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ANALYSIS-European banks are bracing for a bumpy ride after a decade of cheap money

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By John O’Donnell and Tom Sims

FRANKFURT, July 22 (Reuters)European banks, facing a potential economic storm and rising borrowing costs for the first time in more than a decade, are set to show their weaknesses when they report to investors on how their business has fared this year.

They have already had to deal with rapid inflation and rising interest rates, pressure from borrowers, as well as the conflict in Ukraine, which has shaken the European economy, including by restricting energy supplies.

UBS UBSG.SDeutsche Bank DBKGn.DECredit Suisse CSGN.SBNP Paribas BNPP.PA and UniCredit TRDI.MI could set the tone for investors when they report second-quarter results next week.

On the one hand, higher interest rates are good for banks because they can borrow at higher rates. But they suffer when customers, struggling with rising borrowing costs and prices, can’t repay them.

Difficult economic conditions have forced investors to be cautious, which means that European banks, like their American competitors, will earn less from concluding deals and selling investment products.

In Europe, Germany’s banks are at the center of the storm because the country is particularly dependent on Russian energy and its economy would be hit hard by any supply shortfall.

Giles Edwards, an analyst at the rating agency S&P, said that any concerns about European banks this year will depend on how borrowers repay their loans.

While he didn’t expect much immediate growth in bad loans, he said he was watching for “early warning indicators, signs that there’s pressure, kind of a slow nudge that’s basically starting to push a few buttons here and there.” there.”

Analysts too watching the events at Uniper UN01.DEa German energy company which got a public assistance on Friday. [nL8N2Z32QK]

German banks may still have to set aside more to cover loan losses, said Michael Rohr, an analyst at credit rating agency Moody’s.

Over the past two months, analysts have lowered profit forecasts for Germany’s largest bank, Deutsche Bank, which has emerged from a series of crises, and raised forecasts of the amount of required reserves for bad loans.

For Deutsche, the biggest risk is a “severe recession,” Rohr said.

Other warning signs flash.

Eurozone banks strengthened access to credit in the second quarter and will continue to act cautiously, a survey by the European Central Bank showed.

And Germany’s co-operative banks said they expect a “significant decline” in profits this year as they brace for loan losses.

Underscoring these concerns, eurozone bank stocks .SX7E have fallen more than 22% year-to-date, underperforming the broader pan-European STOXX 600 index STOXX the stock index fell by about 13%.

“SLOW COMPRESSION”

The ECB, which unexpectedly raised interest rates by 50 basis points on Thursday to tame soaring prices, has also previously warned of potential dangers such as an overheating property market.

During the pandemic, governments spent billions to prop up much of the economy, but the ECB said they may not be able to this time.

In Spain, one senior Spanish economic official, who spoke on condition of anonymity, said banks were generally vulnerable, pointing to a large number of loans under special watch for default and the potential lifting of payment moratoriums.

“I don’t know what the real impact … will be, and … that worries me,” the official said. Santander SAN. MC and BBVA BBVA.MC to report second quarter results at the end of the month.

In Italy, gripped by a political crisis, pressure is mounting on the country’s government bonds, which is also eroding banks’ capital cushions as the Italian government bonds they hold lose value.

Italy’s dependence on Russian gas and the importance of its manufacturing sector, which consists mainly of small businesses, increase the chances of a recession.

Almost €300 billion (or more than 40%) of Italian corporate loans are guaranteed by the state after banks used emergency measures during the pandemic to refinance existing debt.

While British banks are expected to show solid results, Tom Murry, a banking strategy consultant at Accenture, said he expects bad loan provisions to increase.

NatWest NWG.L A 38 million pound ($45.43 million) cash allowance set aside for potential defaults is expected to translate into new impairment charges of 136 million pounds in the first quarter, according to a survey of analysts.

In high-margin investment banking, European banks are likely to see a year-over-year drop in banking fees similar to what US rivals reported earlier this month, analysts said.

JPMorgan YPM.N and Morgan Stanley MS.N investment banking fees are reported to have more than halved year-on-year. Merger volumes in the US fell 29% in the first half of this year, according to Refinitiv data, while they rose 1% in Europe.

Barclays BARK.Lwith its significant US business, can achieve performance similar to its Wall Street rivals, while banks such as HSBC HSBA.L and Standard Chartered STAN.Lwith their focus on Asia, could be better.

($1 = 0.8365 pounds)

Interest rates G10https://tmsnrt.rs/3Pp74E1

Assessment of European bankshttps://tmsnrt.rs/3PrQXoX

(Writing by John O’Donnell; Reporting by Tom Sims in Frankfurt, Jesus Aguado in Madrid, Lucy Wrighton, Iain Withers and Lawrence White in London, Valentina Za in Milan and Noor Zainab Hussain in Bengaluru; Editing by Jane Merriman)

((john.odonnell@thomsonreuters.com;))

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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