EditorialCompeting against US banks

Europe's banks set out to catch up

The assertion of the structurally inherent superiority of US banks is being challenged not only by the emergence of the new Swiss megabank.

Europe's banks set out to catch up

The NFL's stint in Frankfurt vividly demonstrates that in every aspect, Europe is a second-tier player in American football. However, even without Taylor Swift, the city found itself in a state of exception. The adored Eintracht, beloved in the surrounding areas as well, can only dream of meeting the demand for three million tickets with just 50,000 seats in the Waldstadion – unless they are once again gaining a spot in the cup final. Not to mention the Frankfurt Pirates, reportedly the only club in the metropolis at the river Main that engages in youth development in American football and cheerleading, according to Wikipedia.

Not too long ago, many bankers also seemed to feel as if they were engaged in a niche sport that was in an entirely different ballpark on the other side of the Atlantic. After the 2008 financial crisis, US banks, compelled to undergo capitalization, bounced back much faster than their European counterparts, whom they had pulled into the whirlwind of the subprime crisis.

Mourning the lost luster

In Germany, one major bank had the government as a major shareholder, while the other was under the influence of Anglo-Saxon investment bankers after the crisis. During this time, the narrative of the structurally inherent superiority of US banks remained robust. Unlike in Spain and other European countries, where banks focused on business and regional diversification, there was a prolonged lament for the lost glory of Deutsche Bank. The national penchant for self-flagellation is not unfamiliar even to the finance industry.

To justify the notion that German banks shouldn't even attempt to compete with the US credit industry, let alone the "Big Five" from Wall Street, various reasons were cited. This included the purportedly unfair competition from savings banks in the domestic market, the capital market aversion of European companies, significantly smaller IT budgets, stricter regulation, or the still incomplete banking union.

And these are structural disadvantages, no doubt. However, the wave of bankruptcies among regional banks in spring, the downturn in advisory business, and other repercussions of the altered interest rate environment highlight that the situation in the USA isn't all smooth sailing either. At the same time, the time-delayed return of interest rates in the Eurozone began to manifest in the bank balances.

Profit leaps due to interest income and efficiency programs

Deutsche Bank, Unicredit, Commerzbank, ING, Nordea, Caixabank, and BayernLB: Almost all major European banks recorded profit leaps in the first nine months of the year. Not to mention UBS, which, through the emergency takeover of Credit Suisse, has grown to become the first European bank of American magnitude.

This is partly due to the painful restructuring processes that many institutions have undergone in recent years. But above all, it's due to their business models, which, faced with the underdeveloped capital market, often rely more on interest income than their US competitors. This puts the argument of the supposedly insurmountable structural disadvantages of the European industry into perspective.

Europe's banks make themselves interesting for investors

A few strong quarters are obviously not enough to catch up with the leading US banks. Nevertheless, the latter should not be too complacent. Noticeably, many banks are currently doing the right thing by not only distributing dividends but also initiating stock buyback programs to make themselves appealing to investors outside of Europe.

Instead of lamenting that the competition operates under better conditions, the European industry is gearing up for a race to catch up. This is no futile endeavor because, just as Frankfurt celebrates the NFL, many Americans are increasingly enthusiastic about soccer, which is still deemed somewhat exotic in the USA.