest units, the U.K. looks the most vulnerable, with Keefe, Bruyette & Woods forecasting a 36% drop in net income.
That’s putting a spotlight on the bank’s capital strength. Chairman Ana Botin has argued the lender can operate with smaller capital buffers because it doesn’t engage in volatile trading like the big investment banks. Botin may also face more questions about the botched hiring of Orcel, the former UBS investment banker who is now suing Santander after the Spanish lender withdrew its job offer.
(Adds Julius Baer in eighth paragraph, Nordea in 10th, Mustier in 14th.)
