Now or never? European banks watch the comeback against Wall Street

US consumer protection agency adds stress on banks over fees

“The need is becoming much more urgent for European banks to show what they truly stand for and how they’re going to differentiate themselves to create an advantage for the long term,” said Eriola Shehu Beetz, managing director and partner at Boston Consulting Group.

Replenished firepower and higher interest rates will give Europe’s banks an ideal opportunity this year to reverse recent underperformance and paw back market share from rivals in the United States, industry specialists say. European lenders lost ground to Wall Street rivals during the pandemic since unpredictable markets helped the procuring power of U.S. banks’ outsized exchanging arms. European rivals acquire proportionately more from lending and advantage from a higher interest rate environment.

In investment banking, U.S. banks have beaten European rivals on their own turf by almost any metric in recent years, and the gap has been widening.

JPMorgan, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America between them claimed 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 largest European rivals took just 12%.

“What the US banks have done really well – and scale helps quite a bit – is that they’ve consistently invested in technology in their capital markets businesses. That makes them much more resilient,” Shehu Beetz said.

That 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 their U.S. equivalents dips below 1, showing the gulf in how investors value lenders from the two continents.

REBOUND POTENTIAL

European banks that lend heavily to home buyers such as Dutch ING, are hopeful that the rock bottom interest rates used to lift the region out of the financial crisis more than a decade ago could finally be coming to an end. Late last year, ING CEO Steven van Rijswijk said the gradual rise in interest rates would trickle down to make its lending business more profitable in the medium term.

In Britain, central bank interest rates are rising after years near zero, helping banks such as Lloyds Banking Group and NatWest make more from lending, with the European Central Bank expected to follow suit in 2023 if not sooner. European lenders have also largely avoided amassing mountains of bad loans as corporate borrowers weathered the COVID-19 pandemic.

A combination of fewer than expected soured loans in the pandemic and, until recently, curbs on shareholder payouts and banker bonuses from central banks, mean lenders have generally built up healthy capital buffers. “The (loan) moratoria are almost gone and banks still have quite a lot of (bad loan) provisions that they can take back,” said Jerome Legras of Axiom Alternative Investments.

Investors hope higher capital levels will translate into bumper dividends and share buybacks. But banks could also take advantage of their replenished firepower to invest for the long term, in areas such as digital services and wealth management. “The banking system has proven to be able to cope … Enough is enough now, and the focus has to be on what you do with that 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 spiralling wage demands, a trend seen across U.S. banks in recent weeks.

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