Bonus row adds spice to hot bank profits

 

Banker bonuses, increasing regulation and the impact of bad debts on capital health may take the shine off what should be mostly strong results from Europe's top banks over the next month.

Lively capital markets activity in the third quarter continued a theme from the first half and will underpin results, offsetting the impact of rising losses on souring home and business loans.

The trend was clearly shown by JP Morgan and other U.S. banks. Deutsche Bank said on Wednesday its earnings will beat forecasts, but a dip by its shares showed the U.S. results have raised expectations.

"Investment banking should continue to do well" said Arturo de Frias, analyst at Evolution Securities. "But retail banking is a completely different story. There's no loan growth, there are capital and regulatory constraints, no fee income growth and provisions are on the rise."

Credit Suisse will be Europe's first major bank to post full results on Thursday, and should reap the rewards of strong investment banking profits after coming through the financial crisis as a relative "winner".

Barclays, Deutsche Bank, BNP Paribas and HSBC should have also benefited from the trend, analysts reckon.

The upcoming results could also mark a shift in focus. Capital is still being rebuilt but there is less urgency to do so and more clarity on regulatory changes could see attention shift to prospects and away from past mistakes.

"Given that the threat of massive structured credit losses looks to have passed and a nasty credit cycle seems manageable at this stage, we believe banks will start reviewing their medium-term strategies" Andrew Stimpson at Keefe, Bruyette & Woods said in an earnings preview note earlier this month. 

Shares have reflected the better mood. The DJ Stoxx European bank index .SX7P has rallied by a third since the end of June, and is up almost 60 percent this year.

BUMPER BONUSES?

JPMorgan's bumper $3.6 billion (2.2 billion pounds) Q3 profit set the tone for the latest spurt. Income at its investment bank more than doubled to $1.9 billion as it benefited from the disappearance and weakness of Wall Street rivals.

That bodes well for European rivals also strong in fixed income, currencies and commodities (FICC), such as Credit Suisse and Barclays. Volumes in rates and foreign exchange have slowed and credit spreads have eased back, and the U.S. dollar's weakness could dent reported European earnings, but debt and equity underwriting have been strong, analysts said.

Prospects are also brightening for M&A and IPO activity after a tough year and income from there could take up the slack if bond issuance revenues fall, analysts said.

But massive bad debts from the real economy still have the potential to derail some banks and remind investors that commercial banks face a long slog while unemployment rises, analysts said. Bank of America highlighted the reality with a Q3 loss.

HSBC's elevated U.S. losses and pain at home for Spain's Santander show no banks are immune. The scale of losses will be key issues for several banks considering raising capital, such as Erste Group, Royal Bank of Scotland and Lloyds.

Another issue likely to flare up will be payouts for staff, even for banks that have remained free from state help.

Goldman Sachs reignited fury over this issue after last week setting itself on course to pay out $20 billion to staff this year, infuriating critics so soon after repaying taxpayer funds. 

Major countries last month agreed to reforms including subjecting pay to clawbacks and deferrals, but no cap has been set and regulators and politicians are threatening more direct interference if banks don't rein pay in.

Credit Suisse this week shifted the pay structure for 7,000 top staff, putting pressure on rivals to outline changes.