The sharp rise in interest rates has brought European banks a profit boom after some lean years.
The gap between the major American banks and their European counterparts has increased in many areas since the financial crisis. One of the numerous proofs of this is the net profit of the large institutions in the USA, which has been significantly higher every year over the past decade than that of the European banks.
An important reason for this is the different market sizes. While the American institutions have around 330 million potential customers based on the population, the EU has 450 million, but the banks mostly operate primarily nationally in the private and corporate customer business. The European market remains quite fragmented along its borders and the banking and capital markets union is unfinished.
Europeans are on par when it comes to return on equity
Last year, the ten largest American banks, with a net profit of the equivalent of 146 billion euros, were significantly more profitable than the ten largest European institutions, which achieved a net profit of almost 100 billion euros, according to an analysis by the consulting and auditing company EY.
A few institutes stood out on both sides of the Atlantic. In the USA, JP Morgan Chase was by far the industry leader with a net profit of the equivalent of 45 billion euros, while in Europe UBS and HSBC Holdings left all other banks far behind with the equivalent of 26 billion and 21 billion euros. In the USA, the largest Swiss bank would come into second place, ahead of Bank of America and Wells Fargo, especially thanks to the successful takeover of Credit Suisse.
However, UBS benefited from a large special effect that resulted from the rescue of Credit Suisse. Without this effect, the profit would have only been around 3.6 billion euros. What is happening in Switzerland is therefore also distorting the results of European banks overall positively upwards. Deutsche Bank had a net profit of almost 5 billion euros.
But at least last year, European credit institutions achieved significantly higher profit growth of 29 percent than their American competitors, which only achieved 4 percent. In addition, both groups were almost on par with a return on equity of 11 percent (American banks, unchanged) and 10.9 percent (European banks, plus 1.8 percentage points).
EY partner Ralf Eckert explains the Europeans’ catch-up in some important key figures by saying that European banks have benefited above average from the interest rate turnaround and the significant increase in interest rates on both sides of the Atlantic and have increased their profits more. This is also due to the different business models. The deposit and lending business is more important for the Europeans than for the Americans, who in turn have a larger footprint in the capital market business.
According to EY partner Gunther Tillmann, American banks have also recorded increasing interest income, but their mergers and acquisitions and IPOs play a much larger role than their European competitors. Accordingly, they would have suffered more from the slump in IPOs and the declining merger business.
In Europe and especially in Germany, many banks have achieved their best interest results in many years. They benefit from the very sharply increased interest rates that they receive for short-term investments at the European Central Bank (ECB) and when lending to private and corporate customers, whereas they only absorb the increased interest rates on deposits very slowly and not completely pass on to customers.
This is also due to the inertia of customers, who hardly react to bad offers from their bank, which would stimulate competition among the institutions. The cost of switching banks for slightly higher interest rates is apparently too high for customers.
According to Landesbank Baden-Württemberg (LBBW), profitability in the German banking sector reached a level last year that at least roughly covered the cost of capital. This should actually be a given for every company. The cost-income ratio was around 65 percent.
US banks three times more valuable than European counterparts
The differences between American and European banks are currently the greatest on the stock market. Investors value the “big banks” of the United States. The ten largest institutions have a market value that is almost three times as high as the ten largest European institutions. This gap increased even further in the first three months of this year. While the market capitalization of European banks climbed by 2 percent to 560 billion euros by mid-March, that of American institutions rose by 8 percent to the equivalent of a good 1.4 trillion euros.
This development could continue because the economy in the USA is doing significantly better than in Europe, which will benefit the business of American banks. At the same time, interest income is likely to fall on both sides of the Atlantic, as the US Federal Reserve and the European Central Bank are both expected to begin cutting interest rates by summer at the latest due to declining inflation. This hits Europe’s banks harder. Various geopolitical tensions, a possible increase in corporate bankruptcies and the collapse in commercial real estate prices that have been occurring for some time are also causing uncertainty.
You can contact Frankfurt business correspondent Michael Rasch on the platforms X, Follow Linkedin and Xing.