Doom and Gloom? Are European Banking Earnings Poised for a Pullback in Q2?

Optimism surrounding European banks may be short lived with expectations pointing to a decline in Q2.

Q2 in Europe could already be erasing all the optimism across the banking sector from the first three months of the year. With major lenders poised to report their latest financial results, investors may be setting a standard that’s impossible to meet, given a surprisingly strong performance in Q1.

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2017 was supposed to be marred by a further downturn in profits and revenues at leading banks in Europe. Fresh off forgettable 2016 campaigns, leading lenders such as Deutsche Bank, Barclays, Standard Chartered, and others all shocked the world with robust results in Q1 – widely panned restructuring processes were paying dividends.

US banks such as JPMorgan will first report their earnings this week, with Goldman Sachs, Citigroup, and Morgan Stanley disclosing theirs the following week. European lenders will follow later this month, with much of the industry looking to their US counterparts for cues, not unlike Q1.

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Monetary policy impact

However, plagued by lower volatility in Q2, many trading businesses have been muted. Nowhere is this truer than across the capital markets sector, which saw much of its trading activity taper off substantially relative to Q1. This is not the only sector lying dormant as many trading desks have seen slower activity due to static markets.

Unlike European banks, US lenders may receive a small boost via their retail units, given the benefits of the US’ recent tighter monetary policy. The prospect of higher interest rates could enable banks to yield greater profits by increasing charges for borrowers. On the other side of the Atlantic, the ECB’s continued bond-buying program is also likely to impact banking outlooks.

Many European lenders have continued to deal with sweeping job cuts and other restructuring measures throughout the year, especially in Q2. With the specter of Brexit on the horizon and banks pressed for more concrete plans, many are finally formally adopting relocation plans to either Frankfurt or Dublin. These upcoming regulatory costs and operational moves are unlikely to be reflected in Q2, although they could play a factor during H2 2017.

In the end, Q2 may be as much about unmatched expectations for European lenders as tangible declines in profits. Analysts are already tempering expectations for Q2, according to a Bloomberg report. However, any disappointments could lead to more internal measures and cost-cutting efforts to help placate nervous investor bases.

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