For bank investors, the third quarter is one they’d rather erase from their minds – and portfolios alike. European banks were down by more than 25 percent and saw their worst performance since the fourth quarter of 2008, when the collapse of Lehman brothers shook the markets.
Shares in Swiss banks were hit just as hard: UBS fell by 27 percent, while Credit Suisse was down 24 percent over the last three months.
The bank earnings should be just as dismal, according to banking analysts. Both banks have had disappointing quarters.
"We downgraded Credit Suisse to reduce rating after it released half year results," Dirk Becker, deputy head of banking sector research at Kepler Capital Markets told CNBC.
"August has been particularly bad for investment banks. We don’t expect to see an improvement in the third quarter," he said. "The bank makes most of its investment banking business in equities and M&A advisory and we’ve seen a drop in deal volume. We expect them to suffer on the revenue side.
"At the same time, they said they would downsize the business, which means that there will be restructuring costs which would hurt the bottom line."
Even before accounting for the challenging market environment, UBS has already warned it will likely post a loss for the third quarter as a result of the $2.3 billion rogue trading loss.
Analysts at Barclays Capitalexpect UBS to post a loss of 1.4 billion francs ($1.6 billion) in the third quarter, versus a previous estimate of 668 million francs in pre-tax profit.
As if the third quarter hadn’t been terrible enough with excessive market volatility, a slump in equity markets, liquidity showing signs of freezing up and investors exiting stocks in favour of cash, Swiss banks were also faced with new record highs of the Swiss franc against the euro and the dollar in early August.
However, the SNB has offered some relief in setting an exchange rate floor of 1.20 for the EUR/CHF on September 6th. As a result, the euro has staged an impressive rally and finished the quarter with a gain of almost 2 percent against the Swiss franc.
Over the last year though, the euro is still down 9 percent against the franc while the dollar is off by almost 8 percent against the Swiss currency, leaving Swiss asset managers with lower reported assets under management and depressed revenues.
According to Rainer Skierka from Swiss private bank Sarasin, the pressures for UBS are here to stay: "It seems probable that the challenging market and economic conditions will persist for a while to come. In addition to this, the low interest rate environment and the franc's strength will have a negative impact on results."
The picture is just as gloomy for US banks. As a result of the excessive market volatility and low client activity, a number of analysts have reduced their third quarter profit estimates for US banks - among them Citigroup, which has recently slashed its forecast by 45 percent on average.
Citigroup cites the volatility in the credit markets and concerns over the global sell off in equities as its key reason for lowering its forecast.
Bank of America Merrill Lynch is cutting third quarter earnings forecasts for Goldman Sachs , Morgan Stanley and Citigroup even for a second time. In short, analysts are concerned about European debt spreading to the core.
BAML writes: “One of the lowlights of banking activity in the third quarter is the fact that heightened volatility had led to significantly weaker FICC trading, exacerbating the normal seasonality further”.
BAML also sees a meaningful decline in investment banking activity levels across mergers and acquisitions and underwriting.According to Thomson Reuters, announced M&A in the third quarter is down 30 percent from the second quarter, marking the weakest quarter since the third quarter of 2009.
