European banks: an ever-widening gap with the United States
The gap between US and European banks is colossal, both in size and in price to book. Unfortunately, this is unlikely to change in the short term for various reasons: first, because Trump’s re-election has opened the way to easing regulations, which will create new competitive advantages for US banks; second, because the European market has real difficulties in consolidating, in part for political reasons.
German cooperative banks sullied by a series of scandals (LinkedIn post)
The German banking landscape is experiencing a challenging period, marked primarily by acquisitions and political tensions. UniCredit’s acquisition of a stake in Commerzbank illustrates this dynamic, raising concerns over banking sovereignty. At the same time, BNPP strengthened its presence by acquiring the private banking subsidiary of HSBC. These movements reflect the relative fragility of a sector faced with an ailing economy and a moribund credit market.
This period is also suffering from problems within cooperative banks, which find themselves plagued by scandals that tarnish their reputation and highlight flaws in the supervision mechanisms. However, their security net and proximity-based model continue to guarantee their resilience, which is recognised by rating agencies and to which the mutualist federation contributes through measures aimed at strengthening controls.
These two pieces of context – the intrusion of foreign actors and the difficulties facing the cooperative sector – are the consequence, at least in part, of one of the specificities of this market: the German banking market is highly fragmented. Indeed, with the exception of two major banks, it is extremely divided: it has approximately 1,400 banks, including 400 in the public sector and almost 800 cooperatives. The market will likely need to be restructured if it is to survive.
Cross-border bank mergers in Europe: myth or reality? (LinkedIn post)
European banking markets are relatively diverse. In France, for more than 20 years now, banks have been concentrating around six major players, with very moderate profitability in the domestic retail business. Conversely, Germany, Italy and Spain are highly fragmented – particularly Germany, with its 1,400 banks, including almost 400 in the public sector and nearly 800 cooperative banks.
These divergences lead to differing priorities. France is looking to strengthen its universal model by diversifying its business lines – towards financial services and asset management, in particular – and its geographic presence, mainly in Europe. By contrast, Italy and Spain are gambling first on domestic consolidation, with targets like Banco BPM or Sabadell. However, it cannot be said that the public authorities are of much help.
As a result, cross-border mergers, which are crucial to be able to rival US banks, are rare. Rules on the non-fungibility of capital and liquidity, combined with differences in practices, products and IT infrastructure, complicate such mergers. These obstacles stand in the way of the emergence of European champions capable of fully exploiting potential synergies, depriving Europe of world-class banking players.
The growing valuation gap between US and European banks (LinkedIn post)
As already mentioned, the valuations of European banks are considerably lower than those of their US counterparts. JPMorgan, at a value of over $700 billion, is now worth more than the top ten European banks combined. Several reasons lie behind this gap: the stronger growth of the US economy, higher-margin business models in retail banking and domination of the capital markets via highly lucrative quasi-oligopolies.
The fragmentation of the European banking market exacerbates this disparity. The incomplete Banking Union, coupled with regulations that hinder the free circulation of liquidity, is holding back cross-border consolidation. Unlike France, where banks are concentrated, countries like Italy and Germany have yet to complete their domestic consolidation, resulting in a Europe that lacks the veritable champions to rival Wall Street.
The future does not bode well. Trump’s second administration is promising greater deregulation, further strengthening the competitiveness of US banks. In Europe, the reforms necessary to harmonise the markets are progressing slowly. In order to counter the rise in power of the United States, the recommendations of the Draghi report must be implemented quickly. Otherwise, the transatlantic gap is likely to widen further.
Nicolas Darbo, Partner, Accuracy