(Bloomberg) -- European bank stocks are trading close their steepest-ever discount to U.S. rivals and early signals show that first-quarter earnings may only reinforce the gap.
The continent’s lenders, already in a tough spot before the coronavirus outbreak hit, are likely to detail more worrying news for their embattled investors. In Germany, Deutsche Bank AG (DE:DBKGn) may have seen credit trading weigh on its markets revenue while Commerzbank AG (DE:CBKG) probably started to set aside more funds for troubled loans. HSBC Holdings Plc (LON:HSBA) warned of higher provisions, and French bank BNP Paribas (PA:BNPP) SA has already taken a trading hit.
Italian banks are confronting the prospect a resurgence of troubled loans after spending years decade cleaning up their balance sheets. Switzerland’s big wealth managers may prove an exception, with UBS Group AG and Credit Suisse (SIX:CSGN) Group AG already indicating that earnings will rise.
Average prices of European bank stocks compared with their book value are at 50% of U.S. levels, the lowest since a record 48% was reached in 2012 at the height of Europe’s debt crisis. The continent’s banks are set to report on a period hit by lockdowns that have devastated their corporate clients’ income and whipsawed markets, with uncertainties remaining over the duration of the crisis and the level of government assistance that will be given.
Provisions for future bad loans will be a major focus after many of the biggest U.S. lenders set aside billions of dollars in the first quarter. European banks are set to report comparatively small increases in loan loss reserves, Bloomberg reported last week, citing senior bankers and regulators.
Here’s an overview of how various banking businesses may have fared in the first three months of the year.
CORPORATE BANKING
The disruption of global supply chains could hurt banks focused on financing companies and trade. Commerzbank will more than double the amount of funds it sets aside for troubled loans this quarter from the same period last year, according to analysts surveyed by Bloomberg. That’s still a smaller jump than at U.S. banks, but provisions will probably continue to rise later this year. On Wednesday, UniCredit SpA said it will book an additional 900 million euros of loan loss provisions in the first quarter to prepare for the economic impact of the coronavirus. On the revenue side, the issuance of new loans probably stalled in March although the effect of companies tapping existing credit lines may “flatter” lending income at banks, according to S&P Global Ratings.
RATES AND CURRENCIES
One bright spot is that swings in the price of sovereign bonds and currencies usually force investors to tap banks for hedging services. That’s why a communication misstep by European Central Bank President Christine Lagarde and the subsequent roller coaster ride for government notes could be a good thing for banks’ revenue. The focus will be on firms like BNP Paribas, which touted market share gains in rates last year. The volatility could also help Deutsche Bank, one of the world’s biggest currency traders, although analysts only expect a small increase overall in fixed-income trading revenue, compared with a 31% jump at the biggest U.S. banks.
CREDIT TRADING
Corporate bond markets had some of their worst weeks since the financial crisis, with droughts of liquidity from late February into March. Credit Suisse and Deutsche Bank are the most exposed banks in Europe to leveraged loans, meaning they’re at risk of being been forced to take losses on debt they invested in or held to facilitate trading for clients, according to JPMorgan Chase (NYSE:JPM) & Co. analysts. Credit Suisse said last month that its overall trading revenue was higher than a year earlier. Oil companies have also suffered from a plunge in the price of crude, which could spell trouble for lenders that are more exposed to the sector such as France’s Natixis SA and Credit Agricole (PA:CAGR) SA.
EQUITIES
Stock market brokers were busy in the quarter as investors jettisoned their holdings. While several banks stand to benefit from that level of activity, investors will probably be more focused on the performance in the more complex business of equity derivatives, where SocGen and BNP Paribas are leaders. BNP Paribas lost an estimated 200 million euros ($219 million) when trades went awry in areas including dividend futures and structured products, Bloomberg reported earlier this month citing people familiar with the matter.
ORIGINATION AND ADVISORY
Companies raised a record of at least $752 billion in bond markets around the world last quarter to build cash buffers as the threat of recession grows. While U.S. banks dominate that business, the trend augurs well for Barclays (LON:BARC) Plc, Deutsche Bank, BNP Paribas and HSBC Holdings Plc, which were in the top 10 in the first quarter. The picture is a lot less rosy for equity issuance, where volumes declined. Credit Suisse and UBS had the highest ranks among European banks in the business. The deep freeze in mergers and acquisitions has deal makers pitching themselves as restructuring experts to open up a source of revenue once companies run into trouble.
WEALTH MANAGEMENT
The turmoil has given affluent individuals a reason to reassess their portfolios or make opportunistic purchases. That helped wealth management, which is dominated by UBS and Credit Suisse. The latter said on March 19 that private banking was ahead of the year-earlier period thanks to higher transaction revenue. UBS Chief Executive Officer Sergio Ermotti told Bloomberg TV on April 9 that his firm saw “new demand” for loans in its wealth management business. Still, analysts at Barclays recently cut their estimates for how much the two firms stand to earn in private banking in coming years to reflect lower market levels.
RETAIL BANKING
Banks including Commerzbank say this business got off to a good start in 2020, but it’s been undermined by the prospect of interest rates staying low to help deal with the fallout of the virus. Deposits now frequently generate losses for banks because negative rates at central banks aren’t being passed on to the broad mass of customers. The answer for many banks has been to cut costs, but that may be difficult to pull off as many banks try to reassure their workforce by promising to pause staff firings. Generating additional revenue will also be difficult in markets where business is facilitated by face-to-face meetings. “Let’s be realistic, I don’t think that the French citizen will go to branches to borrow money on a mortgage,” SocGen CEO Frederic Oudea said last month at a conference.
GEOGRAPHY MATTERS
Geography is bound to be a major factor as countries such as Italy and Spain have endured the most deadly virus outbreaks. While UniCredit generates slightly less than half its revenue in Italy, rivals such as Intesa Sanpaolo (MI:ISP) SpA and Banco BPM SpA are completely dependent on their domestic market.
In Spain, both Banco Bilbao Vizcaya Argentaria and Banco Santander (MC:SAN) SA get more revenue from Latin America than their home country. However, that comes with its own issues. Santander withdrew its full-year guidance for its Mexico business, which accounts for 9% of underlying group profit, citing measures such as loan deferral programs.
(Updates with UniCredit loan loss provisions in seventh paragraph)
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