Watching the debacle of the #Brexit debate in Britain, you might think that the UK is in a national meltdown. According to a survey on the front of Metro this week, 9 out of 10 Brits think that the political handling of Brexit is a national humiliation. I must admit that, watching this from the comfort of my airline seat, yes, it does look ridiculous. But then we see other things happening. The French gilets jaunes are crippling France and Paris no longer looks romantic but dangerous; Germany’s government is crippled by the migrant issue and Merkel’s intransigence; Greece, Italy and Spain are still facing financial issues over stability; and the far right seem to be rising in historically stable economies like the Netherlands.
Europe is a bit of a basket case.
A lot of it dates back to the double-whammy of the financial crisis of 2008 followed by the sovereign debt crisis in the PIIGS (Portugal, Ireland, Italy, Greece and Spain) in the early 2010s, but it goes further and deeper than this.
In fact, it is clear that stable economies have strong financial systems and resilient banks. European economies have weakened financial systems and strained banks. That is the issue.
No more is this demonstrated than the forced merger discussions between Commerzbank and Deutsche Bank in Germany. Until 2008, Deutsche Bank looked like the most robust bank in Europe and maybe the world. Since 2008 and specifically during this decade, it’s been limping along like a sick dog. Combine that with Commerzbank which needed a bailout in the 2008 crisis, and you have two sick dogs. What happens when you mate two sick dogs? I guess you get a sicker dog.
If you are not aware of what is happening, the weakest banks in Europe right now appear to be German and, in order to bolster the weakened financial system in the formerly strongest economy of Europe, the two big banks are looking at a tie up. Here’s the low-down from The Guardian:
Over the weekend, Deutsche Bank and Commerzbank confirmed they had entered into merger talks, ending months of speculation over a deal. But experts are sceptical that the merger would be a quick fix to the lender’s troubles. Analysts at Barclays warned that while the “status quo is not sustainable in the long term” for Deutsche Bank, a Commerzbank tie-up is not a silver bullet …
Commerzbank is still 15% owned by the German government, having taken €16.2bn as part of a state bailout in 2009. It has significantly scaled back its investment banking and trading activities, becoming a simpler and more stable retail and corporate lender, but still has international operations including in London, where it employs about 1,000 staff.
Deutsche does not have the best track record when it comes to corporate tie-ups, having struggled to realise the benefits of its Postbank takeover in 2010.
In fact, the whole thing rings of a tie up that the German Finance Minister Olaf Scholz and Peter Altmaier, the German Economy Minister, orchestrated. They want to create a German banking champion that can compete on the world stage with the likes of Citi and HSBC. However, that may prove difficult when you have two sick dogs. Shares of Deutsche Bank are down more than 80 percent while Commerzbank shares are down 93 percent over a ten-year period for a reason,
And this is not just in Germany, but across Europe. The Bloomberg guys nailed it pretty well yesterday:
Since January 2018, when shares touched a two-year high, the benchmark Stoxx 600 Banks Price Index has dropped about 26 percent. European banks are worth just a quarter of their peak value, reached in 2007.
By comparison, U.S. banks have rebounded from the abyss and by early 2018 had recovered almost all of their post-crisis losses, with profits reaching a record last year. As measured by return on equity, profitability stands at about 9.5 percent in Europe. In the U.S. it’s closer to 12 percent.
European banks have bolstered their balance sheets, offloaded toxic assets, and retreated to core activities and geographies after the threats to their survival unleashed by the financial and subsequent sovereign debt crises. Nudged by more stringent regulation, they’ve also adopted more prudent lending and trading practices. But investors are hardly pricing that in. Banks on average trade at 20 percent below their book value, with a huge divergence that sees some of the biggest companies—that’s you, Deutsche Bank—trade at discounts of as much as 75 percent. By contrast, U.S. banks are valued significantly more highly by investors, at a 40 percent premium to book value, according to Bloomberg Intelligence.
While leaders of European banks can do more to address their institutions’ weaknesses to revive profitability, they’re stuck in a quicksand of low interest rates and rising costs. Regulation is forcing banks to hold more funds to help cushion potential losses in the event of crises, and investment needed to tighten controls and upgrade antiquated technology is pushing expenses higher. Meantime, competition from financial-technology upstarts is forcing banks to spend more on innovation and chipping away at fees they can charge on payments such as international cash transfers, all of which is eroding margins.
What’s more, the region’s failure to complete its vision for a single, Europe-wide financial-services market—the so-called banking union—has left in place obstacles that make it almost impossible for banks to grow outside their home markets. Instead, rising national interests have led to a splintering of Europe. Britain’s decision to leave the European Union will add further barriers and exacerbate the fragmentation of capital markets. The future looks bleak.
I recommend you clickthrough and read the rest of the Bloomberg article. It’s a winner … or rather, Europe’s the loser.
For all the bark and bluster of Britain’s Brexit baloney, maybe there are good reasons why Europe is not the best place to be right now.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...