European Banks Brace For Pain Ahead With End to Trading Boom

A trio of Europe’s biggest banks are girding for more pain from a worsening economy in the second half of the year. This time, they can’t count on a trading boom to soften the blow.

Spain’s Banco Santander SA posted the first loss in its 163-year history after a $14.8 billion write-down on assets. Barclays Plc’s pretax profit fell 77% and its credit-card unit booked a loss. Deutsche Bank AG’s asset management and retail banking units both saw lower revenue.

And while traders at Barclays and Deutsche Bank enjoyed stellar quarters, executives at both warned those gains are likely to ebb in the second half.

“We do expect a normalization” in the trading environment, Deutsche Bank Chief Financial Officer James von Moltke said in an interview with Bloomberg TV. “The investment bank outperformance in the first half has essentially financed the corona-related impact” on earnings.

European Banks Brace For Pain Ahead With End to Trading Boom

The second-quarter results mirror the performance of the largest U.S. banks, where traders benefited from market gyrations and policy makers’ radical steps to prevent an economic meltdown.

Barclays led declines in the banks’ shares, sliding 6.6% at 12:33 p.m. in London, despite its securities division reporting a 60% gain in foreign-exchange, rates and credit income.

The investment banking gains at Barclays -- and throughout the industry -- reflect regulatory changes in the past decade that “moved the focus of financing economic growth from banks to the capital markets,” said Barclays CEO Jes Staley. With the “massive amounts” of central bank liquidity, that’s resulted in a “constructive response to the pandemic.”

Deutsche Bank

Deutsche Bank’s gains bolstered Chief Executive Officer Christian Sewing’s turnaround efforts.

Income from buying and selling debt securities rose 39% from a year earlier, offsetting weaker revenue in asset and wealth management. While its traders couldn’t quite keep up with the five biggest Wall Street banks, which roughly doubled fixed-income revenue, their gain was the biggest since the third quarter of 2012. Revenue from advising on stock and bond sales as well as mergers increased 73%.

Even with the expected slowdown, the bank lifted its revenue outlook for the full year slightly, predicting that the top line will be “essentially flat” rather than down.

Core bank revenue, which includes the businesses Deutsche Bank is keeping in its overhaul, rose 6%, driven by the investment bank. The transaction bank -- a centerpiece of Sewing’s effort to wean the lender off its reliance on trading -- saw a 4% increase, reflecting higher credit loss recoveries and a rebalancing of the portfolio.

The bank set aside 761 million euros ($894 billion) for bad loans, roughly in line with its June estimate of about 800 million euros. Borrowers who had drawn down credit facilities during the early days of the pandemic have started to pay them back or refinance, boosting the bank’s main measure of capital strength -- the common equity Tier 1 ratio -- to about 13.3% at the end of June from 12.8% three months earlier, Deutsche Bank said last week.

Santander

Banco Santander’s historic quarterly loss came after a deterioration of the economic outlook forced it to write down the value of its businesses across the globe. It’s the worst among European lenders since UniCredit SpA’s 13.6 billion-euro wipeout in late 2016.

Still, despite the size of the loss and impairments, the charges won’t hurt capital levels or cash flow, it said.

On an underlying basis, the bank also did better than expected, posting a profit of 1.5 billion euros compared with analyst forecasts of 944 million euros. Core revenue was in line with expectations, while expenses were better than forecast at 5.1 billion euros, down from 5.8 billion euros a year earlier.

Barclays

At Barclays, the results underlined the scale of the challenges that retail and business banking faces in its home British market.

The London-based lender took a 1.6-billion-pound ($2.1 billion) charge to anticipate bad loans after the firm downgraded its forecasts for the U.K. and the U.S. economies. That brought the total to 3.7 billion pounds so far.

“There has been extraordinary economic contraction,” especially in the U.S. and U.K., the bank’s two principal markets, Staley said on Bloomberg Television. He said growth at the securities unit might slow after “exceptional” volatility in the first two quarters. “People are expecting a normalization.”

©2020 Bloomberg L.P.

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