European banks to claw back market share

The financial district is photographed on January 29, 2019 in Frankfurt, Germany. REUTERS Kai Pfaffenbach File Photo

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 banks lost ground to Wall Street rivals during the epidemic due to volatile markets boosting the earning power of U.S. banks' outsized trading arms. European rivals earn more money by lending and benefit from a higher interest rate environment.

As the continent's biggest lenders prepare to report full-year earnings for 2021, Deutsche Bank DBKGn kicks off. European banks must take advantage of the opportunity that now presents itself, analysts and investors say. The need for European banks to show what they 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.

The gap has been wide and the U.S. banks have beaten European rivals on their own turf in the past few years in investment banking.

JPMorgan JPM.N Goldman Sachs GS.N Morgan Stanley MS.N Citigroup C.N and Bank of America BAC.N claimed 31% of merger fees in the region of 2021, up from 26% in 2019 and their six largest European rivals only 12%, according to Refinitiv data.

The US banks have done well and scale helps a lot, and they have invested in technology in their capital markets businesses. Shehu Beetz said that makes them more resilient.

That is reflected in valuations.

According to Refinitiv data, none of the ten largest European banks have a price to book ratio above one, while only Citigroup among their U.S. equivalents dips below 1, showing the gulf between the investors' value for loans from the two continents.

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 come to an end.

In the last year, ING INGA.AS CEO Steven van Rijswijk said that the gradual rise in interest rates would make its lending business more profitable in the medium term.

In Britain, central bank interest rates are rising after years near zero, helping banks like 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 largely avoided amassing mountains of bad loans, as corporate borrowers suffered from the COVID-19 epidemic.

A combination of fewer than expected soured loans in the Pandemic and a curtailed shareholder payouts and banker bonuses from central banks have resulted in healthy capital buffers, which means lenders have generally built up healthy capital buffers.

Jerome Legras of Axiom Alternative Investments said the loan moratoria are almost gone and banks still have a lot of bad loan provisions that they can take back.

The investors hope that higher capital levels will result in bumper dividends and share buybacks. Banks could take advantage of their replenished firepower to invest for the long term, in areas such as digital services and wealth management.

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

That's what has been missing for two years. A constraint on these ambitions is likely to be spiralling wage demands, a trend seen across U.S. banks in recent weeks. Swiss bank Credit Suisse CSGN.S set a dour tone for European earnings on Tuesday, warning of a fourth-quarter loss, but analysts said the bank's troubles should not affect the rest of the sector. Cross-town rival UBS UBSG.S should report more positive earnings on Monday, extending a recent winning streak that saw it post its highest quarterly profit since 2015 in October.

Deutsche Bank DBKGn was founded on Thursday by Germany. DE nearly tripled its fourth-quarter profit, defying expectations for a loss, as revenues at the investment bank went up. It was the bank's longest streak in the black since 2012.

Other European heavyweights expected to report include Italy's UniCredit CRDI.MI on Friday, Spain's Santander SAN.MC on Wednesday and France's BNP Paribas BNPP.PA on February 8.

Britain's biggest banks are expected to report robust earnings with Standard Chartered STAN.L first on February 17 followed by NatWest NWG.L the next day, HSBC HSBA.L on February 22, Barclays BARC.L on February 23 and Lloyds LLOY.L on February 24.