Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Well, that was quick.

After a one-day respite from selling pressures thanks to rumors of a confidence-boosting debt buyback from Deutsche Bank, fears over Europe's banks returned with a vengeance on Thursday after disappointing -- but by no means disastrous -- results from France's Societe Generale.

European lenders sank 5 percent against a broader market fall of about 3 percent, just the latest example of how the financial sector has become a lightning rod for fears about the broader economy as investors fret about potential losses ahead on loans and trading.

Sitting Target
It's been a bad year so far for markets, but Europe's banks are a whole other story
Bloomberg data

As jitters mount over the economic outlook and cratering commodity prices, expect the market to keep the spotlight on broader unknowns facing the banking sector, which is also part of the reason for the recent panic over Deutsche Bank.

Some of the challenges in banking are of course global, but it's hard to argue with Goldman Sachs COO Gary Cohn, who said this week that Wall Street had taken its medicine early -- unlike its European competitors.

And while a repeat of the 2008 crisis still looks less than likely, this is the first time the post-crisis banking model is being tested by seriously rocky financial markets. The past five years have seen European banks shrink balance sheets and bolster their financial position, but always against a backdrop of bullish markets and benign interest rates. Now investors fear the safety net is being whisked away just as banks embark on another round of cost cuts and asset sales.

SocGen's quarterly results, which missed forecasts, were a microcosm of the unknowns facing Europe's banks. The lender saw loan-loss provisions surge at its corporate and investment bank, citing "cautious" provisions on the bank's oil and gas lending and also on one unidentified European company. An extra litigation charge effectively soaked up all of the gains from selling its stake in asset manager Amundi. The bank also said it was going to be difficult to hit profitability targets for 2016 because of "headwinds" -- in other words, things may get worse.

Falling Profit, Rising Provisions
SocGen's corporate investment bank results
Source: company filings
SocGen Suffers
Bloomberg

Investors want more clarity from banks on any potential nasties lurking on balance sheets and how they're going to navigate treacherous markets. They got some from Natixis -- the only European banking stock in positive territory on Thursday -- which gave a specific breakdown of losses it may have to face if oil stayed at $20 to $30 over the next few years. SocGen was less precise and less transparent. There's no obvious magic wand out there for bank CEOs to calm market fears, but disclosures today may very well set the tone for trading tomorrow.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net