Banking's transatlantic divide set to grow in 2017

The top executives at the leading US banks told analysts on their earnings calls in January that, despite all the political uncertainties, 2017 looks like it will be a positive year. 

For their European counterparts, however, the light is at the end of a much longer tunnel.

Chiefs at JPMorgan Chase, Morgan Stanley, Citi, Bank of America, Wells Fargo and Goldman Sachs all expressed a measure of optimism about the impact of rising interest rates on net interest income.  Add to that the potential to grow loan books on the back of increasing consumer confidence and net interest margins could see also a big improvement.

JPMorgan’s chief financial officer, Marianne Lake, said she expects net interest income to be up $1.5 billion on the year on loan growth alone. Add in December’s rate hike and it is “a little over” $3 billion. 

Bank of America sees a similar story, with about a $600 million increase in the first quarter, assuming “modest loan and deposit growth”, according to its chief, followed by an increase of $3.4 billion over the following 12 months.

Wells Fargo’s new CFO, John Shrewsberry, said on the bank’s 2016 earnings call that even without any further rate hikes by the Federal Reserve in 2017: “It’s pretty easy to sketch out a 4%, 5%, 6% net interest income growth trajectory full year ‘17 over full year ‘16.”

There were similar predictions at Citi, where CFO John Gerspach expects NIM could hit 290 basis points or higher in the second half of the year (Citigroup reported 279bp in the fourth quarter). 

Morgan Stanley’s CFO, Jonathan Pruzan, sees NII growing modestly from 2016’s $3.5 billion. 

Goldman Sachs was characteristically reticent about making predictions, but with most banks also reporting active deal pipelines, the overall picture looks better than it has for some time.

Although some of the big European banks will have benefited from the same market volatility that boosted trading revenues at the US banks, the overall picture is likely to be mixed. 

In fixed income, currency and commodities, “European consensus assumes a materially lower figure” than the numbers reported by US banks, wrote Credit Suisse analysts in January. “Although the mix varies across banks, the breadth of performance in FICC might limit the potential for variance in growth rates.” 

European interest rates are set to remain low, some banks are still restructuring and the system is still carrying a large quantity of legacy assets. 

Banks such as Deutsche Bank and Credit Suisse have large legal impairments to book.

According to Andrew Lowe, analyst at Berenberg in London, the postponement of the publication of final Basel Committee on Banking Supervision standards could have also a deleterious effect on European bank shareholders. 

“The delay of Basel IV [the unofficial name of the proposals] means additional uncertainty,” Lowe says. “You have to wonder whether some European banks will delay or cut dividends.”

One of the committee’s proposals – on the output floor on capital held against credit risk assessed by banks’ internal models – could hit European banks particularly hard since they tend, unlike their US counterparts, to have large balance-sheet exposures to high risk-weighted mortgages. 

“US banks tend to take low-margin mortgage loans off balance sheet and retail loans like consumer finance are higher margin,” says Simon Adamson, analyst at CreditSights.

Although US banks are now trying to figure out how to reorganize their European businesses in the face of a future ‘hard Brexit’ [a complete exit of the UK from the EU], they are generally diversified enough to be able to weather the changes. 

This is not the case for the Europeans. Most – with some notable exceptions such as Deutsche Bank, Barclays, UBS and HSBC – rely heavily on European economic performance, which is likely to remain weak. 

And many are still in the process of their own expensive restructurings, attempting to unburden themselves of non-core activities and assets.

Santander, which benefits from being among the most diversified European banks, gave an indication of what was to come for European bank earnings when it reported a slight decline in NII from €32.2 billion in 2015 to €32.1 billion in 2016. 

A weaker pound, which offset some other gains at the bank, will also play heavily in the results of its UK counterparts.

Meanwhile, US banks have hopes of some relief from regulatory requirements under a Republican Congress.

“You will see banks be more aggressive in growing opening branches in new cities, adding to loan portfolios, seeking out clients they don’t have,” said JPMorgan chief Jamie Dimon on the banks’ earnings call. “So I’m hoping to see a little bit of that too, but they will wait for regulatory relief.”