European banks suffer setback in Q1 2016, still posit no disaster

European banks suffered a setback during the first quarter of this year, as capital revenues continued to be hit by concerns about global economic growth and banks’ own business models. However, cost cutting amid decline in loan provisions slightly helped resist the fall in profitability.

Turmoil in global financial health amid weakness in trading activity subdued investor sentiments below usual levels. As a result, trading income at the 20 largest European banks fell by more than half year on year, and fees and commissions dropped by 8 percent. By contrast, net interest income remained almost stable at -1.8 percent, after a strong rise last year.

However, banks have benefited from a continuing slow normalization in lending volumes. Credit growth of all banks in the euro area was running at 2 percent y/y with households and was basically flat with companies, both better than in 2015. Overall, large banks’ revenues were 11 percent lower than in the previous year.

Total assets, which had been inflated by the euro depreciation a year ago, now fell by 6 percent y/y at the large banks and by 4 percent in the euro area. The equity base hardly changed in either case, which supported capital ratios. The leverage ratio at the large banks went up by 0.3 pp y/y and has now reached 4.7 percent on average. Similarly, the fully loaded Basel III CET1 ratio gained almost a full percentage point, rising to 12.7 percent, thanks not least to a further reduction in risk-weighted assets by 3 percent, Deutsche Bank reported.

However, some relief has been provided by reduction in administrative expenses by 4 percent, as well as a decrease in loan loss provisions by almost 16 percent. Net income fell by a third, thereby reversing the progress made in 2015, and was back at the Q1 2014 level.

While negative political surprises usually have only short-term effects on financial markets, more fundamental decisions are on the table this time. Uncertainty is therefore particularly pronounced, which means that the impact may be more significant and longer-lasting, the report added.

"Banks’ performance will depend on how much further progress they themselves can achieve with respect to cost containment, finding new sources of revenue (particularly on the fee side), successfully repositioning versus advancing new competitors, and resolving remaining litigation issues," Deutsche Bank commented in its research report.