LONDON (Reuters Breakingviews) - Even strong athletes can be hobbled by unexpected twinges of pain. All the more so European banks, which are still on the path to recovery. Société Générale and Commerzbank on Wednesday became the latest to say that they had been hurt by difficult trading conditions in the second quarter. The volatility of revenues from this business risks masking banks’ improving fitness.
SocGen’s revenues fell 1.3 percent in the second quarter compared with a year earlier once exceptional items were stripped out. Lower volatility and investors’ wait-and-see attitude proved a difficult backdrop for its global markets and equities divisions. Commerzbank revenues fell almost six times as much in the same period, with the decline particularly marked in its corporate clients business. The German lender also cited difficult market for trading but has bigger challenges. It is cutting jobs and streamlining its business in a bid to return to profitability.
The good news is that the underlying financial health of the sector is improving. European banks’ common equity Tier 1 ratio rose to 14.1 percent in the first quarter from 12.4 percent two years earlier, according to the European Banking Authority. At Commerzbank, this ratio has risen further since then, to 13 percent in the second quarter from 12.5 percent at the end of March.
There are other reasons for optimism. Several big banks are enjoying growth in lending and deposits: SocGen and ING were among their number on Wednesday. That bodes well for their profitability when interest rates eventually rise. Commerzbank reckons a 100 basis point increase in short- and long-term rates would boost its net interest income by about 500 million euros the following year. But that gift is solely in the hands of central bankers.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.