What's going on?
A swathe of major European banks reported their earnings late last week, with a few of the big players falling short of investors’ expectations.
What does this mean?
Germany’s biggest bank, Deutsche Bank, went first when it reported its weakest quarterly revenue in 3 ½ years. The bank has been focusing on cutting costs as part of its latest turnaround plan, but cutting too many costs can lead to a fall in revenue (e.g. letting go of people means there are fewer people generating business).
On Friday, Barclays reported a large one-off loss resulting from its sale of a big stake in Barclays Africa (a separate company which Barclays is reducing its exposure to). But even ignoring the one-off charge, Barclays’ revenue fell short of research analysts’ expectations. Meanwhile, in Switzerland, both Credit Suisse and UBS reported results that beat expectations, largely due to the performance of their private banking operations.
Why should I care?
For markets: European banks have still had a great 12 months.
Around this time last year, shares of European banks were hit hard on concerns over their profitability and whether they were holding enough excess cash to protect against unforeseen negative scenarios. But the overall environment for banks has improved markedly: economic growth, particularly in Europe, has picked up, meaning more demand for banking activity. Also, rising interest rates globally mean banks can charge more for the money they lend. European bank shares have jumped about 50% over the past year – so last week’s tepid results should be viewed in that context.
The bigger picture: The restructuring of European banks isn’t over yet.
Most major European banks have changed the focus of their businesses in recent years, typically by de-emphasizing trading (e.g. stocks and bonds) and focusing on either advising corporate clients or, in the case of the Swiss banks, private clients. UBS started this process earlier than many and appears to be enjoying the fruits of it now. But the others, particularly Deutsche Bank, are still in the midst of making large scale changes – and figuring out how to be successful for shareholders moving forward.