Even though banks are typically associated with stability and reliability, the financial landscape is not looking so rosy for the banking sector. The confluence of various factors such as rising interest rates, funding costs, and new regulations has put American banks in a tough spot. In fact, the performance of large American bank stocks has been less than stellar, with the KBW index dropping by 15% this year.
Amidst these challenges, it’s important to remember that banks are not like startups or tech firms. They operate in a mature industry where their fortunes are closely tied to the broader economic environment. Investors are looking for banks that can demonstrate potential for growth in the near future and have the ability to reward shareholders with dividends or buy-backs.
Unfortunately, American banks are currently falling short on these fronts. Rising interest rates have been marred by increased funding costs, customer exodus, and the looming shadow of new regulations such as Basel 3 “endgame” rules, which could significantly raise capital requirements for some American banks. This, in turn, could severely limit the ability of banks to pay dividends or engage in buy-backs, making them less appealing to many investors.
In contrast, European banks are presenting a more attractive prospect. With funding costs remaining relatively stable and modest capital requirements under Basel 3, European banks are seeing steady earnings upgrades. This makes them a potentially more lucrative investment opportunity for those looking to venture into the banking sector.
The struggles of American banks have led to open warfare between bankers and regulators over proposed changes in capital requirements. While there is a chance that these proposals could be watered down or pushed into a grey zone, the uncertainty surrounding these developments may make some investors wary of betting on American banks.
Given this backdrop, it may be worthwhile for investors to shift their focus towards European banks, which are offering a more favorable outlook. The return to positive rates in Europe after years of negative rates has been likened to “rain in the desert”, and the relatively lower capital requirements make European banks a compelling option for potential investors.
In conclusion, while American banks are facing an uphill battle due to a combination of factors such as rising interest rates, funding costs, and regulatory challenges, European banks are showing promise with stable funding costs and modest capital requirements. This could make them a more attractive investment option for those interested in the banking sector. Keep an eye on the developments in the banking industry as they continue to evolve over the coming months.
Read more from Buttonwood, our columnist on financial markets:
– Short-sellers are endangered. That is bad news for markets (Nov 30th)
– Investors are going loco for CoCos (Nov 23rd)
– Ray Dalio is a monster, suggests a new book. Is it fair? (Nov 16th)
Also: How the Buttonwood column got its name
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