Have you bought a packet of crisps recently? Open one, and you will find a lot less inside than the packet had you hoping for. Likewise, look inside a European bank and you will find the reality is less impressive than the picture the directors like to paint. This week a glut of banks treated the market to their second-quarter earnings. Those old friends “underlying”, “pre-exceptional” and “adjusted” made their customary appearances as the banks tried to put a gloss on things.
But any long-term investment in the sector has to rest on the belief that, at some point in the not-too-distant future, adjusted profits will converge with real net profits – the kind that can be used to generate capital and pay dividends. This week’s numbers showed there is still a distance between the two at some of Europe’s largest banks. The UK’s Lloyds, for example, reported £3.8bn of underlying profits but only £863m of statutory profits for its first half. At Credit Suisse there was a Sfr2bn ($2.2bn) gap between second-quarter “strategic” net income and overall net income. At BNP Paribas €6.2bn separated pre-exceptional from post-exceptional net income during the bank’s second quarter.
There is always a reason. Lloyds has had to contend with insurance mis-selling claims, while Credit Suisse and BNP Paribas have come to settlements with US authorities. But, at the banks that report adjusted numbers, there is no clear trend towards a narrowing of the gap between the two. At Deutsche Bank, over the past 12 quarters, the gap between “core” pre-tax profits and total pre-tax profits has fluctuated between €218m and €1.6bn – the most recent quarter was €581m. At Barclays, the gap between adjusted and statutory net income was £634m in the first half of 2014, lower than the £2.7bn in the first half of 2012 but up from last year’s second half. UBS is an exception – the gap, although volatile, is falling.
This state of affairs does not apply to all European banks. Many of them, such as Santander and BBVA (often those with straightforward retail and commercial businesses) report a single set of numbers. It is at the investment banks where the bag of crisps seems to be emptiest.
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