European, UK lenders to show if they can match US peers

Frankfurt am Main

EUROPEAN lenders are about to show investors if they can ride the pandemic-induced wave of investment banking revenue that propelled US peers to a record quarter.

While Credit Suisse Group kicked off Europe's bank earnings season on Thursday, its gains in trading and advising on deals were a sideshow given blow-ups related to Greensill Capital and Archegos Capital Management. This week, four of the biggest securities firms are in the spotlight.

The focus will be on Deutsche Bank's ongoing efforts to regain market share in debt trading, UBS Group's performance in wealth management and Barclays' ability to bolster earnings by releasing reserves for bad loans.

Banks are relying on their deal-makers and traders to generate profits. While lockdowns have forced corporate and retail banking divisions to stash money for a wave of bad loans when taxpayer-funded support measures run out, some US banks and European peers have already started to release reserves because of a better-than-expected economic outlook.

These are some of the hot topics for investors when UBS publishes first-quarter earnings on Tuesday followed by Deutsche Bank the next day, BNP Paribas on Friday and Societe Generale the following week.

All the main UK lenders are also reporting results this week, including HSBC Holdings on Tuesday and Barclays on Friday. Investors are on the lookout for additional guidance on HSBC's increased investment in Asia and will scrutinise the performance of Barclays' investment bank.

Bankers who help companies orchestrate takeovers and raise money on financial markets are set to outshine their colleagues on trading desks as clients rush to lock in lower funding costs. Still, that business is traditionally smaller than the markets operations and most European investment banks aren't expected to track the doubling in revenue the top five US firms saw in the first quarter.

• Fixed income. Securities firms have warned that revenue from trading debt and currencies will probably fall this year after a bumper haul in 2020. Yet Deutsche Bank looks set to continue to profit in the first three months, allowing it to claw back market share after years of retrenchment. Again, the 10 per cent gain that analysts are predicting at the German bank is less than the 17 per cent increase at US competitors.

Deutsche Bank said in mid-March that revenue at its wider investment bank to date was 20 per cent higher than a year ago. It cited particular strength in credit trading. The German firm is Europe's biggest bond trader, although it is still smaller than US peers.

• Equities. BNP Paribas and SocGen will probably see revenue from dealing in stocks rebound in the first quarter from a year ago when the suspension of many corporate dividends caused losses in equity derivatives, a specialty of French banks. SocGen could beat analysts' expectations after Bloomberg reported that the business may generate a level of revenue close to the 667 million euros (S$1.07 billion) seen in the first quarter of 2019.

Yet, after overhauling those businesses, SocGen especially will face questions on where gains will come from in future. Other big stock traders in Europe, like UBS, will probably fail to keep up with the 36 per cent jump that US firms delivered in equities.

• Archegos. Credit Suisse was burned by the collapse of the secretive family office that made highly leveraged bets on stocks. The lender took a 4.4 billion Swiss franc (S$6.4 billion) hit in the first quarter. Analysts will probably also ask other banks for details on their related risks, notably how Deutsche Bank cut its exposure without incurring any losses. The German lender sold about US$4 billion of holdings seized in the implosion of Archegos in a private deal, Bloomberg reported this month.

UBS may also take a hit related to the secretive family office, although it hasn't detailed any exposure. Finews reported in March that the bank may record losses of "not more than low three-digit millions" - not enough to trigger a profit warning.

• Bad loans. While lockdowns have forced corporate and retail banking divisions to stash money for a surge in bad loans, European lenders may now follow US banks in releasing some of the provisions on signs that the economic hit may be less severe than expected. That would bolster profit at a time when questions abound as to how sustainable the market flurry will be and the slow pace of vaccinations in some countries clouds the outlook.

Barclays could beat analysts' profit forecasts with releases, although such a move is more likely in the second quarter when there's greater clarity on the success of vaccines, according to Citigroup.

• Greensill. While Credit Suisse is front and centre when it comes to Greensill Capital, the Swiss lender isn't the only bank exposed to the fall-out from the implosion of the supply chain finance firm. Deutsche Bank and Commerzbank could eventually face a hit if a German fund that compensated depositors of Greensill's Bremen-based bank has to be replenished. Deutsche Bank is also lobbying to cap levies for a separate European bank rescue fund that are weighing on its earnings. BLOOMBERG