LONDON Costly new capital rules, a grim end to the year for investment banking and the prospect lenders in Spain and beyond need to raise more cash are casting a shadow over 2010 results from Europe's banks.
Earnings from the top 16 banks were likely to hit 100 billion euros (86 billion pounds) for 2010, more than double the tally for 2009, according to analysis of consensus forecasts.
But the cost of bigger safety buffers which watchdogs are telling banks to put up is likely to be a dominant theme -- hurting profitability and causing a strategy rethink from bank chiefs seeking to kick-start growth and boost returns.
New Barclays (BARC.L) CEO Bob Diamond is expected to unveil a shake-up to slim down capital-intensive units and bulk up in areas offering decent returns, and rivals may follow suit with their plans on how to make money under the new regime.
"We are now seeing the realisation of Basel III and other regulations starting to impact. Banks need to think about the business model in its entirety to maximise shareholder return and maximise the capital that they do have," said Chris Wheeler, analyst at Mediobanca in London.
"Bob Diamond is chasing very hard how he gets a return on tangible equity of 15 percent. The status quo won't be maintained," Wheeler said.
Big change in Spain is already underway and could accelerate during the results period. Savings bank La Caixa is to become listed and is expected to mop up weak rivals to spur an overhaul of the country's troubled sector.
U.S. banks last week showed investment banking activity was weak in the fourth quarter. Wall Street powerhouse Goldman Sachs (GS.N) suffered a year-end slump in trading revenue as worries about European sovereign debt and rising U.S. Treasury yields kept investors on the sidelines.
That's likely to be repeated in Europe, where Deutsche Bank (DBKGn.DE) and Barclays Capital are most exposed to fixed income weakness -- though any guidance that 2011 has started well could lift the mood.
Banks that are more reliant on equities income, such as Credit Suisse CSGN.VX, UBS UBSN.VX and Societe Generale (SOGN.PA), could be best positioned, analysts said. Debt trading is predicted to stay tough this year.
Still, full-year earnings will show a big jump from a year earlier, because the sector's bad loans are shrinking.
The top 16 banks are estimated to show underlying profits of 99.5 billion euros, up from 48 billion in 2009 at current exchange rates, according to Reuters Estimates.
Big swings will be seen at Lloyds (LLOY.L), Royal Bank of Scotland (RBS.L) and UBS, with HSBC (HSBA.L) and SocGen also set for strong gains.
A clash this week between JPMorgan (JPM.N) boss Jamie Dimon and French President Nicolas Sarkozy showed the mood remains raw around regulation and banker pay -- probably more so in Europe than elsewhere.
Key regulatory issues include the cost of holding more capital and liquidity; how banks may mitigate the rise in risk-weighted assets; the cost of extra taxes; the threat of a capital surcharge for big banks; and others themes such as replacing long-term funding, as well as derivatives reforms.
Evolution Securities estimates these could cut investment banking profits by between 10 and 25 percent.
A political and public backlash against bankers' pay remains strong and shareholders are also looking for more cost control to cushion the impact of greater regulation, although U.S. banks did not rein in pay as much as some had expected.
"Not all the banks did and I'd have liked to have seen a bit more, but I think banks have taken on board the level of hostility on this issue and are gradually reacting," said Collins Stewart analyst Matthew Czepliewicz.
The European bank sector .SX7P, up 0.3 percent at 215.37 by 1349 GMT, has rallied from a late November low but remains less than half its early 2007 peak of 541.27.
Here are the expected reporting dates for major banks:
(Editing by David Holmes)