European banks announce good but pessimistic news on the economy

FRANKFURT/LONDON, July 27 (Reuters) – European banks reported surprisingly good earnings news this week, but some executives spoke of bleak prospects for the rest of the year amid runaway inflation, war and energy shortages.

Deutsche Bank (DBKGn.DE), the German lender to Europe’s largest economy, reported stronger-than-expected second-quarter profit on Wednesday, helped by trading revenue in volatile markets and lower interest rates higher. Read more

But at the same time, Deutsche ditched a 2022 cost target, cast doubt on its profit target and downgraded the outlook for its global investment banking division as deals falter.

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“The coming months will continue to be difficult. There is reason to believe that things will get even more difficult economically,” Deutsche Bank chief executive Christian Sewing wrote to staff.

This split-screen image of a strong business paired with a bleaker outlook is playing out in banks across Europe.

In a week of earnings reports from its top lenders – including UBS (UBSG.S), UniCredit (CRDI.MI) and Lloyds Banking Group (LLOY.L) – investors have been looking for signs that a weaker economy, higher interest rates and the war in Ukraine are weighing on banking activity and prospects.

Since the outbreak of war, European banks have been in turmoil, trying to sever ties with Russia, carrying out a series of tougher sanctions against Moscow and navigating an uncertain and weakened economy.

Central bank efforts to halt runaway inflation across Europe with higher borrowing costs have boosted results for several major lenders, but a big question on bankers’ minds now is that further cuts increases in gas supply will affect the banks and economies of the region.

Nicolas Charnay, an analyst at ratings agency S&P, said the impact was likely to vary across Europe.

“What we probably wouldn’t do is some sort of large-scale European rating action. We would differentiate between countries, and potentially also between banks,” he said.

This echoes the mixed picture painted by this week’s results.

“UNPRECEDENTED CHALLENGES”

In Switzerland on Tuesday, UBS, the world’s largest wealth manager, set the tone with weaker-than-expected profit growth and its chief executive Ralph Hamers warned of an “uncertain” rest of the year and a “moderate” feeling. The bank’s shares fell 9%. Read more

By contrast, Italy’s UniCredit on Wednesday raised its outlook for 2022 after a surprisingly strong second quarter in which it reduced its exposure to Russia and moved ahead with a plan to buy back shares it had suspended. Read more

Still, CEO Andrea Orcel said: “The global economy is facing unprecedented challenges and a lot of uncertainty.”

In Britain, Lloyds Banking Group, Britain’s largest national lender, raised its full-year dividend and profitability forecast despite falling first-half profits and a bleak outlook for the economy. countries, with rising interest rates outpacing modest growth in distressed loan provisions. Read more

Chief executive Charlie Nunn told reporters that one in five of his 26 million customers had been forced to drastically adjust their spending – with 2.2 million canceling subscriptions to big services. audiences such as streaming TV since last summer and the average family spending £89 a month more on energy and food.

UBS’s smaller long distance rival Credit Suisse (CSGN.S) reported a bigger-than-expected loss and a management reshuffle in its latest push to recover from a series of scandals and losses.

Amidst the noise was the undertone of market turmoil associated with war, inflation and resulting client risk aversion.

“We expect these market conditions to continue in the coming months,” Credit Suisse said.

As interest rates rise in Europe for the first time in decades, banks are beginning to profit from the widening gap between what they charge borrowers and what they pay savers.

But the same rate hikes can also trigger waves of defaults as customers struggle to meet their repayment obligations.

After years of abundant liquidity, the challenge bankers now face is balancing the possibility of earning more by lending more while assessing risk appropriately against the backdrop of deteriorating global economic growth prospects.

The International Monetary Fund slashed its global growth forecast again on Tuesday, warning that downside risks from high inflation and the war in Ukraine were materializing and could push the global economy to the brink of recession if they don’t. were not under control.

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Additional reporting by Marta Orosz in Frankfurt; Valentina Za in Milan; Iain Withers and Lawrence White in London; and Oliver Hirt and Michael Shields in Zurich Editing by Tomasz Janowski

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