European banks post better-than-expected results

— The Royal Bank of Scotland posted first-half losses Friday that weren't nearly as bad as some analysts had feared, rounding out what is shaping up to be a relatively bright earnings season for Europe's biggest financial institutions.

European banks have been getting help from stronger business in emerging economies, and have been reporting surprisingly resilient results in the face of global economic turmoil and losses from the U.S. subprime mess.

Of the major banks, only Switzerland's UBS has yet to post its results, which are due Tuesday.

The season's headlines were often dire, as the credit crunch — which has been in full swing for a year — forced many banks to post huge losses as they wrote off billions in bad U.S. debt.

But their underlying core banking operations — especially in fast-growing emerging markets — did well.

"The results haven't been good, but it's all about expectations and they could have been much worse than what materialized," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

Spain's Banco Santander, the largest bank in the group of countries using the euro, said that despite the difficult market conditions its first-half net profits rose 6 percent to 4.7 billion euros for the year to June 30, compared to the first six months of 2007. Santander in part credited a booming business in Latin America, where operating income increased by 29 percent to 3.6 billion euros ($5.4 billion).

Britain's HSBC, Europe's largest bank, posted a 29 percent fall in profits for the first half compared to the roaring first six months of 2007. But that still left the bank with an impressive net profit of $7.7 billion.

Like Santander, HSBC said the positive results were thanks to its thriving presence in developing economies. In the Middle East, profits before tax grew by 63 percent to nearly $1 billion. In Asia, where HSBC rakes in over 50 percent of its pretax profit, earnings rose by 20 percent excluding one-off dilution gains over the period to $6.7 billion.

The No. 3, France's BNP Paribas, said Wednesday revenue from retail banking in emerging markets grew 27 percent to 440 million euros ($663 million), helping the company to retain its position as the only European investment bank to be consistently profitable since the start of the credit crisis

"Generally the banks that have done relatively well in maintaining profitability are not pure play investment banks," said Cubillas Ding, London-based analyst with Celent, a global financial consulting firm. Like Santander and HSBC, banking's winners have strong commercial banking units and presence in a diverse set of geographies, he said.

Deutsche Bank, Germany's largest, suffered a worse first-half than many of Europe's other large banks because of its heavy reliance on investment banking. Second quarter net revenue fell to 645 million euros ($971 million) from 1.8 billion euros in the April to June period of 2007, as the credit crisis forced writedowns of 2.3 billion euros ($3.5 billion).

The German giant is now planning to get into retail. To that end, it has already expressed interest in buying Postbank — Germany's largest retail bank in terms of locations and customers — from Deutsche Post.

Half-year earnings results also revealed that most of the companies are doing a good job of cleaning up their balance sheets. Being well-capitalized is now a major priority, and lots of Europe's banks are selling non-core assets and having share sales in order to boost this.

No one has done this more ardently than the Royal Bank of Scotland. In June, the Scottish bank, which reported a first-half loss of 802 million pounds ($1.5 billion), raised 12.3 billion pounds in Europe's largest-ever rights issue. Around the same time, it also agreed to sell its European train unit for $7 billion.

The benefits of good capitalization were illustrated by Credit Suisse's half-year results. Switzerland's second-biggest bank climbed to a 1.2 billion Swiss francs ($1.2 billion) profit in the second quarter of the year after slipping 2.1 billion Swiss francs into the red in the first quarter. Although this profit was down 62 percent from the April to June period of 2007, chief executive Brady Dougan was "pleased" by the clear mid-half turnaround.

"Our conservative funding structure and our position as one of the world's best capitalized banks remain competitive advantages," he said.

Europe's banking sector isn't out of the woods yet. "We're expecting a bumpy road ahead," Celent's Ding told the AP. "But the results so far are better than we were expecting."