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Europe's Bank Storms Headed to U.S.

NEW YORK (TheStreet) -- U.S. big bank investors may want to use unusually negative comments by European bank conglomerate CEO's in recent earnings as a reason to reassess the risks to financial institutions on this side of the Atlantic - even as first quarter earnings at JPMorgan (JPM - Get Report), Bank of America (BAC - Get Report), Citigroup (C - Get Report), Goldman Sachs (GS - Get Report) and especially Morgan Stanley (MS - Get Report) reflected a revival in some key businesses.

On Thursday, Deutsche Bank (DB), Europe's largest bank by assets, and Barclays (BCS), Britain's second biggest lender reported improving profits that were below year-ago-levels, mirroring the first quarter results of most U.S. investment banks. But the commentary of both banks' CEOs on those earnings warrants a focus by investors in U.S. banks - especially those who aren't ready to call a 2012 sector rally a recovery.
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"Financial markets remain cautious -- as we have seen in April, with investor risk appetite markedly lower," said Deutsche Bank chief executive Josef Ackermann in a letter to shareholders. "Investors, particularly private investors, remained wary after the market turmoil of last year."

Barclays chief executive Robert Diamond mirrored concerns of an April slowdown, in commentary that seemed to refute some of the optimism that spread over the financial sector to start the year. "It was not a robust first quarter," said Diamond in a media call with reporters, according to Bloomberg. "It was only robust compared with the third or fourth. I think most people would say April was a bit sluggish compared to the first three months."

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While falling loan losses, increased lending and a recovery in debt trading were a boost to U.S. bank earnings in the first quarter, and broader corporate earnings and recovering markets augur well for the overall U.S. economy, problems persist in Europe and its struggling banking system. Late on Thursday, Standard & Poor's downgraded the rating of Spain from A to BBB+, citing weakness in the country's banks. Overall, bond yields in the eurozone are rising, once more, after they collapsed on the heels of European Central Bank support in November, which bolstered global markets.

Now some indicators are showing early warning signs that fear may once again preoccupy U.S. bank investors. "Investors are repricing risk at some large U.S. banks following earnings reports," notes Standard & Poor's credit analyst Peter Rigby in a Thursday report. After bond spreads peaked for the nations four largest banks in November as a debt crisis escalated to a near boiling point across the Atlantic, Rigby says that, "there is evidence that investors may be repricing risk."

Though U.S. banks have rallied strongly in 2012, with Bank of America posting a near 50% year-to-date gain and most peers up roughly 30%, the shares of industry giants have tailed off in the past month even as they escaped Federal Reserve stress tests, boosted dividends and reported generally strong earnings.

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As April draws to a close, the shares the five largest U.S. banks are off by between 8% and 18%. Meanwhile, credit spreads on major U.S. financial institutions remain between 30 to 60 basis points higher than 2011 levels, according to S&P calculations.
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