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US banks lift bar for Europe earnings

Stellar earnings from US banks have raised expectations that European rivals will follow suit in the next month, although rising bad debts have the potential to douse that optimism.

Results from Credit Suisse on Thursday and from Santander, Deutsche Bank, HSBC and Barclays in the following two weeks should show boom times have returned to investment banking and retail margins are attractive.

But bad debts are rising sharply as recession bites and banks most exposed to corporate loans and riskier home loans may provide a stark reminder that recovery will be a long, hard slog, analysts said. "The big swing factor for banks this year will be the rising loan impairments, and that's coming through in all the major countries," said Simon Willis, bank analyst at ESN/NCB Stockbrokers in London. Sweden's SEB today posted weak Q2 results as it joined other Nordic banks giving a gloomy message on prospects for the Baltic region, signaling the global recovery is fragile and trouble spots remain. Earnings from top US banks, led by Goldman Sachs beat expectations and confirmed that a bumper first three months for investment banking continued in the second quarter, marking a sharp revival from last year's turmoil. Near-record fixed income revenues and strong equity and commodities business are fuelling profits, and there is a clear positive read-across to Credit Suisse, Barclays and Deutsche Bank, analysts said. Credit Suisse is positioned to be a long-term winner from the retreat by rivals and Thursday's results should show the benefit from market gains in investment banking. Its great rival UBS is struggling to shake off the crisis, however, and has already said it will post a second-quarter loss. Deutsche Bank predicts a 1.5 billion Swiss franc loss for UBS in the period, compared to a 1.9 billion franc profit for Credit Suisse. Losses on toxic assets across banks will continue but at much reduced levels from their 2008 peak, analysts estimate. Bad debts on corporate loans and commercial real estate are probably the biggest drag this year. Warnings from JPMorgan and Bank of America about rising credit losses are expected to be echoed in Europe. Analysts at HSBC estimate loan loss provisions in Europe's five biggest countries will average 1.14% of loans this year and 1.05% in 2010, sharply up from 0.43% in 2007 but below peaks seen in the early 1990s recession.