Investors Get Ready for More Bad News From European Banks’ Earnings

Investors are girding for another batch of bad news from Europe’s biggest banks when they start reporting fourth-quarter earnings, with shrinking margins, rising loan impairments, lackluster trading revenue and one-off tax charges making for a toxic mix.

Deutsche Bank AG is scheduled to report on Feb. 2, followed by BNP Paribas SA on Feb. 6, Societe Generale SA on Feb. 8 and Credit Suisse Group AG on Feb. 14.

Here are some areas to watch:

Tax Hit

Multiple lenders in the region were forced to issue profit warnings after U.S. President Donald Trump overhauled the U.S. tax code, making it harder for them to deduct past losses from future tax bills. Deutsche Bank said it will record a third consecutive annual loss after taking a 1.5 billion-euro ($1.8 billion) hit to account for the change. Credit Suisse may report a third annual loss as well after saying it would take a 2.3 billion-franc ($2.4 billion) charge. Societe Generale, Barclays Plc and most other lenders with operations in the U.S. may also make deductions.

Steinhoff Losses

After U.S. banks disclosed more than $1 billion of losses and charge-offs on margin loans to Steinhoff International Holdings NV, investors will be keen to know European banks’ exposure to the stricken South African retailer. A UBS Group AG loan backed by shares of Steinhoff was to blame for the majority of the Swiss bank’s 79 million francs in credit losses in the fourth quarter, a person with knowledge of the matter has said. Other European lenders that may be impacted include BNP Paribas, HSBC Holdings Plc, Commerzbank AG, Credit Agricole SA, Royal Bank of Scotland Group Plc and UniCredit SpA.

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Painful Scandal

Loans tied to embattled retailer Steinhoff have weighed on U.S. bank results

Source: Company filings and executive comments

Trading Slump

With market volatility across asset classes near record lows, income at banks with large securities units will remain under scrutiny. Deutsche Bank warned earlier this month that trading revenue slumped 22 percent in the final three months of the year, piling pressure on Chief Executive Officer John Cryan to prove he can win back investment-banking share lost to U.S. competitors in recent years. Some of the firm’s largest shareholders have said they may stop supporting Cryan unless performance improves by the time of the annual shareholder meeting in May, people with knowledge of the matter said in October.

But Cryan isn’t the only bank boss feeling the heat over the slump in trading. Barclays’ investors are impatient for evidence that CEO Jes Staley’s revamp of the firm’s securities division is bearing fruit after a disastrous third quarter, when revenue from trading stocks, bonds and currencies fell 31 percent.

Revenue is also likely to remain under pressure at French rivals BNP Paribas and Credit Agricole, both with significant bond trading businesses. Credit Suisse has guided for a loss at one of its trading units and warned that market conditions for both remained difficult in the final months of last year.

Everyone’s Shrinking

German and French banks are expected to report dropping revenue in the fourth quarter

Sources: Company filings; 4Q 2107 estimates compiled by Bloomberg

Bad Loans

Investors in UniCredit SpA, Intesa Sanpaolo SpA and other Italian banks saddled with more than 300 billion euros of bad loans want to see what progress executives are making cleaning up their balance sheets.

For Intesa, the main focus will be on CEO Carlo Messina’s new business plan, which will be unveiled on Feb. 6 and may feature new asset quality targets and plans to expand its insurance and wealth management businesses. Expect also to hear an update on the integration of failed northern Italian lenders Banca Popolare di Vicenza SpA and Veneto Banca SpA.

UniCredit indicated last month that it planned to accelerate the reduction of its non-performing loans. The bank said it would boost its dividend payout to 30 percent of earnings next year, up from 20 percent for 2018.

Carillion Failure

U.K. lenders including Barclays, RBS and Lloyds are on the hook for loans extended to failed British construction company Carillion Plc, which collapsed with more than 1.6 billion pounds ($2.2 billion) of debt last week. Lloyds Banking Group Plc and RBS already wrote down the value of the loans in the third quarter, but analysts expect further losses to come. According to research from consultancy Begbies Traynor, the number of British companies in “significant financial distress” at the end of last year increased by 36 percent.

Mortgage-Backed Woes

Investors will also be looking to RBS and Barclays for an update on how much it will cost to settle a U.S. Department of Justice investigation into the sale of mortgage securities more than a decade ago. For taxpayer-backed RBS, the probe is the biggest remaining obstacle to resuming dividends, which would make it easier for the government to find buyers for the majority stake it still holds 10 years after the financial crisis.

A little more than a year ago, the Justice Department sued Barclays for fraud after the bank refused to pay the amount the government sought in negotiations. At the time, people familiar said Barclays was willing to pay no more than $2 billion, while the U.S. was seeking a far higher penalty.

UBS, which faces a similar probe, said this week it’s unlikely that it will resolve any major litigation soon.

Swiss New Money

UBS kicked off the earnings season for Swiss banks with another strong quarter of net new money growth, which may provide an indication of what to expect when peers Julius Baer Group Ltd. and Credit Suisse report. UBS also increased its dividend and initiated a share buyback. Eyes will now be on Credit Suisse, which has asked shareholders in recent years for about 10 billion francs in capital. At its investor day last year the bank signaled that it may return half of its profit, mainly through buybacks or dividends, once it strengthens capital generation in 2019 and 2020.

Spanish Banks

Investors in Spanish banks will be looking beyond Europe’s shores. The focus for Banco Bilbao Vizcaya Argentaria SA will be the performance of its Mexican business, which accounts for more than 40 percent of group profit. Turkey is seen as a possible source of volatility and risk for the lender and investors will be watching for signals on its business there.

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