Stellar earnings from U.S. banks have raised expectations that European rivals will follow suit in the next month, although rising bad debts have the potential to douse that optimism.
Results from Credit Suisse on Thursday and from Santander , Deutsche Bank , HSBC and Barclays in the following two weeks should show boom times have returned to investment banking and retail margins are attractive.
But bad debts are rising sharply as recession bites and banks most exposed to corporate loans and riskier home loans may provide a stark reminder that recovery will be a long, hard slog, analysts said.
The big swing factor for banks this year will be the rising loan impairments, and that's coming through in all the major countries, said Simon Willis, bank analyst at ESN/NCB Stockbrokers in London.
Sweden's SEB on Monday posted weak Q2 results as it joined other Nordic banks giving a gloomy message on prospects for the Baltic region, signaling the global recovery is fragile and trouble spots remain.
Earnings from top U.S. banks, led by Goldman Sachs beat expectations and confirmed that a bumper first three months for investment banking continued in the second quarter, marking a sharp revival from last year's turmoil.
Near-record fixed income revenues and strong equity and commodities business are fuelling profits, and there is a clear positive read-across to Credit Suisse, Barclays and Deutsche Bank, analysts said.
Credit Suisse is positioned to be a long-term winner from the retreat by rivals and Thursday's results should show the benefit from market gains in investment banking.
Its great rival UBS is struggling to shake off the crisis, however, and has already said it will post a second-quarter loss. Deutsche Bank predicts a 1.5 billion Swiss franc loss for UBS in the period, compared to a 1.9 billion franc profit for Credit Suisse.
UBS's results on August 4 are likely to be overshadowed by the strategic plans of new CEO Oswald Gruebel and by whether it settles its dispute with the U.S. government over alleged tax evasion by that date.]
Losses on toxic assets across banks will continue but at much reduced levels from their 2008 peak, analysts estimate.
It may be too soon for writebacks, but this removes a material drag on bank earnings, and a further negative for the sector seems to be fading, said Andrew Stimpson at Keefe, Bruyette & Woods.
That leaves bad debts on corporate loans and commercial real estate as probably the biggest drag this year. Warnings from JPMorgan and Bank of America about rising credit losses are expected to be echoed in Europe.
Analysts at HSBC estimate loan loss provisions in Europe's five biggest countries will average 1.14 percent of loans this year and 1.05 percent in 2010, sharply up from 0.43 percent in 2007 but below peaks seen in the early 1990s recession.
Britain's Lloyds Banking Group warned in May that corporate impairments in 2009 are likely to be over 50 percent higher than last year, which could see its corporate loan losses alone top 14 billion pounds and drag Lloyds to a loss of over 8 billion pounds, analysts estimate.
Loan deterioration at other banks has been slower than at Lloyds, and many lenders will not see impairments peak until 2010, analysts reckon.
There is scope for many results to be substantially swung by one-off factors, including valuation gains on toxic assets. That could even help Lloyds show a headline profit, according to a weekend press report.
Royal Bank of Scotland will benefit from its disposals of a stake in Bank of China <3988.HK> and its Spanish insurance joint venture. RBS and several others will book a gain on the repurchase of their own debt, although the reversal of gains on the carrying value of debt may dent some results.
The following are scheduled results for Europe's top banks, and forecast for full year 2009 earnings:
BANK DATE 2009 PROFIT
Nordea July 21 1.9 bln eur
Credit Suisse July 23 6.2 bln CHF
BBVA July 28 6.3 bln eur
Deutsche Bank July 29 5.4 bln eur
Santander July 29 10.5 bln eur
Barclays Aug 3 6.1 bln stg
HSBC Aug 3 $9.2 bln
BNP Paribas Aug 4 7.0 bln eur
Standard Chartered Aug 4 $4.0 bln
UBS Aug 4 0
Unicredit Aug 4 3.0 bln eur
Lloyds Banking Aug 5 (8.1 bln stg)
Societe Generale Aug 5 2.6 bln eur
Royal Bank of Scotland Aug 7 (4.9 bln stg)
Credit Agricole Aug 27 2.0 bln eur
Intesa SanPaulo Aug 28 3.3 bln eur
(*Average analyst forecast for pre-tax profit, based on Reuters Estimates poll)
(Editing by David Cowell)