2016 was never likely to be the year of fat profits, at least not for some of Europe’s largest banks in the middle of deep restructuring.
For many of these troubled banks, it’s been a rough start to the year. Shares have dropped on average by more than 20 percent since the start of the year in Europe’s banking sector, with a tough global economic environment weighing on investor sentiment and their appetite for doing business with banks.
The economic uncertainty has hit bank profits across the globe, but in Europe, three banks in particular have done even worse than the European average. Deutsche Bank, Credit Suisse and Italy’s Unicredit are all in the middle of overhauling their business models.
For these three banking giants, managing expectations will be the name of the game over the next few months. Better to surprise investors by beating their forecasts than to disappoint them with more bad news.
Results from the first quarter of this year highlight this battle of expectations. Of the three banks, Unicredit actually posted the biggest quarterly profit – yet its share price fell as investors had hoped for more.
Deutsche Bank and Credit Suisse, by contrast, surprised investors with some good news after months of warning that the times were tough. The two banks saw their share price rise accordingly.
To some extent the lower the profits – or if we have a marginal loss – it could be more the hallmark of success. John Cryan, Deutsche Bank CEO
Take Deutsche Bank: Germany’s largest bank last week surprised investors with a profit of €236 million in the first three months of this year, sending its share price up nearly 5 percent. It marked the first profit in three quarters as legal expenses for the quarter dropped to just €187 million, a tenth of the €1.5 billion the bank paid a year earlier.
It marked a rare bit of good news for a bank that has been grappling with thousands of legal cases and investigations, with some analysts signaling that the profits may be the first sign that the bank is turning a corner. Deutsche Bank is planning deep cost cuts this year, shedding about 9,000 full time jobs and closing operations in a dozen countries.
Its chief executive, John Cryan, has been doing his best to set investors up for disappointment this year. He has warned that the bank could face a loss over the course of 2016.
If anything, Mr. Cryan even sought to play down the first quarter’s good news. Losses can be a good thing, he argued, if it means that Deutsche Bank has made progress in its restructuring and settling the many legal disputes that are its biggest challenge for this year.
“We want to have an awful lot done this year, and to some extent the lower the profits – or if we have a marginal loss – it could be more the hallmark of success," Mr. Cryan said. "A bigger profit may be a hallmark of us not having achieved a lot of what we wanted to achieve.”
Investors in Italian bank stocks have also become accustomed to regrets. Negative headlines from the industry have recently been as much a part of Italy as cappuccino and Saltimbocca.
On Tuesday, Unicredit's chief executive, Federico Ghizzoni, provided even more cause for concern: Italy’s largest bank reported net income of €406 million ($462 million) in the first quarter, which was more than 20 percent lower than in the same quarter last year.
Long-suffering investors promptly sent shares in the Italian bank, which also owns Germany’s HypoVereinsbank, into a 1.6-percent decline.
The latest bad news from Milan comes at a bad time for Mr. Ghizzoni. The Unicredit CEO has been under pressure for some time, due to a massive price slump in the last 12 months and the bank's chronic shortage of capital.
Shareholders are disappointed. Most recently, a bailout for the ailing Banca Popolare di Vicenza, for which Unicredit was supposed to guarantee a capital increase, has led to further turmoil.
These are turbulent times at the Milan headquarters of the major Italian bank. Even if the rumors surfacing every two months about the need for yet another capital increase and Mr. Ghizzoni's replacement prove to be unfounded, one banker in Milan characterized the latest quarterly results as "inadequate."
"We are not worried, but it is clear that we need to deliver," said the banker, who declined to be named.
Officially Mr. Ghizzoni, who replaced Alessandro Profumo as chief executive of the Italian bank six years ago, expressed confidence. Without one-time payments for a restructuring in Italy and Austria, the result could be seen as satisfactory, he said. Analysts had also anticipated even lower net income, he added.
We are not worried, but it is clear that we need to deliver. Unicredit Banker
"We are on track with the implementation of our strategic plan," said Mr. Ghizzoni. "We have already achieved significant results with our cost reduction program."
Unicredit unveiled its strategy through 2018 in November. Among other things, it calls for a broad pullout of Austria, concentrating the bank's Austrian business in Milan instead, and cutting 14 percent of jobs.
The Unicredit figures also reflect a miserable quarter for the entire Italian banking sector. Worries over the stability of the country's banking system had led to sharp declines in Italian bank shares. The second major bank, Intesa Sanpaolo, had also reported a decline in profit a few days earlier.
The consolidation of the banking sector, promoted by the government in Rome, is moving at a slow pace. Investors are repeatedly unsettled by reports of sharp declines in share prices. There have also been isolated reports that customers are withdrawing their money from banks.
For economics professor Marcello Messori of LUISS University, the banks' quarterly figures are a reflection of the current systemic crisis facing Italy’s entire banking sector. A collapse of four smaller regional banks in November was followed by a broader market crash at the beginning of this year as investors focused on the hundreds of billions in bad loans still on the balance sheets of Italian banks.
"It was a chain reaction," he explained, arguing that a recent deal with the European Union on a government-backed “bad bank” for the non-performing loans has yet to solve the problem.
The Atlante fund, equipped with between €5 billion and a maximum of €6 billion, raised by Unicredit and Intesa Sanpaolo, insurance companies, foundations and the CDP credit institute, is intended to buy bad loans from ailing banks and provide assistance with upcoming recapitalizations.
But Atlante experienced a false start and the first performance test was a flop: Demand for a capital increase for Banca Popolare di Vicenza was so weak that the Milan Stock Exchange cancelled the IPO, leaving Atlante as the bank's main shareholder.
Bank expert Mr. Messori of the LUISS University believes the banking sector remains fragile but does not see problems of insolvency or a lack of liquidity among banks in Italy. He is concerned, however, about the bad loans.
"The process of dismantling these loans is moving slowly and is an obstacle on the path to more growth," he said.
Over in Switzerland, the country’s second-largest bank is trying to signal investors that it believes it has turned a corner.
The bank took an unusual step on Tuesday to prove its point: While banks normally discuss their quarterly figures via teleconference, the entire executive board of Credit Suisse turned up for a press conference in Zürich.
For once, Switzerland's second-largest bank had no bad news to announce, which partly explains the top executives' presence. On balance, the bank lost 302 million Swiss francs (€272 million, or $310 million), but after the bank had issued profit warning in March, analysts had expected a loss of closer to half a billion francs.
Against expectations, Credit Suisse was also able to keep its core capital ratio at 11.4 percent, the same level as in the first quarter of last year.
"We managed to maintain our capital position in a difficult market environment," explained the bank's chief executive, Tidjane Thiam, as he highlighted one of the biggest positive surprises.
The bank’s share price increased by 5 percent on the news, with many analysts and investors focusing on the strong capital base.
"That is the highlight of these results," said Andreas Venditti of Bank Vontobel.
We managed to maintain our capital position in a difficult market environment. Tidjane Thiam, Credit Suisse CEO
That doesn’t mean the bank is out of the woods. The stable capital ratio was primarily the result of a surprisingly sharp reduction in risk-weighted investments, said Andreas Brun of Zürcher Kantonalbank, but noted that this could quickly turn around by as soon as next quarter.
"The numbers still don't signify a turnaround," said Mr. Brun.
With respect to the divisions, the Global Markets division did surprisingly poorly, with a pre-tax loss of 649 billion Swiss francs. The three regional units in the Asset Management division exceeded expectations with a total of 1 billion francs in profits. The consolidated loss was smaller than expected, partly because of lower restructuring costs in the settlement unit.
Mr. Thiam also focused on the bank's successful efforts to cut costs. Of the targeted 1.4 billion francs in cost cuts, "more than half" had already been achieved, he said.
Some 6,000 jobs are to be cut by the end of the year, of which already 3,500 have been eliminated. Nevertheless, earnings were down 27 percent over the previous year, compared to only a 3 percent decline in spending.
When the quarterly figures in asset management are extrapolated to the entire year, the result is a pretax profit of about 4 billion francs. Mr. Thiam aims to increase this number to 6.5 billion francs by the end of 2018. He reacted with slight irritation to questions of whether this was unrealistic.
The current figures are not representative, in light of difficult market conditions, he argued. "That's why I am not prepared to abandon my profit objectives."
Christopher Cermak is an editor for Handelsblatt Global Edition in Berlin, covering finance and economics. Regina Krieger is Handelsblatt’s correspondent in Rome and Holger Alich is Handelsblatt’s correspondent in Switzerland. To contact the authors: [email protected], [email protected] and [email protected]