Concerns about new banking regulations and a shaky economic recovery tempered optimism over improving results from more of Europe's top banks on Wednesday.

The results mostly showed higher-than-expected profits thanks to shrinking bad debts.

The faster than expected fall in bad debts is outweighing a slump in investment banking income following Greece's economic crisis, a sharp contrast to the first quarter when investment banking drove record results.

Societe Generale's second-quarter profit was nearly 50 percent higher than estimates, despite income from investment banking sinking by more than a third.

The French bank forecast losses for the year from risky assets would come in at the bottom end of its previous guidance.

Asian-focused Standard Chartered posted record profits to beat forecasts, while Britain's Lloyds returned to profit as impairments halved, posting a 5 percent rise in net income.

For the most part, the banks reporting Wednesday followed the trend laid out by European leaders HSBC and BNP Paribas showing bad debts are falling.

Analysts said the decline in bad debts was good news but they would rather see profits driven by improvements in revenue.

What we have been seeing with most other banks in this reporting season is that impairments have normalized sooner than anticipated, Citi Investment Research analysts said in a note.

While welcome, and a definite driver of FY10e and (to a lesser extent) FY11e earnings forecasts, this does not necessarily cause significant upgrades to earnings forecasts further out, they added.


So-called Basel III capital rules are looming, and while banks recently won a respite on the timeline for phasing in the rules, there are still concerns about their impact, as shown by Germany's Postbank scrapping its profit targets Wednesday.

There is fragility in the global economy and nervousness in financial markets, said StanChart Chairman John Peace, adding that UK banks in particular were disadvantaged by rules on taxes, remuneration and regulation.

For investors, the sector has been looking more attractive after it emerged from the July pan-European stress tests mostly unscathed -- particularly for banks with global exposure.

The results tell you that emerging markets, like China, India and Brazil, are the markets to be (in) for generating good businesses, said Ted Huang, manager of the Pinebridge Asia High Yield Fund in Taipei, after StanChart's results.

European banking shares <.SX7P> have risen nearly 9 percent since the stress test results were released, against a rise of about 2.5 percent for European shares more broadly <.FTEU3> and 8 percent for U.S. banking shares <.BKX>.

In early trading the sector index fell 1.4 percent, deeper than the decline for the broader market <.FTEU3>. SocGen rose 1 percent and Lloyds rose 1.3 percent.

Postbank bucked the trend by raising provisions for bad loans and scrapping profit targets despite reporting profits which met expectations.

Germany's largest retail bank by clients said it expects earnings in the second half to lag the first half.

It threw out its medium-term profit targets on the uncertainty caused by looming bank regulations, saying it could only give reliable targets once decisions had been made on potential bank taxes and core capital requirements.

Bailed-out Allied Irish also said its first-half loss more than doubled, even as it reported progress improving its funding profile.

They join Italy's UniCredit , the biggest lender in central and eastern Europe, which delivered bad news on Tuesday. It missed estimates blaming goodwill impairments, falling trading income and high risk costs.

UniCredit's warning on bad debts in eastern Europe, where loan loss provisions continue to rise, followed on similar caution from Erste last week.

Shares in Postbank fell 0.2 percent while StanChart fell 5 percent and Allied Irish dropped 5.9 percent. UniCredit fell 4.1 percent as well. Analysts said StanChart was showing a lofty valuation relative to peers.

(Additional reporting by Arno Schuetze and Edward Taylor in Frankfurt, Andras Gergely in Dublin, Steve Slater in London and by the Hong Kong bureau, Writing by Ben Berkowitz in Amsterdam, editing by Elaine Hardcastle)