The European bank sector has just posted its worst year since the eurozone crisis as the sector fell 25 percent, costing shareholders $380 billion. The ills that these banks face are profitability, outdated business models, negative rates and Brexit. Despite some improvements in profitability, European banks still lag US and Asian banks as they struggle making profits in the current environment.
According to a research firm, US banks are now making return on equity of 16 percent while European banks are making less than half that as costs remain stubbornly high. Deutsche Bank which was one of the world’s leading banks saw its stocks fall by 53 percent this year. The evidence continues to point to a demographic implosion in 27 of the 28 EU countries (counting the British in), which points to a future of fewer customers, and of course less activity on the retail side of the business.
It is important to note that since 2008, the banking sector struggled with fines from regulators, but these fines are now fading so the outflow of cash has faded. But again Danske Bank continues to have its name checked by regulators as as 200 billion Euros of Russian and old Soviet funds were processed through the Estonia Branch of Danske Bank. As a result of this scandal, its shares dropped 43 percent. So the main banks that continue to capture large, international clients are doing well but it is these smaller institutions that are struggling more as they sometimes take on less interesting customers in China, Russia and other areas that are questionable.
And as you well know, banks rely on interest rates and note that few economists and analysts believe that interest rates will rise very much in Europe – again a concern for bank profits – anytime soon. Of course with lower interest rates, banks will be forced to earn revenue in other areas.