The positive effect of rising interest rates is not enough to outweigh major headwinds for bank valuations such as the end of quantitative easing, deglobalisation, Russian exposure, and the continuing rise of Chinese megabanks.
Swiss bank stocks are out of favor. The share price of UBS is only slightly up this year, while Credit Suisse (–19%), Julius Baer (–18%), Swissquote (–17%) and Vontobel (–10%) are deep in the red.
The trend is identical for most international banks. JP Morgan is down 17%, Bank of America and Citi lost 11% and 12%, respectively. Deutsche Bank (flat), Commerzbank (–1%), Barclays (–21%), Lloyds (–3%), BNP Paribas (–16%) and Société Générale (–21%) are all back in a downtrend. Many stocks have lost a third or half of the rebound they had enjoyed since March 20.
But there is a major difference between US and European banks. The listed European groups are seeing this poor performance after years of having underperformed their US peers. While a giant like Bank of America has known a second life since it merged with Merrill Lynch with the help of the US government after the subprime crisis, the share price of UBS has never recovered.
The upside revaluation benefited US banks who increased their grip on the US investment banking and trading market since 2009, as also illustrated by the performances of Goldman Sachs and JP Morgan Chase. The benefit of prolonged quantitative easing (QE) by the Fed also favored US groups, while the liquidity from European QE has also been mainly devoted to investing in the more dynamic US market, and during the last decade particularly in the booming tech sector. US corporate finance and Wall Street trading desks have been first in line to benefit from the startup boom in the Silicon Valley and hundreds of IPOs.
On the other hand, the share price of UBS has stagnated for quite some time. Ever since the bank lost its strong position in the US investment banking market, the share price never broke the 20 franc level again and remains roughly 75% below its 2007 peak.
This «Great Discount»-effect is even clearer for other European banks having lost their leading position on the US market after the subprime crisis, such as Deutsche Bank, whose valuation kept declining, while the German economy and tech sector have been dwarfed by the US and China.
Shares of Société Générale display a similar sideways pattern after it rolled back its international trading expansion:
These trends have been much more important than the current changes in interest rate policies on both sides of the Atlantic. Normally, the outlook of rising rates should provide support to banks’ earnings outlook, as it promises to increase their interest margin (or the difference between the interest they receive on their lending and what they pay for funding). When the Fed started raising rates at the end of 2015, bank stocks strongly outperformed the S&P 500 index over the following two years.
Now that we are supposedly at the start of an even more aggressive rate cycle, even US bank shares aren’t receiving that kind of support. The negative impact of the end of QE is more important than the positive effect of the beginning of rate hikes: the former can bring a big market correction, and especially a bond sell-off.
Other, bigger risks are clearly getting in the way, affecting all banks but especially European ones. Russia’s invasion of Ukraine creates risks of Russian exposure for many European banks: Exposure to clients, demands to implement sanctions and asset freezes, risks of credit losses and exposure to volatility.
Even more critical is the big picture: Western banks need growth in order to gain value. But their playground is shrinking fast: the outlook for international expansion toward markets such as Russia, but also China, is compromised by the Russian war in Ukraine and the new Russia-China alliance. Entering the Chinese market has never looked riskier for a Western company. Asia is increasingly revolving towards the Chinese pole of competence. The banking space there is being taken by Chinese mega banks: 5 out of the top 10 worldwide banks today are Chinese, and the expansion continues.
Growth will be more subdued for European banks, but also for US banks in the next few years. Western banks are entering a consolidation period in which managing their risk and their international exposure will become a priority for a while. In this context, expansion plans might need to be set aside for now, as geopolitical factors and central banks combine to offer some major headwinds.