Profit collapse stalks Europe banks, where next?

Europe's banks will barely scrape a profit for 2008 and are likely to scrap or slash dividends as the impact of a "perfect storm" on balance sheets takes centre stage at annual results in the coming weeks. The results will be marked by big losses at four of Europe's top banks - Royal Bank of Scotland, UBS, Credit Suisse and Deutsche Bank.
Other lenders should stay in the black but show the strain of a year of turmoil and signal more gloom to come. Europe's top 14 banks look set to post an aggregate 2008 profit of about $16 billion, compared with nearly $118 billion in 2007 at constant currency, according to Reuters Estimates forecasts. Investors are braced for grim 2008 results after a bad year worsened in the fourth quarter when asset valuations slumped and economies lurched towards recession.
"The wholesale banks will reflect the fact that Q4 was an extraordinarily difficult environment, but that's not new news. The question is ... what are they going to do about it next and how is future earnings potential," said Huw van Steenis, European bank analyst at Morgan Stanley.
"We are intensely focused on deterioration in the real economy and impact on asset quality - such as UK or Spanish real estate lending," he added. Many banks have already unveiled the scale of writedowns and losses, lowering expectations for the reporting season.
There is some optimism last quarter may mark the low point of the crisis, but the challenges facing banks will last well into this year, analysts predict. Rising bad debts on commercial loans could be the biggest problem and will land on top of rising defaults on mortgages and other consumer loans.
Some measures - such as setting up so-called "bad banks" to mop up toxic assets or schemes to insure against future writedowns - could shield banks from excessive damage to balance sheets, but capital adequacy remains the key issue. Dividends will be a casualty. Payouts are off the agenda for most banks who have had to scramble for cash, and even those who have avoided the worst pitfalls will try to preserve cash.
Europe's biggest bank, HSBC, has benefited from its strong capital position and watched rivals raise funds, but it is expected to cut or scrap its dividend or pay it out in shares to save up to $11 billion over a year. There could also be big strategic shifts. RBS will post a loss of up to 28 billion pounds, the worst in UK corporate history, including 15-20 billion pounds of goodwill on past purchases.