In This Article:
* Europe's banks lag U.S. rivals on valuation, performance
* Rising rates, surplus capital offer signs of hope
* Banker pay hikes may constrain turnaround plans
By Lawrence White and Iain Withers
LONDON, Jan 27 (Reuters) - Replenished firepower and higher interest rates will give Europe's banks an ideal opportunity this year to reverse recent underperformance and claw back market share from rivals in the United States, industry experts say.
European lenders lost ground to Wall Street rivals during the pandemic because volatile markets boosted the earning power of U.S. banks' outsized trading arms. European rivals earn proportionately more from lending and benefit from a higher interest rate environment.
As the continent's biggest lenders prepare to report full-year earnings for 2021, kicking 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, analysts consultants and investors say.
"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.
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.