European banks set to trail Wall Street as provisions swell

FRANKFURT: European banks probably failed to live up to US peers’ record fourth-quarter profits as they set aside more money for troubled loans and missed out on the rally in equities trading.

Ten of Europe’s biggest lenders probably set aside US$15bil for doubtful credit in the fourth quarter, taking the year’s total to US$61.5bil, the highest since 2012, according to analyst estimates compiled by Bloomberg.

Many of the top US banks, by contrast, bolstered profit by releasing reserves made earlier in the year.

“The sector provisioned what it could, ” said Iacopo Dalu, an analyst at Janus Henderson which manages US$358bil including bank stocks.

“Profitability will be subdued for longer than in other regions because there isn’t the level of earnings to absorb the cost of defaults early on.”

Weakened by years of negative interest rates, European lenders had taken a relatively optimistic view of the Covid-19 pandemic when it first hit, making use of regulatory flexibility to avoid large upfront hits while their US rivals quickly notched up billions in provisions.

Since then, a rally in fixed-income trading in the wake of the pandemic has bolstered the region’s securities firms, though a shift toward stocks in the final months of the year means companies such as Deutsche Bank AG that exited or cut back their equities desks stand to benefit less.

The top five US investment banks – which combined for a record US$30bil in profit in the quarter – saw their fixed- income trading revenue rise almost 10% from a year earlier while the equities business surged 35%.

That’s a reversal from the prior three months, when banks recorded the biggest gains in bond trading.

Several European banks managed to eke out a rare win over their Wall Street peers in the third quarter because they did relatively well in fixed income. The same firms now stand to lose out, because they have struggled in equities in recent years.

On average, analysts surveyed by Bloomberg expect European banks to post smaller gains or even declines in stock trading, while delivering a better performance in fixed income.

French lenders BNP Paribas SA and Societe Generale SA may see equities revenue fall in the fourth quarter from a year earlier, according to the estimates. Both banks have sought to grow in the business, yet they were stung when the cancellation of corporate dividends during the pandemic caused losses on related investment contracts.

Deutsche Bank has said fixed-income trading revenue grew 10% in October and 23% in November. Chief financial officer James von Moltke has guided that the bank will probably set aside about €1.8bil (US$2.2 bil) in 2020 for doubtful loans.

That implies about €260mil in the fourth quarter, although analysts expect a higher number. Chief executive officer Christian Sewing has said such costs will fall next year. Deutsche Bank reports earnings on Feb 4.

UBS Group AG may prove an exception, because it kept a relatively large equities desk when it pivoted away from trading and toward wealth management after the financial crisis.

Switzerland’s biggest bank will give investors a first glimpse of how Europe’s securities firms fared when it reports earnings. New CEO Ralph Hamers may also drop hints about any changes he plans for the world’s largest wealth manager. — Bloomberg

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