U.S. President Donald Trump has pledged to roll back rules he says are inhibiting U.S. banks. That’s bad news for European banks still struggling to craft a post-financial crisis business model that can deliver a sufficient return on equity to satisfy their shareholders.
Trump signed two directives at the end of last week aimed at curbing bank regulation. “We’re going to attack all aspects of Dodd-Frank,” Gary Cohn, the former Goldman Sachs President who’s now director of the White House National Economic Council, told Bloomberg Television on Friday. “Banks have been forced to hoard capital.”
No matter how hard it proves for Trump to negate Dodd-Frank, legislation introduced in the wake of the financial crisis designed to make the banking industry safer, it’s clear that he agrees with U.S. bank chiefs that the rules are too limiting. Allowing them to put aside less capital would tilt the playing field in their favor and against their European peers.
At a banking conference I attended last month, the head of capital markets at a big European firm said it was ironic that the meltdown in the U.S. mortgage market triggered the financial crisis that’s led to tighter regulations, and yet the U.S. banks looked likely to be first to get relief from those rules, thus giving them a competitive advantage.
To be clear, European banks are in large part the architects of their own post-crisis misfortune. They were much slower than their U.S. counterparts to recognize that they needed new capital to bolster their balance sheets. And they fought against every new rule proposed by regulators designed to prevent future mishaps becoming the burden of taxpayers.
The result is clear from their share price performance relative to their U.S. peers. A six-month rally in European bank shares leaves them exactly where they were five years ago as measured by the Euro Stoxx bank index, a stark contrast to the gains delivered by the bank index of the S&P 500:
Back Where They Started and Half as Good
Relative performance of European versus U.S. bank shares
Source: Bloomberg
European banks have been retrenching in the international capital markets, ceding ground to their U.S. competitors. In global loans, for example, the top four underwriters are JPMorgan, Bank of America Merrill Lynch, Citigroup and Wells Fargo, with a combined market share in 2016 of more than 32 percent. The next three most-active banks are Barclays, Deutsche Bank and HSBC, with Credit Suisse in ninth place and the European firms sharing just 13 percent of the business among the top 10.
A decade ago, while the same three U.S. banks were the market leaders with about a third of the business, the next five most active institutions were European, and Credit Agricole was in 10th place, with a combined market share for the European firms of more than 25 percent.
In international bond underwriting, the five leading U.S. banks managed almost 31 percent of last year’s sales, leaving the Europeans in the top 10 with just 25 percent of the market. There’s a similar imbalance in global equity offerings, where U.S. banks hold five of the top 10 positions, sharing almost 38 percent of the market and leaving top-10 European banks with four slots and a 17 percent share.
And in equity offerings in Europe, the Middle East and Africa for 2016, the five top-10 U.S. firms had a combined market share of more than 36 percent, while the five European firms had less than 28 percent.
I’ve argued before that Europe’s finance firms risk becoming irrelevant if they cede too much market share to their U.S. counterparts. Trump’s dismantling of Dodd-Frank looks likely to give U.S. banks more capital to commit to winning business at a time when European firms are still trying to improve their balance sheets.
Unicredit on Monday began selling new shares to raise 13 billion euros ($14 billion) of fresh capital. While the deal is fully underwritten by a who’s-who of investment banks (meaning Unicredit gets its money no matter what), the willingness of investors to back Italy’s biggest bank is a key test of confidence in the industry.
If the fundraising effort falters — and the amount sought is about same as Unicredit posted as an annual loss for 2016 — it’ll be clear that shareholders remain unconvinced that European banks can achieve the strong footing of their U.S. peers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net
To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net
