By Tom Sims, Ariane Luthi and Tommy Reggiori Wilkes
FRANKFURT/ZURICH/LONDON, July 29 (Reuters) - Deutsche Bank and UBS beat forecasts again with second-quarter earnings on Wednesday, buoyed by a surge in trading activity and strong retail business as Europe's lenders extend a more than two-year-long recovery.
In a busy day for bank results, Standard Chartered also delivered forecast-surpassing numbers and lifted its full-year income target on the back of surging revenue in wealth and global banking.
European banks have enjoyed a remarkable resurgence in the past 2-1/2 years after more than a decade of rock-bottom interest rates and concerns about euro zone government debt, which soured investor sentiment towards their stocks.
The sector is now one of the best performing in Europe, with the STOXX Europe Banks index at its highest since late 2007 and up 143% since early 2024, as higher rates boost interest income and loan demand swells despite continued weakness of the region's economy.
Germany's biggest bank reported a 10% jump in second-quarter profit, defying expectations for a drop, as strength at Deutsche's global investment banking division offset a rise in expenses.
Some of its competitors reported stronger gains thanks to a trading boom in the wake of the Iran war and blockbuster initial public offerings.
Still, Wednesday's results extend a nearly uninterrupted return to quarterly profit over recent years, as CEO Christian Sewing stabilised one of the world's most significant banks. Revenue growth during the second quarter at Deutsche's fixed income and currencies division even surpassed Wall Street rivals. JPMorgan analysts called the results "strong across the board", and shares rose 2%.
UBS booked a 17% jump in second-quarter profit that also beat expectations, and said it planned to buy back shares worth $3 billion by the middle of next year.
Switzerland's biggest bank, which is waiting for clarity on new capital rules that could shape its future, said that amid robust broad-based growth its trading division delivered record second-quarter revenue.
"While the year is not over, we are close to achieving the same level of profitability UBS had prior to the acquisition," CEO Sergio Ermotti said, referring to UBS' 2023 emergency takeover of local rival Credit Suisse.
EXPECTATIONS HIGH, VALUATIONS STILL LOW
In some cases, investors look beyond headline figures.
Britain's Barclays reported a 17% rise in first-half profit on Tuesday, better than expected, but shares dropped as analysts said its equities performance undershot market expectations while costs came in higher.
France's BNP Paribas last week also beat forecasts with a 33% year-on-year profit rise in the second quarter.
Domestically focused retail lenders, such as Britain's NatWest, Italy's Intesa Sanpaolo and Spain's CaixaBank have also seen their shares recover dramatically.
Despite their sustained rally, European lenders are worth a fraction of their Wall Street rivals. JPMorgan is closing in on a $1 trillion valuation, while the most valuable European lenders today are HSBC and Santander, worth £266 billion ($353 billion) and €180 billion ($205 billion) respectively. European banks remain valued far below U.S. lenders, based on a price-to-book value — a common measure of valuing banks.
The region's lenders are also constrained by regulation and political resistance to cross-border consolidation, analysts say. While some central bankers say such deals are needed for European banks to compete globally, UniCredit's nearly two-year pursuit of Commerzbank demonstrates the difficulty.
The euro zone economy's subdued growth and its vulnerability to the fallout from conflict in the Middle East remain concerns for European lenders, despite little sign of rising bad loans or provisioning yet.
Marina Zavolock, chief European equity strategist at Morgan Stanley, said that higher inflation on the back of rising energy prices could benefit European banks, through higher interest rates.
The appeal for investors is also partly the low base from which European banks have recovered. Lombard Odier analysts said in a note this month that although European banks were benefiting less from capital market activity than U.S. rivals, the outlook remained favourable with a stable economic backdrop and rates rising again.
"We think that improving returns on equity are not yet reflected in valuations for European banks," they said.
($1 = 0.8779 euros)
($1 = 0.7527 pounds)
(Reporting by Tom Sims, Ariane Luthi, Tommy Reggiori Wilkes; Additional reporting by Lawrence White and Jesus AguadoEditing by Tomasz Janowski)
