Deutsche Bank Looms Large Over European Banks’ Earnings Season

(Bloomberg) -- European banks will probably get another urgent reminder why they need to rethink their strategies when they present results for the first quarter.

Trading revenue, long a mainstay of earnings at big banks, will likely continue to slide and increase pressure on firms to shrink the business further. Slowing economies across Europe may lead to more bad-loan charges and prolong the period of record-low interest rates, eating into profit from lending and putting the banks at a disadvantage to their Wall Street peers.

Nowhere are these pressures more pronounced than at Deutsche Bank AG, Europe’s biggest securities firm, which is in its sixth week of official merger talks with Commerzbank AG after several failed turnaround efforts. The outcome of those talks, which could be announced along with earnings on Friday, is looming large over this earnings season, and could shake up the entire banking industry in the region.

“It’s a really tough environment and in Europe you have the added burden of lower rates,” said Andreas Plaesier, an analyst with M.M. Warburg in Hamburg. “Banks need to look at where they can trim the fat they have left and that means cutting staff.”

Regulators in some countries are also ordering banks to add to their financial reserves to prevent lending from drying up if the economy worsens. While such capital buffers can protect the economy, they reduce shareholder returns in the short-term and can even backfire by pushing banks to be more conservative.

Deutsche Bank Looms Large Over European Banks’ Earnings Season

Swiss Banks

Credit Suisse Group AG (April 24) and UBS Group AG (April 25) will give investors their first look at how Europe’s securities firms weathered tough trading conditions at the start of the year. Sergio Ermotti, the chief executive officer of UBS, has called it “one of the worst” first quarters in recent history.

If the results of the U.S. banks are any guide, Credit Suisse’s bigger focus on credit trading could mean it will outperform UBS. Investors will also be looking for signs that Credit Suisse’s efforts to beef up its equities business are paying off. The bank has already said its Asia-Pacific trading unit will break even in the quarter after two years of losses.

Both banks pared back their trading businesses in recent years to focus on wealth management. That reduced their exposure to volatile investment bank earnings, but also opened them to revenue dips when clients stay on the sidelines. Should revenue not improve, the banks may be forced to cut expenses further.

German Banks

Deutsche Bank (April 26) is more reliant on trading revenue that its competitors and the slump in that business has made it harder for CEO Christian Sewing to pull off his turnaround plan. He’s now considering a merger with smaller domestic rival Commerzbank (May 8), but a deal is far from certain and wouldn’t solve all the lender’s issues even if it did go ahead.

Apart from the future of Deutsche Bank’s investment bank, a key question is what will happen to its asset management arm DWS Group. It’s a stable contributor of earnings, so Deutsche Bank is reluctant to part with it. A sale of some or all of the business would be an easy way to raise capital, and insurer Allianz SE is said to have looked at the feasibility of such a deal. For now, DWS is exploring options that don’t involve a full sale, such as joint ventures and distribution partnerships, people familiar with the matter have said.

Commerzbank is a weakened lender in its own right, being among the hardest hit by the European Central Bank’s negative interest rates. While ECB officials have floated the idea of cutting the cost for banks from those rates, action is far from certain and relief might not filter through to the bottom line. To make matters worse, Germany’s powerhouse economy is slowing.

Spain’s Biggest Bank

Europe’s malaise has Spain’s Banco Santander SA (April 30) ramping up investment in more lucrative Latin American markets and the U.S. Ana Botin, the bank’s chairman, will hold her third capital increase since taking over to assume full control of the Mexican unit. A big goal in Europe is finding ways to reduce spending as part of a 1.2 billion-euro global cost-cutting drive.

Returns from deploying 20 billion euros over four years in digitalization and technology initiatives will also be a focus for investors when Santander reports, according to Bloomberg Intelligence. CaixaBank BPI analysts expect Santander to increase first-quarter net interest income, its main source of revenue, while fee income will probably fall and revenue from the much smaller foreign exchange and trading business could slump by almost a third.

French Banks

BNP Paribas SA (May 2) and Societe Generale SA (May 3) cut profitability targets after their trading businesses were hit by a market rout at the end of last year. They responded by closing and shrinking businesses to reduce expenses. The missteps threaten their ambitions to become a dominant force in European investment banking as rivals shrink.

BNP now needs a strong first quarter to deliver on revised targets for its investment bank, according to Bloomberg Intelligence. That may be hard to pull off as BNP Chairman Jean Lemierre suggested this month that the difficult trading conditions at the end of last year remain a lingering threat for investment banks. Analysts at Citigroup Inc. say BNP shares could benefit from signs in the first quarter that the bank is delivering on plans to generate capital, improve efficiency and restructure the investment bank.

SocGen is speeding up staff reductions after tough trading conditions persisted into the new year, people familiar with the matter have said. The bank hasn’t detailed first-quarter performance, but puts the number of jobs to go at about 1,600. Investors are still divided on whether SocGen can shrink itself to greatness. The bank also faces pressure on capital as it exceeds its minimum requirement by the narrowest margin among the top 10 listed euro area banks. Analysts will be watching for progress on that front in the first quarter, months or years after many of its competitors took strides to improve their financial strength.

©2019 Bloomberg L.P.