The majority of major European banks have now reported first quarter earnings for 2021.
Broad themes have emerged from the numbers: British banks are riding high; investment banks continue to make hay amid a boom in SPACs, IPOs, and trading; and Swiss banks are counting the costs of the Archegos implosion.
Perhaps most incredibly, it looks like Deutsche Bank's latest turnaround might actually be working.
Here's what we've learned:
The UK is booming
Britain's major UK banks — Lloyds (LLOY.L), HSBC (HSBA.L), NatWest (NWG.L), Barclays (BARC.L) — all delivered forecast beating results this week, while Santander's UK retail bank was one of the bright spots in its quarterly numbers.
The UK government has supercharged the British housing market thanks to a generous tax break introduced last year. The holiday on Stamp Duty — a levy that can add up to 12% onto the cost of the most expensive properties — was due to end in March but has now been extended until June.
Chancellor Rishi Sunak threw more fuel on the fire when he announced new government-backed 95% mortgages in March's budgets. The scheme allows first-time buyers to purchase a house with just a 5% deposit, widening the pool of prospective buyers even more.
The combination has created a boom in Britain's property market, which is good news for banks. Lloyds — the UK's biggest residential mortgage lender — reported its busiest quarter since 2008.
Banks are also benefiting from a reopening updraft. Britain's aggressive COVID vaccination campaign has allowed the gradual reopening of its economy and the country is on track to be fully unlocked by June. The initial stages have led to a boom in consumer spending, prompting economists to upgrade forecast for the year ahead.
The sunny outlook — combined with relatively low loan defaults so far — has made banks rethink their bad loan provisions. Banks built up billions in reserves last year to guard against a possible wave of defaults caused by the COVID-19 pandemic. That wave failed to materialise thanks to government support.
Hundreds of millions were released from provisions across the banking sector this week, flattering bottom lines.
A similar reopening boom is playing out in the US. Santander (SAN.MC) — one of the few European banks to have a major franchise in America — reported a record quarter for US revenues.
Investment banks are making money hand over fist
The COVID-19 crisis has sparked wild swings in international markets that has prompted a revival for share trading desks. Those dynamics continue, with investment banks across Europe continuing to see strong business in equity trading.
The market is also benefiting from a boom in dealmaking. The first quarter saw the most M&A globally since 1980 and the SPAC mania that started last year peaked in the first few months of 2021. Add onto that the fact that this year saw the best start for IPOs in years and you can see why investment banks are doing so well.
Deutsche Bank (DBK.DE) reported a 134% jump in profits at its investment bank, rising to €1.5bn. That was more than double the profits made at all its other core divisions combined. Barclays reported its best ever quarter for equity trading. And BNP Paribas (BNP.PA) raised over €110bn for clients in capital markets, which was around 20% more than it had this time last year.
There are some concerns about how sustainable all this is. BNP and Barclays both saw their share prices come under pressure after delivering worse-than-expected fixed income trading revenues. (Goldman Sachs (GS) interns have also been complaining loudly about the insane workloads they've faced.)
Archegos was worse than first thought
Not every investment bank is doing so well.
The biggest story in the market so far this year has been the implosion of Archegos Capital. The family office of trader Bill Hwang was little-known outside of the small group of bankers who dealt with it until its spectacular collapse in March.
Initial estimates suggested banks that lent money to Archegos could be left with a $5bn bill from the debacle. Disclosures this week showed the total bill is at least $10bn across the sector.
Swiss banks have been left with some of the deepest scars. UBS (UBSG.SW) said it would end up taking a hit of just over $800m from the affair, despite initially suggesting the damage would be immaterial. Meanwhile, Credit Suisse (CSGN.SW) is in the hole for $5bn — by far the biggest loss among the group of banks that dealt with Archegos.
The affair has led to serious questions about oversight, risk, and competence at both banks.
New UBS boss Ralph Hamers said he was "clearly disappointed" and said the bank was taking it "very seriously".
Credit Suisse has seen two executives and one board member exit over the affair. New chairman Antonio Horta-Osorio, who officially joined on Friday, promised to get ahold of the bank and implement a culture that "reinforces the importance of risk management" and "focuses on personal responsibility and accountability."
Deutsche Bank's turnaround actually seems to be working
Deutsche Bank was until very recently the butt of the joke when it came to international finance. From Russian mirror trading to banking Trump and Wirecard, the German lender always seemed to be in the wrong place at the wrong time. Its share price had underperformed for years.
Over the last decade and a bit, executives have repeatedly tried to clean up and turn around the lender. They haven't had much luck.
Finally, reform might be taking root. The German bank reported its best quarterly profit in seven years this week and, incredibly, said it managed to side-step the Archegos chaos thanks to prudent risk management.
The performance is the product of a brutal — but decisive — turnaround plan launched by chief executive Christian Sewing two years ago. Sewing, who took charge in 2018, announced plans to radically scale back the bank's risk taking and slim down the investment bank, shedding 18,000 jobs in the process.
Signs that the plan is working helped Deutsche Bank shares jump to a three year high this week, reaching the highest level since Sewing took over.
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