FRANKFURT/LONDON, July 27 (Reuters) – European banks offered flashes of better-than-expected earnings news this week, but some executives spoke of a bleak outlook for the rest of the year amid raging inflation, war and energy shortages.
Deutsche Bank (DBKGn.DE), the German lender to Europe’s largest economy, on Wednesday reported higher-than-expected second-quarter earnings, helped by trading earnings in volatile markets and higher interest rates. Continue reading
At the same time, Deutsche Bank abandoned a cost target for 2022, cast doubt on its profit target and scaled back the outlook for its global investment banking arm as dealmaking atrophied.
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“The coming months will remain challenging. There is reason to believe that it will become even more difficult economically,” Deutsche Bank CEO Christian Sewing wrote to employees.
This mixed picture of solid businesses coupled with a bleak outlook is playing out in banks across Europe.
In a week of earnings reports from its top lenders – including UBS (UBSG.S), UniCredit (CRDI.MI) and Lloyds Banking Group (LLOY.L) – investors have been looking for signs that a weaker economy means higher interest rates and war in Ukraine are weighing on the business and prospects of the banks.
Since the outbreak of war, European banks have been in turmoil, attempting to sever ties with Russia, imposing a series of tougher sanctions on Moscow and navigating an uncertain and flagging economy.
Efforts by central banks to stem runaway inflation across Europe with higher borrowing costs have boosted the profits of several top lenders, but a big question now worries bankers is that even deeper cuts in gas supplies are hurting banks and economies will meet in the region.
Nicolas Charnay, an analyst at ratings agency S&P, said the impact would likely be different across Europe.
“What we probably wouldn’t do is some sort of broad European ratings action. We would differentiate between countries and possibly also between banks,” he said.
That reflects the mixed picture painted by this week’s gains.
“UNPRECEDENTED CHALLENGES”
In Switzerland, UBS, the world’s largest wealth manager, led the way on Tuesday with a lower-than-expected profit increase and its CEO Ralph Hamers warning of an “uncertain” rest of the year and “subdued” sentiment. The bank’s shares plunged 9%. Continue reading
In contrast, Italy’s UniCredit on Wednesday raised its outlook for 2022 after a surprisingly strong second quarter, during which it reduced exposure to Russia and pushed ahead with a planned share buyback it had shelved. Continue reading
Still, CEO Andrea Orcel said, “The global economy faces unprecedented challenges and great uncertainty.”
In the UK, Lloyds Banking Group, Britain’s largest domestic lender, raised its full-year dividend and profitability forecast despite lower first-half profits and a gloomy outlook for the country’s economy, as rising interest rates outpaced modest growth in provisions for bad loans. Continue reading
Chief Executive Charlie Nunn told reporters that one in five of its 26million customers has been forced to significantly adjust their spending – with 2.2million cancellations of subscriptions to consumer services like streaming TV since last summer and the average family spending £89 more a month for spends energy and food.
UBS’ smaller rival Credit Suisse (CSGN.S) reported a deeper-than-expected loss and a reshuffle of top management in its recent attempt to recover from a spate of scandals and losses.
Amidst the noise was the undertone of market turmoil related to the war, inflation and the resulting risk aversion of customers.
“We expect these market conditions to persist for the coming months,” Credit Suisse said.
As interest rates in Europe rise for the first time in decades, banks are beginning to benefit from the widening gap between what they charge borrowers and what they pay savers.
However, the same rate hikes can also trigger waves of defaults as customers struggle to meet their repayment obligations.
After years of ample liquidity, the challenge for bankers is now to weigh the opportunity to earn more by lending more and to appropriately price the risks against the backdrop of a deteriorating outlook for global economic growth.
The International Monetary Fund cut global growth forecasts again on Tuesday, warning that downside risks from high inflation and the Ukraine war could materialize and push the global economy to the brink of recession if left unchecked.
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Additional reporting by Marta Orosz in Frankfurt; Valentina Za in Milan; Iain Withers and Lawrence White in London; and Oliver Hirt and Michael Shields in Zurich Edited by Tomasz Janowski
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