Big European lenders are sticking to ambitious performance targets following strong first-quarter profits, but they are increasingly concerned about the impact of global trade tensions, particularly the U.S. tariffs imposed by President Donald Trump. While banks continue to post upbeat headline numbers, executives are eyeing potential threats to future earnings growth.
Challenges Amid Global Trade Tensions
U.S. tariffs, which are the highest in a century, have led some economists to raise the odds of a global recession. According to a Reuters analysis, about 40 companies worldwide have either pulled or lowered their forward guidance in the first two weeks of the first-quarter earnings season. Despite these challenges, many European banks have maintained their shareholder payout plans and profitability objectives for the time being. However, concerns are rising over customers becoming more cautious, and the return of provisions for bad loans is becoming apparent.
Douglas Grant, CEO of Manx Financial Group, stated that while it’s too early for banks to change their strategies, the rise in bad loans serves as a warning sign. He noted that slowing GDP growth, rising wage costs, and geopolitical instability are causing small businesses to scale back investment and preserve cash, which could affect bank profits in the future.
Mixed Results Amid Uncertainty
While European banks have posted record profits in recent years, the economic outlook is increasingly uncertain. After a dip in early April, investor sentiment has improved, and shares in many banks have surged back towards multi-year highs. For instance, Deutsche Bank reported a 39% rise in first-quarter profit, boosted by strong bond and currency trading revenue. However, the results also included a hit from a large single-loan writedown and provisions for potential tariff impacts on clients.
Barclays also saw higher investment banking income, driven by intense financial market activity, and UBS reported a 32% increase in trading revenue. However, some banks, including HSBC, warned of lower loan demand and erosion in credit quality due to the broader fallout from tariffs.
Uncertainty About Future Demand
Despite surpassing analysts’ expectations, several banks are struggling to gauge future demand for risk. UBS Chief Financial Officer Todd Tuckner noted that although some activity occurred in response to market changes in April, growing uncertainty is being priced into the market. UBS CEO Sergio Ermotti acknowledged that the economic outlook was “particularly unpredictable,” with corporate dealmaking on hold, though not canceled entirely.
Barclays’ CEO C.S. Venkatakrishnan expressed caution, emphasizing the need for active risk management. He added, “We have long-established programmes to transfer and hedge risk, and we will continue to do so as warranted by this environment.”
Resilient Domestic Lending as a Buffer
To weather the storm, some banks are focusing on resilient domestic consumer lending businesses. Spain’s Santander reported a 24% profit increase in its retail business, while its corporate and investment banking division grew by 13%. In France, Societe Generale benefited from strong performance in retail banking and equities trading. BNP Paribas also indicated it was preparing to capitalize on opportunities arising from a slowdown, particularly in mergers and acquisitions (M&A), restructuring activities, and Europe’s push for increased defense spending.