Now or never? European banks are considering a comeback against Wall Street

By Lawrence White and Iain Withers

LONDON (Reuters) – Reconstituted firepower and higher interest rates will give European banks a perfect opportunity this year to reverse recent underperformance and reclaim market share from rivals in the United States, according to industry experts.

European lenders have lost ground to rivals on Wall Street during the pandemic as market volatility boosted the earning power of the outsized trading arms of US banks. European rivals earn proportionally more from loans and benefit from a higher interest rate environment.

As the continent’s biggest lenders prepare to report their annual results for 2021, the kick-off with Deutsche Bank https://www.Reuters.com/business/finance/deutsche-bank-nearly-triples-q4- profit-defying-expected-loss-2022-01-27 on Thursday, European banks must seize the opportunity that now presents itself, say analysts, consultants and investors.

“The need becomes much more urgent for European banks to show what they really stand for and how they will differentiate themselves to create long-term advantage,” said Eriola Shehu Beetz, managing director and partner at Boston Consulting Group. .

In investment banking, US banks have beaten European rivals on their home turf by nearly every metric in recent years, and the gap has widened.

JPMorgan, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America together claimed 31% of merger fees in the Europe, Middle East and Africa region in 2021, according to Refinitiv data, compared to 26% in 2019, while that their six biggest European rivals took only 12%.

“What US banks have done really well – and scale helps a lot – is they have consistently invested in technology in their capital markets business. It makes them much more resilient,” Shehu said. Beetz.

This 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 US counterparts dips below 1, showing the chasm in the how investors rate lenders on both continents.

REBOUND POTENTIAL

European banks that lend heavily to home buyers, such as Dutch ING, are hoping the lowest interest rates used to lift the region out of the financial crisis more than a decade ago may finally be coming to an end.

Late last year, ING CEO Steven van Rijswijk said gradually rising interest rates would affect the profitability of its medium-term lending business.

In Britain, central bank interest rates are rising after years near zero, helping banks such as Lloyds Banking Group and NatWest to take greater advantage of lending, with the European Central Bank expected to follow suit in 2023, or even earlier.

European lenders have also largely avoided racking up mountains of bad debt as corporate borrowers weathered the COVID-19 pandemic.

A combination of fewer impaired loans than expected in the pandemic and, until recently, restrictions on shareholder payouts and central banker bonuses, means lenders have generally built up healthy capital reserves.

“The moratoriums (on loans) have almost disappeared and the banks still have quite a lot of provisions (on bad loans) that they can take back,” said Jerome Legras of Axiom Alternative Investments.

Investors are hoping that higher capital levels will result in bumper dividends and share buybacks. But banks could also use their reconstituted firepower to invest for the long term, in areas such as digital services and wealth management.

“The banking system has proven itself able to cope… Enough is enough now, and the focus needs to be on what you do with that excess capital,” said senior credit research analyst Oliver Judd. at investor Aviva.

“I’m looking for strategies. That’s what was missing for two years.”

One of the constraints to those ambitions will likely be soaring wage demands, a trend seen at US banks in recent weeks.

Swiss bank Credit Suisse set a stark tone for European earnings on Tuesday, warning of a fourth-quarter loss, but analysts said the problems at the scandal-hit bank were unlikely to affect the rest of the sector.

Long-distance rival UBS is expected to post more positive earnings on Monday, extending a recent winning streak that saw it post its highest quarterly profit since 2015 in October.

Germany’s Deutsche Bank nearly tripled its fourth-quarter profit on Thursday, defying loss expectations, as investment banking revenue rose. It is the bank’s longest dark streak since 2012.

Other European heavyweights expected to report include Italy’s UniCredit on Friday, Spain’s Santander on Wednesday and France’s BNP Paribas on February 8.

Britain’s big banks are also expected to post relatively strong profits, with Standard Chartered first on February 17, followed by NatWest the next day, HSBC on February 22, Barclays on February 23 and Lloyds on February 24.

(Reporting by Lawrence White and Iain Withers in London, additional reporting by John O’Donnell in Frankfurt; Editing by Elaine Hardcastle)

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