Europe's banks brace for tougher competition under Trump 2.0

Federated Hermes

08/11/2024 13:27

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      European banks struggle with profitability and weak
economies 
    

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      Trump's win boosts US bank shares, European banks face
stricter
oversight
    

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      European politicians brace for new US deregulation
landscape
    

  
    By Sinead Cruise and Tommy Reggiori Wilkes
       LONDON, Nov 8 (Reuters) - European banks face an even
tougher task to close an earnings gap on U.S. rivals, as Wall
Street awaits a new era of financial deregulation under a second
Donald Trump presidency.
    Lenders in the euro zone and Britain have been hobbled by
poor profitability and weak economies since the 2008-09 global
financial crisis, while U.S. banks have soared in value and
stolen market share, especially in investment banking as
European rivals retreated.
    Some banks had begun to claw back lost ground this year.
Until this week, European shares were outperforming U.S. peers
 .DJUSBK  and hopes had grown that the U.S. would adopt some
elements of the Basel III regulations requiring American banks
to hold more capital, helping level the playing field.
    Trump's presidential election win this week has turned the
tables. JPMorgan  JPM.N , Goldman Sachs  GS.N  and Morgan
Stanley  MS.N  shares all soared while the STOXX Europe 600
Banks index  .SX7P  is down more than 1% for the week.
    "The expectation is simple: deregulation and tax cuts in the
U.S. contrast with Europe's strict oversight and
low-interest-rate grind," said David Materazzi, CEO of
Italy-based automated trading platform Galileo FX.
    "If U.S. banks get the expected policy support, they could
ramp up loan volumes and optimize capital in ways that Europe's
banks just can't match right now," Materazzi said.
    Since early 2010, European banking shares have fallen 10%,
while U.S. lenders have more than tripled.
    The European Central Bank has estimated that euro zone
banks' return on equity fluctuates around 5%, against 10% in the
U.S., linking it to higher U.S. fee income and legacy
non-performing loans with which European banks still grapple. 
     
    LEVERAGE TO LOBBY?
    There are already signs European politicians are bracing for
a new landscape under Trump.
    Swiss Finance Minister Karin Keller-Sutter said on Thursday
she and her British counterpart Rachel Reeves had discussed the
outlook for U.S. banking regulation.
    "It was said beforehand that a wave of deregulation was
coming in the USA," she told Reuters, adding that both agreed it
was important to strike a balance between competitiveness and
stability.
    A wave of deregulation should give European banks some
leverage to lobby for easing the rules in Europe, which are
already more onerous, one banking executive told Reuters. 
    The U.S. banking industry is expecting Trump to usher in
Republican regulators who ease capital rules and merger
approvals and further dilute the contentious Basel III endgame
proposal aimed at requiring big lenders to hold more capital.
    But the pace of any deregulation will be determined by new
regulators and key policymakers that Trump has yet to nominate,
leaving the outlook highly uncertain.  
    Michael Ashley Schulman, chief investment officer at Running
Point Capital Advisors, thinks Trump may also roll back parts of
the 2010 Dodd-Frank financial reform law, which increased
regulation on banks to avoid another 2008-style implosion.
    "Additionally, an uptick in expected corporate M&A because
of a less restrictive FTC (Federal Trade Commission) should lead
to increased investment banking fees," he told Reuters. 
    
    "We can also expect an uptick in regional bank mergers.
Comparatively, European banks with their more restrictive
regulatory oversight will be competing with one hand tied behind
their backs."
    Long-awaited European banking M&A has restarted this year
with a potential takeover by UniCredit  CRDI.MI  of Commerzbank
 CBKG.DE  and BBVA's  BBVA.MC  bid for Sabadell  SABE.MC , but
neither deal is guaranteed as they navigate political
opposition.
    Filippo Maria Alloatti, Head of Financials Credit at
Federated Hermes, said U.S. banks would be the primary
beneficiaries under Trump. But international banks with
substantial U.S. operations such as Barclays  BARC.L , Deutsche
Bank  DBKGn.DE , and UBS  UBSG.S , should, he said, see
"positive impacts" too. 

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Barclays' investment bank gains lag Wall Street rivals    https://reut.rs/3YycymP
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 (Additional reporting by Elisa Martinuzzi in London and Jesus
Aguado in Madrid, Editing by William Maclean)
 ((mailto:sinead.cruise@thomsonreuters.com; 020 7513 5026;
Reuters Messaging:
rm://sinead.cruise.thomsonreuters.com@reuters.net/))