Low interest rates, market turmoil and restructuring: it’s too much
IF YOU think America’s banks are having a rough year, take a look at Europe (see chart).
American lenders’ share prices, having rallied from their trough in mid-February, are 6% lower than at the start of 2016; European ones are over 20% down. So miserable has the first quarter been that investors have applauded figures that beat dire expectations. On May 10th Credit Suisse, a Swiss giant, reported a second successive quarterly loss—and was rewarded with a 5% bounce in its shares.
Europe’s banks are struggling with a triple squeeze. First, ultra-low interest rates are thinning their staple diet, the margin between borrowing and lending. Monetary policymakers argue that by stimulating the economy and hence demand for loans, super-cheap money is also good for banks. For most, not yet. Commerzbank, which styles itself as German companies’ house bank, calls demand for loans “subdued”: the operating profit of its Mittelstand division fell by more than 40%, year on year, in the first quarter.
Second, other rations have also been short. The market turmoil of the first six weeks of the year walloped investment-banking revenues on both sides of the Atlantic. The Europeans broadly came off worse; Barclays’ 4% decline almost counts as a triumph. European banks lack the scale of the Americans, and that may be counting against them. Huw van Steenis, an analyst at Morgan Stanley, expects that this year their investment-banking revenues will tumble by 12%, twice as fast as those of their American rivals.
Market volatility dampened non-interest earnings in retail banking, too. With their savings earning zilch, Europeans should be keener to buy mutual funds in search of higher returns. That would mean more commission for banks, which in Europe are big sellers of investment products. But jumpy share prices have given savers pause. (American banks, by contrast, rely more on credit-card and account fees, so have not suffered in the same way.)
Rich customers have been as unadventurous as humbler ones. In the first quarter UBS, Switzerland’s biggest bank, which a few years ago scaled back its investment bank to concentrate on wealth management, attracted a staggering SFr29 billion ($29.3 billion) of net new money, the most for eight years, much of it from Asian clients. But because the wealthy too sought the safety of cash, UBS did not scoop the juicy transaction fees that come with shuffling portfolios. Pre-tax profit at its wealth-management divisions fell by 23%. That said, the squeeze on non-interest revenues should ease, now that markets are steadier.
The third cause of European banks’ pain is bad timing, often their own. With income tight—and with regulators demanding that they build up their capital ratios—control of costs matters all the more.
More basically, so does choosing which businesses to be in and which to quit. Alas, only now are some of Europe’s biggest lenders, under new leaders, taking on the spring-cleaning American banks carried out within a few years of the financial crisis. For both investors and bankers, that is making 2016 extra-painful.
Deutsche Bank, Germany’s biggest, will slough off Postbank, a retail business it bought in 2008 and never fully integrated, and is cutting back its once-swaggering investment bank. It will not pay a dividend for 2016 and although it eked out a first-quarter profit of €236m ($260m) it expects only to break even this year.
Credit Suisse is hurting most. Its boss, Tidjane Thiam, an ex-insurer, is tilting it, like UBS, further from investment banking towards wealth management, with special emphasis on Asia.
He has made an uncertain start. Having announced one strategic overhaul, he had a second crack in March, speeding up the disposal of investment bankers and ditching risky products he at first planned to keep. On his watch the share price has dived by more than 40%. It jumped this week partly because the cull is ahead of schedule. Parsimony used to be a dirty word in banking. It isn’t now.