Euro zone woes keep banks wary after Q1 bounce

Thu Apr 26, 2012 8:56am EDT
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By Steve Slater and Sonya Dowsett

LONDON/MADRID (Reuters) - Earnings from some of Europe's top banks showed the scars of the euro zone crisis on Thursday, with big losses on Spanish property and fragile economic recovery likely to dampen an early investment banking rebound.

Spanish bank Santander said first quarter net profit dropped 24 percent after it took a 3.1 billion euro ($4.1 billion) provision to cover rising loan defaults, as the effects of Spain's property market crash were compounded by recession and widespread joblessness affecting nearly one in four workers.

Although results from Barclays and Deutsche Bank showed investment banking income bounced back strongly, the sluggish euro zone economy continues to hurt the industry.

"The environment remains challenging and volatile," said Barclays Chief Executive Bob Diamond. "It's still slow economic growth around the world. It's still a zero interest rate policy in developed economies. This is not a robust environment."

The trio of banks, all among Europe's top eight lenders by market value and assets, showed an industry in flux.

Banks are trying to cut costs, reshape their business models and pull back from areas that are unprofitable or require too much capital to try to lift returns to attractive levels for investors.

"As shareholders you have to balance the sensible reduction of risk-weighted assets in time to meet the regulatory time frames without overly destroying the asset value or the income you receive from those assets," said Reg Watson, investment director at Standard Life Investments.

Watson said he was broadly happy with efforts made to adapt business models, but added: "Where we are less satisfied is where management appears to be a little slow - in some cases but not all - to cut costs."   Continued...

The logo of Spanish bank Santander is seen outside a building in Madrid October 27, 2011. REUTERS/Andrea Comas