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Euro zone woes keep Europe's banks wary

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Quarterly reports from some of Europe's top banks showed the scars of the euro zone crisis on Thursday, with big losses on Spanish property, and fragile markets casting a shadow despite an early investment banking rebound.

Spanish bank Santander said first quarter net profit dropped 24 percent after it took a 3.1-billion euro ($4.1-billion US) provision to cover rising loan defaults, as the effects of Spain's property market crash were compounded by economic recession and joblessness afflicting nearly one in four workers.

Although results from Barclays and Deutsche Bank showed investment banking income bounced back strongly after a torrid end to last year, the sickly euro zone economy continues to dog the industry.

Barclays beat analysts' forecasts with a 22-percent rise in underlying first-quarter profit to 2.45 billion pounds, as revenues at Barclays Capital, the investment bank that provides the bulk of its profit, rose to 3.5 billion pounds, up 91 percent on a weak fourth quarter and up 3 percent from a year ago.

Losses on bad debts dipped 16 percent from a year ago, but the bank warned the backdrop remained difficult.

"The environment remains challenging and volatile," Barclays Chief Executive Bob Diamond said. "It's still slow economic growth around the world. It's still a zero interest rate policy in developed economies. This is not a robust environment."

He echoed comments from other banks that market activity had slowed in April. "Most people would say April was a bit sluggish compared to the first three months," he said.

By 0849 GMT the European bank index was down 0.6 percent. Santander shares had dropped 3.4 percent, and Deutsche Bank was down 3.3 percent. Only Barclays shares were in positive territory, up 0.9 percent.

APRIL SLOWDOWN

Revenues from Deutsche Bank's corporate banking and securities division hit 6.2 billion euros, up over 80 percent from the fourth quarter, but down 8 percent from a year ago.

Group pretax profit fell to 1.9 billion euros ($2.5 billion US), down from 3 billion a year ago and missing analysts' forecasts.

"Against this backdrop financial markets remain cautious as we have seen in April, with investor risk appetite markedly lower," Deutsche Chief Executive Josef Ackermann said.

Deutsche Bank's bottom line was hit by litigation charges and a writedown on its investment in generic drug company Actavis.

The first quarter is typically the strongest for investment banks and can set the tone for the year, but this year the rebound was exaggerated by massive liquidity support from the European Central Bank, and analysts said signs that impact had faded could be a concern.

U.S. banks and Credit Suisse have also said a strong first quarter slowed in April.

Santander, the eurozone's biggest bank, reported a first quarter profit fell to 1.6 billion euros, with bad loans as a percentage of total loans rising to 3.98 percent at end-March. Profits fell in Spain and Portugal, both struggling with heavy debts and budget deficits, but also in Brazil, which generates more than a quarter of its profit, due to rising credit losses.

Barclays took a 300-million pound extra charge to cover the cost of compensating customers for mis-selling insurance policies. It said it had to add to a 1-billion pound provision last year due to a spike in claims from customers in the last two months.

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