Banks are showing the scars from a series of blows: a euro zone crisis that politicians can't resolve, a transatlantic probe into interest rate-rigging, economic stagnation or recession, and regulators tightening the screw.
Although still profitable, earnings are down sharply from pre-crisis days and investors worry that these skinny results will become the norm as the industry goes through profound structural change.
"It's pretty bleak out there. It's going to be very difficult through the summer," said Chris Wheeler, analyst at Mediobanca in London, citing a series of one-off hits and charges adding to the euro zone gloom.
"The question is whether we are entering a new paradigm, not only in investment banking but in wealth management and other products areas that are going to see lower returns. We are not going to return to pre-crisis levels even in wealth management, the question is how much lower will it be," he said.
In the space of an hour on Tuesday, four of Europe's top banks laid bare the troubled times and the impact on their bottom lines.
Sergio Ermotti, chief executive of Swiss bank UBS which shocked investors with a sharp drop in profit, summed up the mood: "A return of confidence can only happen when clients believe there is a clear and lasting resolution to today's economic and political challenges, and this will take time," he said.
UBS took a 349 million Swiss franc ($356 million) loss on its role on advising and underwriting U.S. social networking site Facebook's flotation in May.
The bank said it would take action against U.S. stock exchange Nasdaq for what it called "gross mishandling" of the initial public offering (IPO).
Its second-quarter profit more than halved to 425 million Swiss francs as its investment bank made a loss after trading activity crashed, in addition to the Facebook hit.
Rival Deutsche Bank, suffered a similar drop in trading at its investment bank where profit plunged 63 percent, underscoring the challenge facing its new leaders as they prepare a strategy overhaul.
Analysts said Deutsche Bank's new bosses have startling problems to address at the investment bank - costs represented 87 percent of income, and return on equity was just 5 percent, well below its cost of capital.
BBVA, Spain's second-biggest bank, said first-half profit slumped by a third as it set aside cash to cover losses on its toxic real estate loans, which all the country's banks have been told to do as recession deepens.
BBVA will have to set aside more in the future and the impact of its sickly home market may be a drag for years.
In Austria, Erste Bank cut its 2012 profit outlook for the second time in three months in the face of deteriorating economies across Europe.
By 1030 GMT, UBS shares were down 4.9 percent, Erste shed 3 percent and Deutsche Bank was down 1 percent. BBVA was flat. The European bank index dipped 1 percent, and is down 18 percent since mid-March.
Investors worry there is more pain ahead, particularly in the fallout from the rate-rigging scandal and in Britain from mis-selling insurance and complex interest rate hedging products.
"This is the longest tunnel I have ever been in and there's no sign of light at the end of it," said an investor who is a top 10 shareholder in Royal Bank of Scotland and holds some other bank shares.
Britain's Barclays was fined $453 million last month by U.S. and UK regulators for rigging interest rates, and more banks are expected to be dragged in.
More than a dozen, including UBS and Deutsche Bank, are being probed by investigators looking at whether Libor and Euribor benchmark rates were manipulated.
UBS said on Tuesday it had appropriate provisions for all litigation. Deutsche Bank did not say whether it had set aside funds for potential costs.
Corporate treasurers, pension funds, charities and other investors are seeking advice on whether to pull their money out of banks, nervous that earnings will be eroded for some time by fines.
"There appears to be a common denominator: the absence of appropriate cultural and ethical values to guide bank management and governance," said George Dallas, director of corporate governance at F&C Investments.
One bright spot is that banks have remained in the black, in contrast to the darkest days of the 2008/09 global financial crisis. Deutsche Bank may need to raise capital, some analysts reckon, but there appears unlikely to be an immediate industry-wide dash for cash.
But even banks that are performing relatively well are struggling to regain investors' trust. HSBC, Europe's biggest lender, on Monday took a $2 billion hit to cover fines due to lax anti-money laundering in its U.S. and Mexican operations and to compensate British customers for mis-selling. That took the shine off a decent underlying performance, analysts said. ($1 = 0.9811 Swiss francs)
(Additional reporting by Sinead Cruise, Edward Taylor, Arno Schuetze, Sonya Dowsett; Editing by Erica Billingham)
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