European banks lost ground to their Wall Street rivals during the pandemic, as market volatility increased the lucrative power of U.S. banks’ huge financial intermediation divisions. European rivals earn proportionately more on loans and benefit from a higher interest rate environment.
As the continent’s biggest banks prepare to report full-year 2021 results, starting with Deutsche Bank on Thursday, European banks should seize the opportunity now, analysts, consultants and investors say.
“The need for European banks to show what they really stand for and how they are going to differentiate themselves to create long-term advantage is increasingly urgent,” said Eriola Shehu Beetz, managing director and partner at Boston Consulting Group.
In investment banking, U.S. banks have outperformed their European competitors on their home turf on virtually every metric over the past few years, and the gap has been widening.
JPMorgan, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America between them took 31% of merger fees in the Europe, Middle East and Africa region in 2021, according to Refinitiv data, up from 26% in 2019, while their six biggest European rivals took just 12%.
“What U.S. banks have done really well – and their size helps quite a bit – is that they have consistently invested in technology in their capital markets businesses. That makes them much more resilient,” said Shehu Beetz.
This fact is reflected in valuations.
None of the ten largest European banks by assets has a price-to-book ratio above one, according to Refinitiv data, while only Citigroup, among its U.S. equivalents, ranks below 1, showing the gulf in investors’ valuation of banks on the two continents.
European banks that lend heavily to homebuyers, such as the Netherlands’ ING, are hopeful that the rock-bottom interest rates used to pull the region out of the financial crisis more than a decade ago may be coming to an end.
Late last year, ING CEO Steven van Rijswijk said the gradual rise in interest rates would translate into higher profitability in its medium-term lending business.
In the U.K., central bank interest rates are rising after years near zero, which has helped banks such as Lloyds Banking Group and NatWest earn more on loans, and the European Central Bank is expected to do the same in 2023, if not sooner.
European banks have also largely avoided accumulating mountains of bad loans as corporate clients weathered the COVID-19 pandemic.
The combination of fewer bad loans than expected during the pandemic and, until recently, restrictions on shareholder payouts and bonuses to bankers by central banks have meant that banks have generally built up healthy capital buffers.
“The (loan) moratoriums have all but disappeared and banks still have plenty of (bad loan) provisions they can recover,” said Jerome Legras of Axiom Alternative Investments.
Investors expect rising capital levels to translate into higher dividends and share buybacks. But banks could also leverage their renewed arsenal to invest for the long term, in areas such as digital services and wealth management.
“The banking system has proven itself capable of holding its own…. Enough is enough, and the focus should be on what you do with excess capital,” said Oliver Judd, senior credit research analyst at investor Aviva.
“I’m looking for strategies. That’s what’s been missing for two years.”
One constraint on these ambitions is likely to be spiraling wage demands, a trend seen across U.S. banks in recent weeks.
Swiss bank Credit Suisse set a gloomy tone for European earnings on Tuesday, warning of a fourth-quarter loss, but analysts said the scandal-hit bank’s problems should not affect the rest of the sector.
Local competitor UBS should post more positive earnings on Monday, extending a recent winning streak that saw it post its biggest quarterly profit since 2015 in October.
On Thursday, Germany’s Deutsche Bank nearly tripled its fourth-quarter profit against expectations of a loss as the investment bank’s revenue rose. This marked the bank’s longest streak in the black since 2012.
Other European heavyweights due to report include Italy’s UniCredit on Friday, Spain’s Santander on Wednesday and France’s BNP Paribas on Feb. 8.
The big British banks are also expected to report relatively strong results, with Standard Chartered first on Feb. 17, followed by NatWest the next day, HSBC on Feb. 22, Barclays on Feb. 23 and Lloyds on Feb. 24.
(Reporting by Lawrence White and Iain Withers in London, with additional information from John O’Donnell in Frankfurt; editing by Elaine Hardcastle; translation by Flora Gómez)