Investors brace for more bad news from European banks' earnings
Investors bracing themselves for another batch of bad news from Europe's biggest banks when they start reporting fourth-quarter earnings

With shrinking margins, rising loan impairments, lackluster trading revenue and one-off tax charges making for a toxic mix, investors are getting ready for bad results for fourth-quarter earnings from the biggest banks in Europe.
Deutsche Bank is scheduled to report on 2 February, followed by BNP Paribas on 6 February, Societe Generale on 8 February and Credit Suisse on 14 February.
Here are some areas to watch:
Tax hit
Multiple lenders in the region were forced to issue profit warnings after US President Donald Trump overhauled the US tax code, making it harder for them to deduct past losses from future tax bills. Deutsche Bank said it will record a third consecutive annual loss after taking a €1.5 billion hit to account for the change. Credit Suisse may report a third annual loss as well after saying it would take a 2.3 billion-franc (€1.9 billion) charge. Societe Generale, Barclays and most other lenders with operations in the US may also make deductions.
Steinhoff losses
After US banks disclosed more than $1 billion of losses and charge-offs on margin loans to Steinhoff International, investors will be keen to know European banks' exposure to the stricken South African retailer. A UBS loan backed by shares of Steinhoff was to blame for the majority of the Swiss bank's 79 million francs in credit losses in the fourth quarter, a person with knowledge of the matter has said. Other European lenders that may be impacted include BNP Paribas, HSBC, Commerzbank, Credit Agricole, Royal Bank of Scotland and UniCredit.
Trading slump
With market volatility across asset classes near record lows, income at banks with large securities units will remain under scrutiny. Deutsche Bank warned earlier this month that trading revenue slumped 22% in the final three months of the year, piling pressure on CEO John Cryan to prove he can win back investment-banking share lost to US competitors in recent years. Some of the firm's largest shareholders have said they may stop supporting Cryan unless performance improves by the time of the annual shareholder meeting in May, people with knowledge of the matter said in October.

But Cryan isn't the only bank boss feeling the heat over the slump in trading. Barclays' investors are impatient for evidence that CEO Jes Staley's revamp of the firm's securities division is bearing fruit after a disastrous third quarter, when revenue from trading stocks, bonds and currencies fell 31%.
Revenue is also likely to remain under pressure at French rivals BNP Paribas and Credit Agricole, both with significant bond trading businesses. Credit Suisse has guided for a loss at one of its trading units and warned that market conditions for both remained difficult in the final months of last year.
Bad loans
Investors in UniCredit SpA, Intesa Sanpaolo SpA and other Italian banks saddled with more than 300 billion euros of bad loans want to see what progress executives are making cleaning up their balance sheets.
For Intesa, the main focus will be on CEO Carlo Messina's new business plan, which will be unveiled on 6 February and may feature new asset quality targets and plans to expand its insurance and wealth management businesses. Expect also to hear an update on the integration of failed northern Italian lenders Banca Popolare di Vicenza and Veneto Banca.
UniCredit indicated last month that it planned to accelerate the reduction of its non-performing loans. The bank said it would boost its dividend payout to 30% of earnings next year, up from 20% for 2018.

Carillion failure
UK lenders including Barclays, RBS and Lloyds are on the hook for loans extended to failed British construction company Carillion, which collapsed with more than 1.6 billion pounds (€1.79 billion) of debt last week. Lloyds Banking and RBS already wrote down the value of the loans in the third quarter, but analysts expect further losses to come. According to research from consultancy Begbies Traynor, the number of British companies in "significant financial distress" at the end of last year increased by 36%.
Mortgage-backed woes
Investors will also be looking to RBS and Barclays for an update on how much it will cost to settle a US Department of Justice investigation into the sale of mortgage securities more than a decade ago. For taxpayer-backed RBS, the probe is the biggest remaining obstacle to resuming dividends, which would make it easier for the government to find buyers for the majority stake it still holds 10 years after the financial crisis.
A little more than a year ago, the Justice Department sued Barclays for fraud after the bank refused to pay the amount the government sought in negotiations. At the time, people familiar said Barclays was willing to pay no more than €1.62 billion, while the US was seeking a far higher penalty.
UBS, which faces a similar probe, said this week it’s unlikely that it will resolve any major litigation soon.
Swiss new money
UBS kicked off the earnings season for Swiss banks with another strong quarter of net new money growth, which may provide an indication of what to expect when peers Julius Baer and Credit Suisse report. UBS also increased its dividend and initiated a share buyback. Eyes will now be on Credit Suisse, which has asked shareholders in recent years for about 10 billion francs in capital. At its investor day last year the bank signalled that it may return half of its profit, mainly through buybacks or dividends, once it strengthens capital generation in 2019 and 2020.

Spanish banks
Investors in Spanish banks will be looking beyond Europe's shores. The focus for Banco Bilbao Vizcaya Argentaria will be the performance of its Mexican business, which accounts for more than 40% of group profit. Turkey is seen as a possible source of volatility and risk for the lender and investors will be watching for signals on its business there.
At Banco Santander, analysts will be looking for clues about the performance of its Brazilian unit, which accounted for about a quarter of the bank’s nine-month profit. As Brazil's economy recovers, analysts expect that to feed through into increased profit for the lender. The UK will also remain a focus for shareholders as they try to assess the impact of Brexit. Santander raised its 2018 profitability target in October after the British business performed better than expected.
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