Investors punish Europe's big banks as results underwhelm

By Danilo Masoni and Iain Withers

MILAN/LONDON (Reuters) -Shares in some of Europe's biggest banks slid on Thursday after a series of earnings updates underwhelmed investors, who are already concerned profit margins may have peaked just as the region's economic outlook darkens.

The broader European banking index fell as much as 2.4% to its lowest in four months by 1017 GMT. Top fallers on the index were Standard Chartered (LON:STAN), down 9%, Swedbank, down 7% and BNP Paribas (EPA:BNPP), down around 4%.

The share moves sharpen the focus on the European Central Bank ahead of its expected decision to keep benchmark rates unchanged later on Thursday, snapping a 15-month streak of hikes.

Major banks have benefited hugely from higher rates designed to curb rampant inflation, as they help them boost lending revenue even as they raise the risk of loan defaults. However, investors are concerned that this trend could be at an end.

"I wouldn't like to be a central banker trying to set interest rates at the moment. There's a lot of conflicting indicators," said Chris Hiorns, head of multi-asset and European equities at EdenTree.

Banks remained attractive investments, Hiorns added, but a global dealmaking slump was hurting lenders with large investment arms.

The fall in bank stocks comes in the context of markets growing nervous about slowing European growth and persistently high U.S. bond yields. Traders said there were hints of funds undwinding positions, including across the European banking sector, which is among the best performing this year.

"I believe they are nervous reactions to situations of uncertainty... it makes sense to reduce leverage in a moment of uncertainty, and many baskets are built using leverage," said Angelo Meda, head of equities at Banor SIM in Milan.

Meda added that overall earnings from the banking sector still looked strong but macroeconomic concerns were starting to take their toll.

Euro zone business activity took a surprise turn for the worse this month, a survey showed on Tuesday, suggesting the bloc may slip into recession.

Concerns about China's economic fragility are also hitting some European banks with major operations in Asia.

London-listed Standard Chartered announced a profit slump driven by a combined nearly $1 billion hit from its exposure to China's real estate and banking sectors. Its stock fell as much as 17% at the open, triggering a brief automatic trading halt.

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France's BNP Paribas, the euro zone's biggest bank, posted in-line quarterly results, but several analysts pointed to unexpected weaknesses in its retail and consumer finance activities. The FTSE 350 Banks (FTNMX301010) index hit its lowest since March, and was last down 2%.

Several Spanish banks appeared to buck the downtrend. Sabadell rose around 3.7% after raising its outlook for 2023 net interest income growth on the back of higher interest rates.