Loan losses raise fears despite rising profits at Europe's top banks

A steep rise in provisions for bad debts took the gloss off a huge rise in profit at Deutsche Bank yesterday.

The company set aside €1bn (£860m) compared with €135m in the second quarter of last year and €526m in the previous quarter.

Germany's biggest bank otherwise reported a strong set of results, driven by an upsurge in investment banking earnings. Profits came in at €1.1bn against €645m in the second quarter of last year.

Bankers' pay is also strongly on the rise, suggesting that the issue is not one that is confined to the UK, although the sort of bonus culture prevalent in the City of London is less common in Frankfurt, Germany's financial centre, where what is seen as excessive pay tends to be frowned upon. A total of €3.14bn was paid out compared to €2.7bn.

Josef Ackermann, Deutsche Bank's chief executive, described the results as "very satisfactory".

He also said that the bank was "committed" to supporting both its private and corporate customers during the downturn. "For private customers of Deutsche Bank branches in Germany, new mortgage lending is up by over 50 per cent since a year ago, and our volume of loans to 'Mittelstand' companies is now around €3bn higher than at the onset of the crisis in late 2007."

Germany's army of "Mittelstand" companies – medium-sized businesses – are widely seen as the linchpin of Europe's biggest economy.

However, while Mr Ackermann said Deutsche was "well positioned", he voiced concern about the outlook for credit. "We remain cautious on the outlook for the global economy, notably employment and real estate markets, while we also foresee continued pressure on the credit environment," he said.

The profits were generally well received and were ahead of analysts' expectations. They follow a strong set of results at Credit Suisse and a stunning performance at the US investment bank Goldman Sachs, which led to fresh concerns about bonus payments and criticism that it had returned to "business as usual" while millions continue to suffer from the effects of the credit crunch.

On the same day, the Spanish bank BBVA's provisions for bad debts hit second-quarter profit by 10 per cent to €2.5bn. That means that bad loans as a percentage of the bank's total loan book had risen to 3.2 per cent at the end of June from 2.8 per cent at the end of March.

Britain's banking season gets under way in earnest next week when attention will be focused on their bad debt provisioning in the wake of the taxpayer-funded bailouts of Lloyds and Royal Bank of Scotland.