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Deutsche Bank, the German lender in Europe's largest economy,
reported on Wednesday larger-than-expected profit for the second
quarter that was helped by trading revenue in volatile markets
and higher interest rates.
But at the same time, Deutsche abandoned a cost target for 2022,
threw doubt on its profit target and scaled back the outlook for
its global investment banking division as dealmaking withers.
"The months ahead will continue to be challenging. There is
reason to believe that things will become even more difficult
economically," Deutsche Bank Chief Executive Christian Sewing
wrote to staff.
That split-screen image of solid business coupled with a grimmer
outlook is playing out in banks across Europe.
In a week of earnings reports by its major lenders - including
UBS, UniCredit, and Lloyds Banking Group - investors have been
looking for signs that a weaker economy, higher interest rates
and the war in Ukraine are weighing on banks' business and
outlooks.
Since the war's outbreak, European banks have been thrown into
turmoil, trying to cut ties with Russia, executing an array of
stiffer sanctions against Moscow, and navigating an uncertain
and weakening economy.
Central bank efforts to arrest runaway inflation across Europe
with higher borrowing costs have boosted the bottom lines of
several top lenders but a big question on bankers' minds now is
even deeper cuts in gas supplies will affect banks and economies
in the region.
Nicolas Charnay, analyst with the ratings agency S&P, said the
impact was likely to vary across Europe.
"What we would probably not do is a kind of broad European based
rating action. We would be differentiating across countries, and
potentially also across banks," he said.
That echoes the mixed picture painted by this week's earnings.
'UNPRECEDENTED CHALLENGES'
In Switzerland on Tuesday, UBS, the world's biggest wealth
manager, set the tone with a profit rise that was smaller than
expected and its Chief Executive Ralph Hamers warning about an
"uncertain" rest of the year and "subdued" sentiment. The bank's
shares tumbled 9%.
In contrast, Italy's UniCredit on Wednesday raised its 2022
outlook after a surprisingly strong second quarter in which it
cut its exposure to Russia and moved ahead with a proposed share
buyback it had put on hold.
Still, CEO Andrea Orcel said, "The global economy is facing
unprecedented challenges and much uncertainty."
In Britain, Lloyds Banking Group, Britain's largest domestic
lender, hiked its dividend and full-year profitability forecast
despite lower first-half earnings and a murky outlook for the
country's economy, as rising interest rates outpace modest
growth in provisions for troubled loans.
Chief Executive Charlie Nunn told reporters one in five of its
26 million customers were forced to adapt their spending
significantly - with 2.2 million cancelling subscriptions on
consumer services such as streaming TV since last summer and the
average family spending 89 pounds a month more on energy and
food.
UBS' smaller cross-town rival Credit Suisse reported a
deeper-than-expected loss and a reshuffle in top management in
its latest effort to recover from a series of scandals and
losses.
Amid the noise was the undertone of market turmoil associated
with the war, inflation, and resulting client risk aversion.
"We would expect these market conditions to continue for the
coming months," Credit Suisse said.
With interest rates on the rise in Europe for the first time in
decades, banks are starting to benefit from the increased gap
between what they charge borrowers and what they pay savers.
But the same rate rises can also trigger waves of defaults as
customers struggle to meet their repayment obligations.
After years of abundant liquidity, the challenge bankers face
now is to balance the opportunity of earning more by lending
more while pricing the risks appropriately against the backdrop
of deteriorating global economic growth outlook.
The International Monetary Fund cut global growth forecasts
again on Tuesday, warning that downside risks from high
inflation and the Ukraine war were materializing and could push
the world economy to the brink of recession if left unchecked.
(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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