Europe News

European banks brace for earnings frenzy and ECB scrutiny

Where do European banks head from here?

Banks across Europe have started to feel the heat as markets eagerly await their second-quarter earnings.

Already struggling under the weight of non-performing loans, European banking stocks have been hit since the U.K. voted to leave the European Union on June 23. The Euro Stoxx Banking index was down nearly 7 percent a week after Brexit - its worst since August 2015. The index is currently down over 30 percent year to date.

Major European banks like Deutsche Bank, Royal Bank of Scotland, Lloyds and Credit Suisse saw their shares in free-fall after the referendum's results were announced. In the UK, Royal Bank of Scotland was the worst-hit among all banks after the bank saw its shares plunge by more than 30 percent since June 24.

These prices have seen a rebound since Brexit vote but still continue to be in negative territory. Share price in Barclays and RBS was down nearly 2 percent in current trade on Tuesday. Second-quarter results in Barclays are due to be announced on Friday, while RBS is due to announce its results next week along with HSBC.

Meanwhile troubles for German banks seem never ending. Deutsche Bank's shares are down nearly 3 percent. This as the company awaits its second-quarter results on Wednesday. The bank has recently found itself in the midst of fresh troubles after its U.S. business failed a Federal Reserve stress test and the International Monetary Fund referred to Deutsche Bank as one of the riskiest banks globally last month.

Commerzbank, another German bank has its shares down 5 percent after the bank reported Tuesday a fall in its second-quarter operating profit to 342 million euros ($375.82 million) from 419 million euros in the year-earlier period, according to a preliminary earnings release on Monday. The bank is due to publish full figures for the second quarter 2016 on August 2.

As if waiting for investor reaction to second-quarter results over the coming weeks, banks are also cautious as they await results of the ECB stress tests on Friday. While the test will not specify if a bank has passed or failed, it will look into general health issues of euro zone lenders.

"The European banking sector faces judgement this week from the European regulators who will publish results after scrutinizing the stability of over 51 banks," Ana Thaker, Market Economist at PhillipCapital UK told CNBC via email.

"However, the outlook is bleak as markets focus on the fragile Italian banking system that is plagued with non-performing loans and overloaded balance sheets."

Italy has been trying to deal with its banking system that is heavily bogged down by non-performing loans in the size of 360 billion euros. This restricts the country's economic growth as it reduces the amount of debt banks can lend out. At the latest ECB press conference, President Mario Draghi said non-performing loans posed a significant problem for the future ability and the capacity the banks have of lending. He explained that the problem of NPL is an obstacle to the ECB's monetary policy and the solution is based on three pillars:

  • A consistent supervisory approach
  • Element of a full functioning NPL market
  • Government action in passing the legislation the foster the development of a NPL market

"The Italian banks are at the sharp end in a sector weakened by lower interest rates and economic growth, increased regulation and close political scrutiny," Steve Hussey, Head of Financial Institutions Credit Research at AllianceBernstein told CNBC via email.

"The issues in Italy highlight the need, not for the first time, for greater harmonization across Europe, a nettle that should have been grasped way before now. Without this, questions around an ever closer "banking union" will once again come into doubt."

Shares across the board in Italian banks are down in current trading session with Unicredit down more than 3 percent, followed by Banca Monte dei Paschi di Siena that is thought to be one of the weakest among lenders in Italy.

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