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How are European Banks Doing?

What is it about?

The second-quarter results for European Banks have been released, so let’s have a look at how they did. HSBC, Europe’s largest bank by assets, reported a 65% fall in pre-tax profits compared to figures reported a year ago. They had a challenging period not only due to the Covid-19 pandemic, but also the crisis in Hong Kong, which was detrimental to its Asian-focused business, relying on more than two-thirds of the profits in the region. The growing tension between the US and China seems to be becoming another challenge to HSBC, with China recently accusing it of colluding with the US in relation to a legal case against Huawei. It is to be seen how China would deal with HSBC in its country in the coming months.

Santander reported a net loss of 11.1 billion euros. Its major markets such as Brazil, Spain, the UK, were the countries that have suffered the most by the pandemic. Losses were caused by loan impairments and write-down in the value of assets. Deutsche Bank reported a net loss of 77 million euros, but this outperformed its own estimates of 133 million euros and analysts’ estimation of 182.9 million euros. This was thanks to strong performance in investment bank that made up for loan loss provisions. Similarly, BNP Paribas saw its net income fall only by 6.8% year-on-year, which was above analysts’ expectations, due to a surge in investment banking.

Thinking beyond

The key is not how the banks have done so far, but how they will do now onwards, as pandemic becomes a prolonged phenomenon. HSBC says it will speed up its restructuring plan announced in February. This would involve scaling down its businesses in Europe and the US. It is considering selling its US retail banking and merging its retail banking and wealth management units. Overall, its plan will result in cutting 35,000 jobs across its global branches. Santander is preparing to turnaround the performance of its UK branch by integrating Santander UK more closely with its banks in Spain, Portugal and Poland. It has hired Antonio Simoes, HSBC’s former head of private banking for the mission of integrating European businesses closer together. This will involve sharing technologies and investments among subsidiaries. Santander will also be cutting costs by closing down some of the branches across Europe to drive efficiency.

The transformations banks are planning to embark will heavily involve lawyers. When cutting jobs or closing down operations, banks’ in-house legal teams will be advising on employment rights and employment contracts to carry out lawful termination of employment. Group reorganisation will require lawyers negotiating and drafting contracts such as contracts regarding the merger of subsidiaries, and filing necessary legal documents after the reorganisation. If certain services or products are to be shared among companies within the same group, contracts are again needed to record how they will be shared. If HSBC is to sell its US retail banking, it is likely to be relying on external law firms for the sale as it will involve lawyers in a wide range of practice areas. Sale of this division will not only involve corporate issues such as drafting share or asset sale agreements but also employment, intellectual property, data protection and most importantly, financial regulation issues that are specific to banking sector M&A transactions.

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