Grim second quarter may add to European banks’ stress

By Steve Slater

LONDON (BestGrowthStock) – Europe’s banks have become used to jumping from one drama to another, and even before stress test results are unveiled for 91 banks later this week attention is shifting to potentially grim half-year results.

Investment banking income in the second quarter may have fallen about 40 percent from a strong first quarter as capital markets activity slumped after Greece’s economic crisis threatened to spread and rattled investors.

The slowdown will hurt earnings at Credit Suisse, Deutsche Bank, UBS and Barclays, and to a lesser degree HSBC, BNP Paribas and Societe Generale, analysts said.

The impact is expected to be softened by an improvement in retail banking, however, as bad debts continue to decline.

The trend is in contrast to the past year, when strong investment banking profits helped absorb high credit costs.

“Now it’s a reverse, with the investment bank businesses suffering from high market volatility and widening credit spreads, whilst the commercial banks are saying the credit cycle has turned a corner,” said Jon Peace, analyst at Nomura.

Credit Suisse reports on Thursday, followed by most other top names in the next three weeks.

Analysts have been warning that Q2 results would be weak, and figures from U.S. banks JPMorgan, Citigroup and Bank of America have all confirmed the trend as capital markets were slammed by the European sovereign debt crisis.

Nomura analysts estimated their revenues for fixed income, currencies and commodities (FICC) was down 41 percent in Q2 from Q1, equities revenues dropped 45 percent and advisory revenues fell 11 percent.

Goldman Sachs this week reported a slump in earnings, but Morgan Stanley fared better.

HEALTH CHECK UNCERTAINTY

The outlook for capital markets activity is also challenging. July has not started any better than June, and August is typically slow, so analysts said a pick-up is needed in the last four months of the year to meet 2010 forecasts.

Many banks expanded aggressively in the last year, so may start trimming jobs in the coming months if slow conditions persist, several bankers said.

A system-wide health check on Europe’s banks has also created an uncertain backdrop, with the stress test results due on Friday.

Europe is testing its banks on how they would cope with another economic slump in an effort to restore confidence among investors and open up funding markets for many banks, which could in turn help investment bank income.

“If the stress tests work in their intended purpose of bringing liquidity back to European funding and interbank markets, they could potentially be a catalyst for better revenues in H2,” analysts at Credit Suisse said.

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Grim second quarter may add to European banks’ stress