Christian Sewing, chief executive officer of Deutsche Bank AG. — Bloomberg
BIG European banks are humming, but you’d never guess that from looking at their stock prices.
BNP Paribas SA, Deutsche Bank AG, Banco Santander SA and UniCredit Spa all reported better-than-expected results for the second quarter on Wednesday. Yet only one, Spain’s Santander, saw its stock price rise.
The common thread is a troubling outlook for the European economy: A mix of stagnant growth and stubborn cost inflation for manufacturing that was revealed in purchasing managers’ surveys Wednesday morning.
For banks, that might protect their interest margins if price pressures delay European Central Bank rate cuts, but weakening economies will likely mean less demand for new loans and eventually more borrowers struggling to repay their debts.
UniCredit’s share price slipped in early trade even though it easily beat profit expectations, lifted its revenue guidance and announced a deal to buy a small cloud-based bank that should improve its digital capabilities.
BNP Paribas also smashed forecasts, set a new record for quarterly net income and reported its strongest equities-trading revenue ever, which for the first time outstripped its traditionally dominant trading of bonds, currencies and commodities. Its stock also dropped.
First quarterly loss since 2020
Quarterly net income attributable to shareholders. But it was Deutsche Bank that proved the biggest loser, though it too reported underlying profit better than analysts predicted and turned in the best numbers for advisory and underwriting fees in its investment bank since the boom times of 2021.
The German lender’s problem was confirming that it would likely do no more stock buybacks this year because of the 1.3bil (US$1.4bil) provision for shareholder lawsuits that it flagged in April. But even then, executives insisted it was still good for its pledge to return more than 8bil to investors by 2026.
The bank has returned 3.3bil of that so far, including 675mil of buybacks this year.The lawsuits are linked to Deutsche Bank’s takeover of Germany’s Postbank, which it completed 14 years and four CEOs ago.
Former shareholders claim they were underpaid in the final stages of the progressive acquisition: The final leg of the offer in 2010 was done at 25 per share, whereas Deutsche Bank had paid more than double that when it first bought a stake in 2008 ahead of the global financial crisis.
A preliminary Higher Regional Court ruling unexpectedly went against Deutsche Bank in April after several lower courts had decided in its favour, and the bank then decided to put aside the maximum amount against costs it could possibly face.
That provision pushed the bank into its first quarterly net loss attributable to shareholders since the second quarter of 2020 when the Covid-19 pandemic hit.
There’s a chance that Deutsche Bank investors could get some or all of this money back – settlement talks are ongoing and the German Court overseeing the litigation is set to make a final decision in late August.
For investors and analysts, however, the troubling aspects of the episode are twofold: It’s a distraction for leadership and an unwelcome reminder that past problems can still rear their heads at a lender that was long among the most dysfunctional big banks after the 2008 crisis, but has been on a much better track in the past few years.
The interruption to its buyback programme and the loss for the quarter also highlight that the bank’s ability to deal with financial surprises is still limited.
The bugbear of European bank investors for years has been weak growth and worries about bad debts, especially in southern Europe. However, Santander, UniCredit and Banco Sabadell SA all reported lower provisions for loan losses than forecast, and improving asset quality.
Worries about stagflation in the eurozone and Deutsche Bank’s mishap are all the wrong kind of blast from the past. Investors might be overreacting, but they’ve been bitten too many times before. — Bloomberg
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. The views expressed here are the writer’s own.
