LONDON/MADRID 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."
Barclays beat analysts' forecasts with a 22 percent rise in underlying first-quarter profit to 2.45 billion pounds ($3.95 billion). Revenues at its investment bank arm, which provides the bulk of its profit, rose to 3.5 billion pounds, up 91 percent on a weak fourth quarter and up 3 percent from a year ago.
Fixed income trading was its star performer, with a 9 percent rise in revenue on the year, led by growth in Asia.
Losses on bad debts fell 16 percent from a year ago, but the bank said the backdrop was difficult. Both it and Deutsche Bank warned that activity slowed in April, echoing comments from U.S. banks and Credit Suisse.
"Most people would say April was a bit sluggish compared to the first three months," Diamond said.
By 1230 GMT the European bank index was down 1.9 percent. Shares in Santander and Deutsche Bank dropped 4 percent and Barclays shares were near flat.
Revenues from Deutsche Bank's corporate banking and securities division hit 6.2 billion euros, up over 80 percent from the fourth quarter, but down 8 percent from a year ago.
The first quarter is typically the strongest for investment banks and can set the tone for the year, but this year the rebound was exaggerated by liquidity support from the European Central Bank. Analysts said signs that impact from the cheap cash injection had faded could be a concern.
"Both Deutsche and Barclays had a strong recovery in their investment banking business, especially Barclays," said Chris Wheeler, analyst at Mediobanca, saying both appeared to have taken market share from rivals.
"The second quarter has started off weakly ... clearly people are uncomfortable (with the economic backdrop) and even during the results season there's been a deterioration in market confidence," he added.
Deutsche Bank's pre-tax profit fell to 1.9 billion euros, down from 3 billion a year ago and missing analysts' forecasts, hurt by litigation charges and a writedown on its investment in generic drug firm Actavis.
Santander, the euro zone's biggest bank, said first quarter profit fell to 1.6 billion euros, with bad loans as a percentage of total loans rising to 3.98 percent at end-March.
Profits fell in Spain and Portugal, both struggling with heavy debts and budget deficits, but also in Brazil, which generates more than a quarter of its profit, due to rising credit losses. Profits also fell 40 percent at its UK arm.
Profits at domestic rival Sabadell fell 5 percent from a year before after it put aside 293 million euros to cover rising bad debts.
Barclays took a 300 million pound extra charge to cover the cost of compensating customers for mis-selling insurance policies, adding to a 1 billion pound provision last year due to a spike in claims from customers in the last two months.
Barclays said its adjusted return on equity, a key measure of profitability, improved to 12.2 percent, up from 6.6 percent for 2011 and near its target of 13 percent. But Diamond has said the difficult backdrop and tougher capital and liquidity requirements may make it tough to achieve that by 2013.
Royal Bank of Scotland's Chief Executive Stephen Hester said the harsher regulations have wiped off as much as 20 billion pounds from the market value of his state-backed bank.
"We can cope with these extra challenges, but they use up the outperformance we have achieved and they mean that our shareholders, indeed all bank shareholders, will see value recover less well than hoped for," Hester said in a speech.
As most European banks retrench and shrink, some banks are looking to take advantage, and Sweden's Handelsbanken said it plans to expand in Britain, after reporting a 16 percent rise in first quarter profit.
(Additional reporting by Sinead Cruise and Matt Scuffham in London and Edward Taylor in Frankfurt; Editing by Will Waterman and Elizabeth Piper)