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* Europe's banks lag U.S. rivals on valuation, performance
* Rising rates, surplus capital offer signs of hope
* Banker pay hikes may constrain turnaround plans
By Lawrence White and Iain Withers
LONDON, Jan 27 (Reuters) - Replenished firepower and higher
interest rates will give Europe's banks an ideal opportunity
this year to reverse recent underperformance and claw back
market share from rivals in the United States, industry experts
say.
European lenders lost ground to Wall Street rivals during
the pandemic because volatile markets boosted the earning power
of U.S. banks' outsized trading arms. European rivals earn
proportionately more from lending and benefit from a higher
interest rate environment.
As the continent's biggest lenders prepare to report
full-year earnings for 2021, kicking off with Deutsche Bank https://www.reuters.com/business/finance/deutsche-bank-nearly-triples-q4-profit-defying-expected-loss-2022-01-27
on Thursday, European banks must seize the
opportunity that now presents itself, analysts consultants and
investors say.
"The need is becoming much more urgent for European banks to
show what they truly stand for and how they're going to
differentiate themselves to create an advantage for the long
term," said Eriola Shehu Beetz, managing director and partner at
Boston Consulting Group.
In investment banking, U.S. banks have beaten European
rivals on their own turf by almost any metric in recent years,
and the gap has been widening.
JPMorgan, Goldman Sachs, Morgan Stanley
, Citigroup and Bank of America between them
claimed 31% of merger fees in the Europe, Middle East and Africa
region in 2021, according to Refinitiv data, up from 26% in
2019, while their six largest European rivals took just 12%.
"What the US banks have done really well – and scale helps
quite a bit – is that they've consistently invested in
technology in their capital markets businesses. That makes them
much more resilient," Shehu Beetz said.
That is reflected in valuations.
None of the ten largest European banks by assets has a price
to book ratio above one, according to Refinitiv data, while only
Citigroup among their U.S. equivalents dips below 1, showing the
gulf in how investors value lenders from the two continents.
REBOUND POTENTIAL
European banks that lend heavily to home buyers such as
Dutch ING, are hopeful that the rock bottom interest rates used
to lift the region out of the financial crisis more than a
decade ago could finally be coming to an end.
Late last year, ING CEO Steven van Rijswijk said
the gradual rise in interest rates would trickle down to make
its lending business more profitable in the medium term.
In Britain, central bank interest rates are rising after
years near zero, helping banks such as Lloyds Banking Group and
NatWest make more from lending, with the European Central Bank
expected to follow suit in 2023 if not sooner.
European lenders have also largely avoided amassing
mountains of bad loans as corporate borrowers weathered the
COVID-19 pandemic.
A combination of fewer than expected soured loans in the
pandemic and, until recently, curbs on shareholder payouts and
banker bonuses from central banks, mean lenders have generally
built up healthy capital buffers.
"The (loan) moratoria are almost gone and banks still have
quite a lot of (bad loan) provisions that they can take back,"
said Jerome Legras of Axiom Alternative Investments.
Investors hope higher capital levels will translate into
bumper dividends and share buybacks. But banks could also take
advantage of their replenished firepower to invest for the long
term, in areas such as digital services and wealth management.
"The banking system has proven to be able to cope … Enough
is enough now, and the focus has to be on what you do with that
excess capital," said Oliver Judd, senior credit research
analyst at investor Aviva.
"I'm looking for strategies. That's what's been missing for
two years."
One constraint on these ambitions is likely to be spiralling
wage demands, a trend seen across U.S. banks in recent weeks.
Swiss bank Credit Suisse on Tuesday set a dour tone
for European earnings, warning of a fourth-quarter loss, but
analysts said the scandal-hit bank's troubles should not impact
the rest of the sector.
Cross-town rival UBS should report more positive
earnings on Monday, extending a recent winning streak that saw
it post its highest quarterly profit since 2015 in October.
On Thursday, Germany's Deutsche Bank nearly
tripled its fourth-quarter profit, defying expectations for a
loss, as revenues at the investment bank rose. It marked the
bank's longest streak in the black since 2012.
Other European heavyweights set to report include Italy's
UniCredit on Friday, Spain's Santander on
Wednesday, and France's BNP Paribas on Feb 8.
Britain's big banks are likewise expected to report
relatively robust earnings, with Standard Chartered
first on Feb. 17 followed by NatWest the next day, HSBC
on Feb. 22, Barclays on Feb. 23 and Lloyds
on Feb. 24.
(Reporting By Lawrence White and Iain Withers in London,
additional reporting by John O'Donnell in Frankfurt; Editing by
Elaine Hardcastle)
