EU banks face bleak earnings outlook

Performance weighs on stock as management teams try to temper expectations ahead of quarterly reports.

The financial district in London.
Getty Images
The financial district in London.

Banking news may go from bad to worse this spring, with European Union banks set to announce earnings in coming weeks after their U.S. counterparts.

EU bank shares' performance has broadly been worse than even those of their U.S. competitors to begin 2016, with some banks seeing more than 30 percent of their value cleaved off in a turbulent market. Interest rates applied to EU banks are now lower than rates applied to U.S. institutions.

Now, what has become a challenging market for European banks is forcing some to scale back operations and retrench efforts at an inconvenient time.

"In Europe, banks are still working through problems," said Frederick Cannon, Keefe Bruyette & Woods' director of research.

But it's not clear when European banks' problems will be alleviated. Whereas the U.S. recovery from the market swoon that began the year is expected to allow the Federal Reserve to eventually proceed with its plan to lift interest rates, concern abounds in the EU over whether rates will be cut further, and go negative.

Barclays will report earnings April 27, according to an announcement Wednesday. It will be followed by Deutsche Bank, which will disclose its performance on April 28. On May 3, UBS, BNP Paribas and HSBC are each expected to announce results. Credit Suisse will release earnings May 10.

Each of the banks has seen shares fall by double digits to begin 2016. None of the banks provided comment.

A temporary silver lining for EU banks comes from the European Central Bank, which in slashing interest rates also decided last month to expand its asset-buying program to more than $80 billion monthly.

One immediate impact from the ECB move was a flood of jumbo bond deals, much of which were marketed by EU banks. Jumbo bond deals are larger corporate transactions; it includes a 13 billion euro ($15 billion) offering in March from Anheuser-Busch InBev. It's not just being felt by corporates in Europe; it has also trickled down to consumers, where it might generate more revenue for banks.

Read MoreECB reopens its door to fresh rate cuts

"There is a bit of consumer revival in the European business," said Julien Jarmoszko, senior research manager at S&P Global Markets Intelligence. "Consumer spending is driving loan growth."

But elsewhere there is plenty of fear. Some banks decided to reveal disappointing projections ahead of earnings, in part driven by a very sluggish start for European firms. Each bank's earnings call will be carefully watched by investors, who are eager to get an updated sense of banks' exposure to energy loans, similar to their U.S. counterparts.

Already, some EU banks are telling investors to expect bad news, particularly in their investment banking divisions.

"On the back of a particularly strong March in 2015, the board of Barclays does not expect as strong a performance from its investment banking operations," the company said in an announcement Tuesday.

Read MoreEuropean banks face major cash crunch

Barclays' shares fell more than 2 percent Tuesday. The bank's stock is down more than 30 percent year to date. The shares then rebounded 2 percent Wednesday.

S&P Capital IQ analysts wrote in a recent report that they expect revenue to decline this year at Deutsche Bank, which is pulling out of 10 countries and scaling back on banking businesses.

And at a conference in March, UBS' chief executive, Sergio Ermotti, said he "would consider performance to be satisfactory if the investment bank covers its cost of equity," adding that he expected this would be the case.