Why the News About Europe’s Banks Is Never, Ever Good

(Bloomberg) -- The news about Europe’s banks never seems to be any good. Long before the latest scandals over money laundering, the continent’s biggest lenders have been caroming from crisis to crisis, with a revolving-door roster of chief executives and seemingly endless resets of strategy. The flailing is particularly dramatic when compared with American rivals: The top five U.S. banks raked in almost $100 billion in profit in 2018. The top five European banks? About a third of that amount.

1. How bad is it?

Bad. Consider Deutsche Bank AG, a limping giant that has become a long-suffering symbol of the woes of European finance. Chief Executive Officer Christian Sewing outlined the firm’s latest overhaul plan in April 2018 – its fourth since 2015 – yet less than a year later he is now mulling a merger with local rival Commerzbank AG, which the German government seems to desire more than he does.

2. Is Deutsche Bank the worst off?

Yes, but that’s not saying much. Its large rivals are suffering from the same toxic brew of structural problems: Competition from a crowd of smaller institutions and aggressive U.S. rivals; high costs; anemic revenue growth; and an enduringly tricky political landscape. Plus, now they face new economic headwinds, as parts of the euro zone teeter on the edge of recession – again. It’s no wonder so many strategic plans have come and gone.

3. Why so many resets?

Ten years on from the financial crisis and the wave of bailouts that followed – and the rules, costs and regulatory scrutiny that followed the bailouts – Europe’s biggest banks are still struggling with basic questions. What businesses do they want to be in? How much risk do they want to take? What kinds of clients do they wish to serve and where? The answers have been anything but consistent. France’s BNP Paribas SA and Societe Generale SA rolled out expansion plans, only to announce in February that they will shrink their securities units by a combination of asset reductions, business exits and more cost cuts. Barclays Plc, on its third CEO since 2012, pulled back from riskier investment-banking activities, embraced them again and now is under fire from activist investor Edward Bramson to pull back once more. UBS Group AG and Credit Suisse Group AG, the biggest Swiss banks, have prioritized the safer business of managing the fortunes of the wealthy yet these clients have been yanking out their assets amid increased volatility and geopolitical tensions. A string of scandals – most recently, about money laundering – and big fines involving banks big and small haven’t helped.

4. Sounds like a lot of missteps.

Sure. But it’s not entirely about missteps. In Europe, the economy recovered more slowly from the financial crisis of 2008 than in the U.S., which used more aggressive financial and monetary stimulus and forced banks to write off bad debts sooner. And since 2014, the European Central Bank has set borrowing rates below zero to stoke economic growth. That adds to pain for its banks, since they’re forced to lend at lower interest rates but still have to offer to pay interest above zero to attract depositors. In Europe, about 70 percent of financing in the economy comes from plain-vanilla bank lending, which currently is less profitable because of the negative interest rates. In the U.S., where capital markets provide the majority of funding for companies, banks can earn fees from trading even when lending margins are slim.

Why the News About Europe’s Banks Is Never, Ever Good

5. What could make things better?

The most common refrain from bankers in Europe is that they’d be better off if they could get bigger. Growth through mergers would, among other things, cut down on the competition, which is greater in many European countries than in the U.S. That’s especially a problem in countries including France and Italy as well as in Germany, where the big banks share the market with a large number of government-owned or backed banks. Those serve social and political goals, but they make it hard for commercial banks to turn much of a profit. Mergers would also help big European banks reduce costs that equal 75 percent of income, compared with 60 percent for their U.S. counterparts.

Why the News About Europe’s Banks Is Never, Ever Good

6. Does everybody think that mergers are the answer?

To many, the key question is what kind of mergers, and whether the best kind of mergers are even possible. For instance, many see a merger of Deutsche Bank and Commerzbank as a marriage of two failures. Instead, a cross-border merger that brings Deutsche Bank access to markets it lacks would make more sense. But nobody thinks that is likely.

7. Why’s that?

Politics and market structure. The European Union is not a single financial market the way the U.S. is –- the banks may do lots of cross-border business but they’re all based in a single country. And while countries such as Germany, France and the U.K. bailed out their banks during the 2008 financial crisis and protected them during the subsequent sovereign debt crisis, in return they’ve forced Europe’s big banks to focus more attention on their home market. And no country wants to see a bank that’s regarded as a “national champion” be swallowed up by some other country’s champion.

8. What else could get Europe’s banks out of this rut?

A lot of things, most of which seem hard or unlikely. Bankers have been hoping that the ECB will finally begin raising interest rates. The economic clouds have pushed that prospect back, although they’ve also led the ECB to consider a new round of low-cost loans to banks, known as TLTROs. The ECB has also been quietly lobbying in favor of cross-border mergers. Some U.S. banks are nosing around potential targets, like JPMorgan Chase & Co., which is seen as likely to buy Standard Chartered Plc – which is a British bank, but one that specializes in Asian markets. But any action there may need to wait until after the elections for the European Parliament in May 2019. And while EU officials have started work on building the institutions needed to underpin a broad and robust European market, like a common deposit insurance mechanism, progress has been slow and resisted by some members.

9. Will that be enough?

Maybe, but it’s hard to find a lot of optimists. This gloom is in sharp contrast to the way the future looked in the middle of the last decade, when it was European banks that were expanding onto the turf of their U.S. rivals and looked best positioned to become truly global institutions.

The Reference Shelf

  • Why Deutsche Bank faces pushback to a merger with Commerzbank.
  • A Quicktake explainer on zombie banks.
  • UBS Chairman Axel Weber on the need for mergers.
  • Germany’s efforts to solve the Deutsche Bank problem aim to keep it within borders.
  • How Europe’s political funk sets back its economy.
  • The ECB’s policy of negative rates has created the "smell of panic," according to a report from Deutsche Bank’s head of research.

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