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

Where did the bears go?

After a frankly underwhelming reporting season for European investment banks overall (see here), financial shares were on the rise on Friday, helped by some better-than-expected results from Barclays and UBS, and expectations for a resolution Italy's banking crisis after the results of a stress test are published late tonight.

Friday Feeling
European bank shares are outperforming on Friday following results from Barclays and UBS
Source: Bloomberg
Intraday times are displayed in ET.

Just don't expect the killjoys to take a break for long.

Even behind today's good news, there's little reason to believe Europe's banks are past the worst.

Start with UBS. Unlike a lot of its rivals, it has done a lot right in recent years under CEO Sergio Ermotti, shrinking its investment bank, growing in wealth management, boosting its capital ratio and paying out a dividend. Cost-cutting and a good performance in debt trading helped profit to beat analyst estimates.

But the second quarter also brought with it worrying signs of a downturn in wealth management. Net outflows in emerging markets and Europe, as well as a ramp-up in clients switching into cash holdings, backed up Ermotti's warning of deepening client risk aversion.

Not So Wealthy
UBS' net margin on invested assets in wealth management is being squeezed by clients' risk aversion
Source: Company reports

True, UBS kept a lid on costs, but margins still look under pressure. Given the amount of global geopolitical uncertainty still working its way through markets, it's fair to say the hurdles through 2017 look tougher to clear than the second quarter.

The same goes for Barclays which, like UBS, beat the quarterly expectations game thanks to solid debt trading -- but left plenty to fret about going forward.

CEO Jes Staley wants the bank to be leaner (which is why he's selling assets like the African business) and more focused on Britain and the U.S. Its timing may be unfortunate. Britain, where the lender generates more than half of its revenue, is only just beginning to feel the consequences of voters' decision to leave the European Union. So far, the lender says it has seen no signs of "unusual" impairment trends or stress. Yet quarter-on-quarter loan-loss impairments rose 50 percent at Barclays U.K. -- mostly due to Barclaycard -- and returns on equity slumped.

Plastic Ain't Fantastic
Barclays' U.K. division credit impairments and loan provisions spiked higher, due mostly to Barclaycard
Source: Company reports

Is Brexit going to change that trend for the better?

It's likely that investors are viewing the glass as half-full at least in part as a way to get ahead of European stress-test results -- which historically have tended to give lenders' share prices a boost.

But the market has already reduced what was originally trumpeted as an exercise in clarity and confidence to a call on Italian banks -- and, specifically, the trigger for some kind of solution to Monte Paschi's crippling non-performing loans.

If Italy and EU regulators fail to deliver a solution that cuts those bad loans, bolsters capital and avoids saddling Italian voters with painful losses, the market reaction will be painful for banks big and small.

Expect those banking killjoys to be back quicker than you can say grazie.

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

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Lionel Laurent in London at

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