The Strategist

European banks expected to deliver weak results in Q1 2017

04/25/2017 - 13:37

European investment banks are expected to give way to competitors from the US in trading stocks and bonds. This will be reflected in the financial results for the first quarter, to be published this week, reports Bloomberg.

Barclays Plc, Deutsche Bank AG and UBS Group AG are expected to report a smaller increase in bond income than the five largest US investment banks, which rose their total revenues by 24%.

While American banks increased their income from stock trading compared to last year, European banks, according to analysts, recorded a general decline.

If the forecasts are justified, this will mean continuation of the trend of 2016, when share of the largest European banks in trading stocks and bonds has fallen to a minimum since the financial crisis. Nevertheless, the loss of positions will not be as severe as in the fourth quarter, when US banks sharply increased their market share, as European creditors faced significant legal costs.

Deregulation in the US is "more a threat than an opportunity" for European investment banks, told analysts at Macquarie Group Ltd.

Results of the banking trade in the US were positively influenced by the favorable situation in the country's economy and market volatility after Donald Trump’s victory in the presidential election, as well as his desire to weaken financial regulation. At the same time, European banks have undergone strategic changes and cut jobs, trying to increase profits.

At that, Credit Suisse Group AG is expected to differentiate from others. The bank improved its position compared to the first quarter of last year, when the amount of write-offs on bad debts and other assets with fixed income exceeded $ 400 million.

US banks in the first quarter probably accounted for about 73% of the bond yield of nine US and European companies, compared to 71% in January-March 2016. However, the share of US banks declined compared to the fourth quarter of last year, when it was 77%. Nine companies, as a rule, account for about half of the income of the commercial and investment banking industry, according to Bloomberg Intelligence and McKinsey & Co.

In the shares trading, Wall Street is expected to increase its market share in the I quarter to 70% compared with 68% a year earlier.

Nevertheless, the situation of European banks may improve next year, as they will face less geopolitical risks. The index of European banks Stoxx 600 Banks showed the maximum growth for more than a year on Monday, after the centrist Emmanuel Macron won in the first round of the presidential elections in France. As polls show, he will beat the "National Front" leader Marin Le Pen in the second round of the elections on May 7.