Financial institutions in the US recovered much quicker after the global financial crisis (GFC) than their European peers. While Europe has been weighed down by its efforts to reduce systemic risk and the performance of some of its weaker countries, such as Italy, the US has prospered.
In the last three years we’ve seen something of a ‘Goldilocks’ period in US banking, with wider margins, solid volume growth and provisioning (what banks set aside to allow for impaired loans) remaining at very low levels. Europe’s banks are yet to experience this sweet spot in this economic cycle.
Yet, looking at the valuation premium between banks in the two regions, the discount is effectively as large as it has been since the end of the GFC. I think 2019 could be the year when the balance starts to shift.
The winding up of the European Central Bank’s quantitative easing programme in December could prove to be the catalyst for some of the quality bank stocks Europe has to offer coming to the fore and suggestions of a first interest rate rise later this year mean banks within rate-sensitive countries should be able to offer more for investors. In Spain, for example, new loan ‘originations’ are accelerating and provisioning continues to trend downwards. Accompanied by a rise in interest rates, the market could start to anticipate a significant step up in domestic Spanish bank profitability, to the benefit of shareholders.
In the US, meanwhile, with many of the positive tailwinds banks have enjoyed in recent years disappearing, the ‘Goldilocks’ period has well and truly passed. Maybe this signals a changing of the guard.
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