Europe banks brace for Q2 slowdown after bumper Q1

* Q2 investment bank earnings hurt by grim capital markets

* Trading revenues could be down 40 pct on Q1 -analysts

By Steve Slater

LONDON, June 24 (BestGrowthStock) – Trading revenues for Europe’s
banks may have dropped 40 percent in the second quarter from the
previous three months as capital markets activity slumped when
investors took fright at the euro zone debt crisis.

As the quarter draws to a close it is clear Europe’s banks,
like their U.S. peers, will struggle to match their strong Q1
performance in investment banking.

“There may be one or two standout banks who kept risk on the
table and took advantage of wide spreads. Generally for the
others it looks like being 20 to 40 percent down on profits,
depending on how strong their Q1 was,” said Simon Maughan, bank
analyst at MF Global.

The European sovereign debt crisis crippled new equity and
debt issuance and merger and acquisition activity, especially in
May, when fears mounted that Greece’s problems would spread,
sending stock markets lower and creating a risk averse mood.

UBS (UBSN.VX: )(UBS.N: ) this month said it expected weaker Q2
earnings after capital markets turbulence led to a sharp
slowdown at its investment bank and Societe Generale (SOGN.PA: )
has warned that volatile markets had led to a mixed quarter.
[ID:nLDE65E0F0] [ID:nLDE65911O]

“We expect that trading conditions remained difficult for
investment banks in Q2, in particular in May,” Goldman Sachs
analysts said in a note this week.

“Overall, we forecast Q2 trading results to be down about 40
percent (from Q1), but with potential for a wide range based on
positioning.”

Deutsche Bank (DBKGn.DE: ), Barclays (BARC.L: ), Credit Suisse
(CSGN.VX: ), UBS and Royal Bank of Scotland (RBS.L: ) have some of
the biggest investment bank operations in Europe.

Wall Street rivals including Goldman Sachs (GS.N: ) and JP
Morgan (JPM.N: ) will report Q2 results next month and Europe’s
big banks will follow, led by Credit Suisse on July 22, although
some could issue updates before if trading is far short of
market expectations.

There will be particular scrutiny on Credit Suisse and
Barclays, who blamed underperformance in Q1 on taking less risk
and building a more sustainable model.

“Barclays and Credit Suisse have to outperform this quarter
if their strategy is going to hold up as sound,” Maughan said.

Global debt activity in May fell 58 percent from April, the
lowest level since October 2008, and it was the worst month for
fees for 16 months, according to Thomson Reuters data.

Equity capital markets activity in May was the lowest for
over a year, both globally and in Europe. M&A activity in May
was the slowest since August, the data showed.

Equity derivatives trading has been weak but foreign
exchange trading is likely to have benefited from volatile
markets and profit margins in all areas have improved due to
less competition, analysts said.

Many banks’ credit trading desks took an aggressive stance
earlier in the year but the increase in volatility caused
problems, notably in May, and hurt secondary market liquidity.

The expectation of a Q2 slowdown contributed to a 20 percent
drop by European bank shares in the seven weeks to June 8, but
since then the sector has recovered 10 percent, helped by hopes
that stress tests for Europe’s banks will provide more clarity
on the financial health of banks. Analysts have said that
optimism is dependent on the tests being tough, transparent and
backed up by a willingness to recapitalise banks that come out
badly in the tests.

Banks should show continued improvement in bad debts in
their retail arms, although the decline will only be modest and
problems in southern Europe have raised worries that bad loans
could rise again in that region.

Emerging markets have remained more resilient than Europe,
which analysts said will shield Standard Chartered (STAN.L: ) from
the worst of the capital markets slowdown when it releases a
trading update on Monday.

Stock Market

(Additional reporting by Alex Chambers; Editing by Jon
Loades-Carter)

Europe banks brace for Q2 slowdown after bumper Q1