European Banks' Silver Lining

Consumer banking offers a glimmer of stability for the region's lenders

U.S. banks won the expectations game in the first quarter, posting declines in earnings that still beat most analyst estimates. There's a message for their European counterparts.

Total Eclipse

Total return for European bank shares year-to-date

Source: Bloomberg data

JPMorgan, Citigroup, Morgan Stanley and their peers over-delivered because many of them had spread a message of impending gloom -- or reality -- which prompted analysts to cut their forecasts in the weeks before earnings.

Shrinking Estimates

Analysts cut their earnings-per-share forecasts in the weeks before the big U.S. banks reported earnings

Source: Bloomberg

The firms were able to cut costs at a rapid clip too. They were also helped by relatively robust consumer banking revenue that helped to mitigate the downturn in investment banking.

At JPMorgan, net income for the bank as a whole fell 6.7 percent, while profit at the consumer bank rose 12 percent on the year-earlier period. At Bank of America, revenue from trading fixed income and equities fell 17 percent and 11 percent respectively, while consumer banking revenue increased, in contrast, by 3.3 percent.

No Quarter

Expected adjusted earnings per share growth for top European banks in Q1

Source: Bloomberg data

In Europe, the estimates are certainly grim. Analysts expect first-quarter adjusted earnings per share to drop 29 percent at Barclays, 67 percent at Deutsche Bank and 90 percent at Credit Suisse.

Poor expectations are already baked in. So expect to see a similar divide as in the U.S.: weak investment banking results contrasting with a steadier performance from consumer banking. The latter should help cushion the blow for investors.

In the U.K., for instance, the looming vote on EU membership has dampened investment banking activity. But house prices have climbed to a record and mortgage approvals soared (partly because buyers rushed to beat a tax increase this month.)

Analysts surveyed by Bloomberg expect Lloyds, the country's biggest mortgage lender, to post a 19 percent increase in adjusted earnings per share. Others with big consumer operations, like Barclays, should benefit too.

In the euro zone, negative interest rates are squeezing net interest margins. The more the ECB takes deposit rates into negative territory, the worse it is for bank earnings, all things being equal. Sluggish growth also means banks are struggling to rev up lending to compensate.

But stimulus from the European Central Bank has also helped ease loan losses and reduced funding costs -- and that matters when it comes to clearing a lower hurdle for expectations.

In Spain, for example, first-quarter net loan-loss provisions are set to fall at BBVA, Bankinter, Banco Sabadell and Banco Popular, Deutsche Bank analysts forecast. Big euro zone lenders like France's BNP Paribas, which has about 30 percent of risk-weighted assets allocated to key consumer markets, should benefit too.

Negative rates have also spurred banks to adapt their business models: lenders have tried to defend margins by offering high-yielding products to clients and boosting fee income, a trend Gadfly has noted before.

Money For Nothing

Annual growth rate of loans to households in euro area has risen in the wake of ECB stimulus

Source: ECB data

There's another glimmer of hope: the ECB said in February lending to households grew at an annual rate of 2.2 percent. Demand for corporate loans and mortgages is also rising, data on Tuesday showed.

Europe's banks had as miserable quarter as their U.S. peers. Such positive surprises that their earnings deliver will most likely be in their consumer banks. But it's only a sliver of optimism in an otherwise dismal landscape.

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

    To contact the authors of this story:
    Lionel Laurent in London at
    Duncan Mavin in London at

    To contact the editor responsible for this story:
    Edward Evans at

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