Eurozone fears linger as investment banking rebounds

Top European banks are expected to show earnings from investment banking bounced back strongly at the start of this year but a grim economic backdrop and regulatory reforms remain a drag on their wider businesses.

Spain's Santander is particularly exposed to the euro zone's troubles, and its first-quarter results due on Thursday could suffer from provisions taken on property loans that have soured during Spain's property market crash.

Britain's Barclays and Germany's Deutsche Bank are expected to show more robust first-quarter results, thanks to their far bigger reliance on capital markets activity to swell their earnings.

"We saw a constructive revenue environment for European investment banks largely driven by fixed income. As such, we expect Barclays to have been one of the main beneficiaries of this buoyant start to the year," analysts at Credit Suisse said.

Investment bank earnings should have bounced back from the grim second half of last year, helped by massive liquidity support from the European Central Bank, and be flat or slightly down from the buoyant first quarter seen last year.

The first quarter is typically the strongest for investment banks and can set the tone for the year.

US banks and Credit Suisse have said a strong first quarter slowed in April, however, and investors are wary that the euro zone crisis could flare up and dampen activity.

Santander is expected to report net profit of 1.4 billion euros, according to the average of 11 analyst estimates polled by Reuters, but much will depend on how big a provision it takes on its domestic real estate loans.

It must set aside 2.3 billion euros against the loans this year, but it could follow rival BBVA and postpone the provisions until later this year.

The impact of Spain's recession and high unemployment on its loan quality and domestic business will be key, but investors are also keen for insight on margins and growth at Santander's Brazilian unit and whether it will float its Mexican unit later in the year.

Deutsche Bank is expected to report a first-quarter pretax profit of 2.4 billion euros, down 21% from a year ago, according to the average of 10 analysts polled by Reuters.

Analysts are watching out for moves by Deutsche Bank to clean up its balance sheet before a new leadership team takes the helm in June. Deutsche Bank has put the asset management division and generic drugmaker Actavis on the block.

Barclays should report a pretax profit of 1.9 billion pounds for the quarter, according to the average of five analyst estimates, compared with 2 billion pounds a year earlier.

Revenue at Barclays Capital is predicted to hit 3.4 billion pounds, up 85% from the fourth quarter and just above the year ago level.

But the bank could take extra provisions to cover the cost of insurance policies mis-sold to UK customers, potentially stirring up more discontent about a lucrative pay plan for its Chief Executive Bob Diamond.

Investors are threatening to vote against the remuneration report at its AGM on Friday, angered that the bank has not reined in pay even though returns for investors are well below targets.