European banks are ahead of the millennial zeitgeist

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Europe’s banking sector’s investment in fintech and ESG merits more confidence than their exposure to negative European Central Bank rates might suggest. On these counts, the US banks may be lagging.

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For investors, Europe’s banks are at their lowest ebb. In the run-up to September’s European Central Bank (ECB) meeting, expectations of a new round of monetary-policy easing pushed their shares to a point not seen since 2009. 

As ever-growing capital demands exacerbate the cancer of negative rates – with the sector also suffering from a series of money-laundering scandals – the sick patient of global banking now seems at death’s door.

American peers can only gloat, celebrating their far better stock valuations, and the ever-receding chances of any European bank putting up a proper challenge to their dominance of the global investment banking scene.  

The most common reaction by European bankers is to blame their regulators for putting them on an uneven playing field – and their parochial politicians for failing to create a properly unified continental-scale banking market. Some of this is fair.

Prospects

But European banks are doing well, and demonstrating better prospects than American banks, on what even American banks increasingly see as the most important bases for success in the coming era: digitalization and the prioritization of stakeholders over shareholders alone.

Though in other respects it is a weakness, Europe’s fragmentation forces its financial institutions to better exploit international opportunities in retail banking. The necessary facilitator is front and back-office digital capability, which is crucial for realizing cross-border synergies. This is why ING has successfully challenged tough foreign banking markets like Australia and Germany.


Europe has long been more sceptical than America of unimpeded capitalism, just as its greater population density has made it more aware of environmental degradation 

It is not the case that US banks are better at digital consumer banking. On the contrary, they lag Asian and European banks on this front. Like ING, BBVA, for example, has had to venture outside its borders for growth, in its case into the Americas. It has sometimes outshone American banks in the digital field, even on their home turf.

History and culture help European banks be successful as cross-border retail banks. It’s why BBVA dominates Mexican banking, why HSBC dominates in Hong Kong. By contrast, the lack of such links to faster-growing foreign markets is partly why German and Italian banks are in greater trouble. The Netherlands is an open economy with a strong command of English, which also helps its banks sell themselves abroad.

Green credentials

Meanwhile, Europe has long been more sceptical than America of unimpeded capitalism, just as its greater population density has made it more aware of environmental degradation. Stronger labour laws make corporate restructuring slower ‒ at least in the home market. There have been greater political incentives in Europe for banks to burnish their credentials in the green economy.

Germany, for all the failures of its private banks, is the epitome of how Europe’s banking sector has historically been more orientated towards its clients and staff. Partly because of fears of a leftward lurch under the next generation of clients and voters, this is now a balance to which even JPMorgan’s Jamie Dimon and Bank of America’s Brian Moynihan officially signed up this summer, alongside almost 200 peers.

The mutual banking sector died out in the US in the 1980s. It is alive and kicking across continental Europe, pushing down retail margins for private banks. Mutual banks in Germany and France still provide the bulk of funding for small and medium-sized businesses, partly because of a less centralized operating model. Perhaps they have contributed to the relative absence of de-industrialized heartlands like the Midwest.