Daily Management Review

There’s More Cause for Comfort than Concern Even as US Banks Might Outperform their European Peers


10/29/2016




There’s More Cause for Comfort than Concern Even as US Banks Might Outperform their European Peers
The uncertainty surrounding the U.K.’s exit from the European Union has been another blow to the global banking space which has been weathering a number of storms since the start of the global financial crisis in 2008. And in addition to these, pressure is heaped on a bank's profitability by negative interest rates and the poor economic outlook.
 
But banks at the Wall Street seem to be doing a much better job compared to their counterparts in Europe which are struggling to keep their share price stable.
 
"European banks have had a particularly tough 2016, with the Stoxx 600 banking sector seeing declines of over 20 percent so far this year. This puts the European banking sector on track for its worst year since the depths of the euro zone debt crisis in 2011," Alex Dryden, Global Market Strategist at JPMorgan Asset Management told CNBC.
 
However, the region's banking system is not on the brink of collapse it found itself at the height of the global financial crisis despite the sharp pullback in banking share prices, and speculation that investors are not pricing in the impending collapse of one or more European banks, Dryden further explained.
 
"The cost of buying insurance against European financials firms has ticked up in 2016, but is still below the highs of the euro zone debt crisis. If we dig a little deeper into the balance sheets of European financial companies, there is actually more cause for comfort than concern. These show that European banks have taken significant steps to strengthen their position since the Global Financial Crisis (GFC) and euro zone debt crisis," Dryden said.
 
But an entire basket of uncertainties that tend to weigh on their performance is faced by the European banks, a number of analysts have said. And even while better-than-expected results in the third quarter were posted by Deutsche Bank and Barclays as shown by their latest earnings results, there is looming concerns over their performance in the final quarter of the year and their future.
 
On the contrary, for big U.S. banks such as JP Morgan, Citi and Goldman Sachs that have posted stronger-than-expected profits in the third quarter, the situation is however quite different.
 
"There are a number of major reasons that we prefer U.S. banks over European banks," Naeem Aslam, chief markets analyst at Think Markets UK said.
 
"Firstly, it is the interest rate environment which is a lot more favorable for the U.S. banks. The Fed is about to increase the interest rate for one more time this year and this is going to be positive news for them. But if you look in Europe, we do not think that interest rates are going to move higher anytime soon," Aslam said.
 
Over in the U.S., the banks’ investment arms and the fixed income business are performing very well and this trend could continue, Aslam further explained.
 
"As for European banks, they are in process of cutting the fat and still structural reforms remain the key issue. Also, if you look at the number of toxic assets, European banks have an abundance of these, although they are getting rid some of them now. The U.S. banks have strong balance sheets and they are in a much better position," he said.
 
(Source:www.cnbc.com) 



Tags : Economy




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