This year’s first quarter will likely be one of the most difficult reporting seasons for European investment banks for several years, according to analysts at Bank of America Merrill Lynch.

A note on Wednesday from Andrew Stimpson, vice president European bank strategy, said structural hits from shrinking some units have coincided with a cyclically unfavourable quarter.

“Cost reductions are in their infancy and with little variable cost left to flex, we expect losses at Credit Suisse and Deutsche Bank and much reduced profits at UBS," said the research analyst.

“The second quarter of 2016 starts to look less negative in our view, but structural questions on profitability will likely remain for a significant amount of time.”

Barclays kicks off EU investment bank reporting on 27th April, followed by Deutsche Bank on 28th, UBS on 3rd May and Credit Suisse on 10th May.

Regulatory costs, fintech disruption, volatile markets and low interest rates are some of the factors behind the weaker performances. 

The major concern when it comes to Europe, according to Stimpson and his team, is that cost cutting is not working and that revenues are being cut as headcount is reduced.

“Many of the cuts being made are to profit making businesses (at least formerly profit-making) that consumed too much capital and give sub-standard returns," he says. 

"Therefore surrendering some revenues is inevitable in our view."

Nevertheless, the analyst says it is also true that banks without large restructuring plans have also seen revenues decline in Q1.

"reporting season may not lead to a definitive conclusion of whether it is a structural cut in revenues from franchise damage, just permanently lower RWA/leverage, or a cyclically weak first quarter."

Bank of America's house view is that difficult revenues between January and March should not surprise investors anymore.  

The only area where results may still negatively surprise is in a backward move for capital ratios across the board, which is never welcome.

US likely to beat Europe

On average, JP Morgan, Citi,  Morgan Stanley and Goldman Sachs reported investment banking revenues that were 4% ahead of Bank of America estimates.  Those revenues were still down 22% year-on-year. 

“We estimate that IB revenues for the EU IBs will be down -38% year-on-year," Stimpson's note added.

“EU investment banks gave more guidance on revenues much later in the quarter than the US banks and we see less room for positive surprise from a good March.”