After facing serious challenges, banks in Europe and the US show signs of recovering. Earnings have been decent this year as a number of headwinds fade.Although third-quarter 2017 earnings results were mixed in Europe, compared with a better season in the US, 2017 is still set to be the first year of consistently decent earnings for banks after several years of disappointing results, especially in Europe. The market has noticed the improvement, and the sector has outperformed in recent months.Headwinds are vanishing in Europe. In Europe, where the environment has remained challenging for a long time since the financial crisis, important headwinds have vanished. Economic growth has risen, existential threats to the euro area have dissipated, and balance sheets have improved. The refinement

European financial stocks have sold off sharply in recent weeks, raising concerns about a new banking crisis.

European banks have been underperforming the European equity market to much the same degree as US banks have been underperforming the US market, suggesting that there is no specific issue with European banks. However, the banking sector is vulnerable to pressure on earnings expectations from wider concerns about the global economy, which will continue to weigh on bank stocks.
Three new sources of earnings downgrades for European and US banks have emerged in recent weeks.
First, on the back of losses arising from low oil and commodities prices, a realisation that the global corporate credit cycle is turning, having previously been on a positive trend since the end of the 2007-08 financial crisis. Some losses on loans to the energy sector were taken in Q4, mostly by US banks and in some cases (such as UBS) by European banks, with banks guiding that there is more to come if commodity prices stay low. How high will losses be? That will depend on how low commodity prices go, and for how long they stay there. However, loan losses will be gradual, spread over several quarters—very different from 2007-08, where the marking-to-market of securities in banks’ trading books required them to book losses immediately.