Europe's major banks signal caution as ominous outlook tempers profit wins

By Sinead Cruise and Tommy Reggiori Wilkes

LONDON (Reuters) -Big European lenders are retaining ambitious performance targets after bumper first-quarter profits this week, but beyond the upbeat headline numbers, bank bosses are contemplating a welter of threats to their future earnings prospects.

A global trade war unleashed by U.S. tariffs, the highest in a century, has prompted some economists to raise the odds on recession, with about 40 companies worldwide pulling or lowering their forward guidance in the first two weeks of the first-quarter earnings season, a Reuters analysis showed.

With only a handful of data points tracking the early impact of U.S. President Donald Trump's tariff plan, most banks have held firm to shareholder payouts and profitability objectives but customers are already showing caution and provisions against bad loans are making a comeback.

"While it's too early for lenders to make strategic shifts, the rise in bad loans is a clear warning sign," said Douglas Grant, CEO of financial services company Manx Financial Group.

Grant said slowing GDP growth, rising wage costs, and geopolitical instability were already pushing small businesses to cut investment, scale back growth plans and preserve cash.

European banks have enjoyed a run of record profits and soaring share prices for the past two years, and investors have quickly pushed their shares back towards multi-year highs after a dramatic dip in early April.

Deutsche Bank produced a 39% rise in first-quarter profit on Tuesday after its investment bank's bond and currency trading revenue surged. But the results included a hit from a large single-loan writedown and provisions for the possible impact of tariffs on clients.

Britain's Barclays on Wednesday also highlighted intense financial market activity as a driver of higher investment banking income. At UBS, trading revenue increased 32% to $2.5 billion in the three months to end-March.

'UNPREDICTABLE'

Several banks surpassed analyst expectations in the first three months of the year but future customer appetite for risk is becoming harder to read.

"There was some activity in response to the big market catalyst that we saw at the very beginning of April, but there is more and more uncertainty getting priced in," said UBS Chief Financial Officer Todd Tuckner.

CEO Sergio Ermotti said the economic outlook was "particularly unpredictable", with corporate dealmaking on hold, although not yet cancelled.

Although also beating analyst expectations, HSBC on Tuesday raised the spectre of lower loan demand and an erosion in credit quality due to the broader tariff fallout.

Barclays CEO C.S. Venkatakrishnan struck a similarly sober tone.

"...We have to protect ourselves, as we always do with active risk management," Venkat told reporters. "We have long established programmes to transfer and hedge with, and we will continue to do so as warranted by this environment."

DOMESTIC LENDING

With global trade uncertainty likely to dampen returns from trade finance and lending to multinational corporate customers, some banks are betting on resilient domestic consumer lending businesses to help weather any downturn.

Spain's Santander said profit at its retail business, and its corporate and investment banking division, rose 24% and 13% respectively, offsetting weaknesses in Mexico and Brazil.

In France, retail banking and equities trading boosted Societe Generale. The CEO of BNP Paribas said last week that the bank was preparing to capitalise on opportunities arising from a slowdown such as M&A and restructuring activities as well as Europe's drive to revive economic growth and increase defence spending.

(Additional reporting by Mathieu Rosemain, Stefania Spezzati, Ariane Luthi, Lawrence White and Jesus Aguado. Editing by Jane Merriman)