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Banking

European banks poised for another lacklustre earnings season

From bad to worse: Citi analysts are predicting quarter-on-quarter falls in net income for a number of Europe's major banks amid the macroeconomic headwinds.


Unsurprisingly, it hasn't been a strong quarter for the big European banks, according to research put out by Citi. Analysts there are projecting quarter-on-quarter losses for a number of Europe's largest banks.The forecast for Barclays is dire, driven largely by a poor investment banking performance as deal volumes have collapsed. While Citi still lists it as one if its favoured banks in Europe, thanks to its cheap valuation, it’s too early yet to say how badly the Libor-fixing scandal might damage the bank:


Results 27 July 2Q12 results will be released on Friday 27 July at 07:00 BST. We forecast 2Q12 Group operating profit (ex-FVOD) of £1.6bn, -6% yoy and -34% qoq, driven by a weaker investment bank result. Barclays is in Citi’s European focus list and is one of our three Most Preferred banks in Europe, alongside HSBC and SocGen.

Slowdown in Investment Banking — We forecast Barclays Investment Bank to make an operating profit of £0.8bn, -14% yoy and -34% qoq, driven by a slowdown in revenues to £2.6bn (FICC -30% qoq, EQ -15% qoq, IB -20% qoq), part offset by lower expenses (comp and non-comp). This is a result of slowing volumes, the return of some modest basis risk, and a reversal in credit spreads.”


There is some quantum of solace: Citi still expects that Barclays can turn its operating profit for the 2012 fiscal year into an improvement on 2011, projecting a 17% rise on last year’s profits of £5.59 billion. Similarly, Citi projects that the investment banking wing will see a 14% improvement on 2011.


Credit Suisse looks set to suffer from a similarly poor investment banking performance for the quarter - especially compared to the previous three months, with a 27% drop in revenues and an even more punishing 33% drop in net income as compared to the first quarter.



Challenging IB Environment - In 2Q12, we forecast a tough IB quarter with qoq revenues down 27%; however, we forecast revenues up 10% yoy against an exceptionally weak 2Q11. However, we believe that CS is somewhat betterpositioned to cope with a tough IB environment given the lower cost base, with the expense run-rate down SFr1.3bn into 2012. Moreover, CS is running with lower levels of credit inventory down c30%-60%, while positive basis could partly offset weak client activity and otherwise difficult trading conditions.


Citi is also predicting that Deutsche Bank will see a 20% quarter-on-quarter reduction in profits before tax.


Of the banks Citi's note covers the only institution that has cause for muted cheer is UBS, which is expected to notch a 74% increase in net profits on a quarter-on-quarter basis. This would make Q2 2012 the most profitable period for the Swiss bank since the first quarter of last year, while its investment banking division is expected to return to profitability. Over the last three quarters, the bank has only achieved this once. The relatively strong Q2 performance is partially down to its focus on FX trading, which Citi is expecting to offset poorer performances in rates and credit.

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