Europe’s banks need a faster recovery
After a year in the recovery ward, 2017 results show some banks are healing. The most serious illness, negative rates, is stubbornly resistant however. The danger remains that banks may not recover before another disease –financial or technological – strikes.
European banks have been in the recovery ward for almost a year now. After struggling for much of 2015 and 2016, the Stoxx 600 European bank index rose about 30% in the six months to early 2017. It has barely budged since. Was that rally well-founded?
On the regulatory front, things have moved in a better direction. When the Basel committee belatedly agreed its new rules late last year, the outcome was better than feared for Europe. This is particularly important for French banks, because of their heavy use of internal ratings-based models. More regulatory clarity could now help M&A, which would be the best catalyst for higher valuations.
For banks with important markets businesses, trading revenues looked weaker in the third and fourth quarters of last year than a year earlier, when there was volatility caused by Brexit and the US election. But the volatility in early 2018 around changing US rates expectations is a help, as long it does not get so scary that it derails investment banking deal flow. Alastair Ryan, equity analyst at Bank of America Merrill Lynch, calls this moment “goldilocks in capital markets” for being just right for bank earnings.