Morgan Stanley CEO James Gorman wants investors to "stay tuned" for a better performance from his bank as markets recover. While waiting it out might be an option for Wall Street, it's a luxury Europe's bankers can ill afford -- which helps to explain the 10,600 job cuts at Barclays since Jes Staley took over in December.
Sure, the first quarter was ugly for everyone -- even Gorman's upbeat stance masks cost and staff cuts behind the scenes. Yet lending profits at U.S. banks are set for a pickup as the Federal Reserve mulls an interest-rate increase, while euro-zone banks are still struggling to overcome a squeeze from negative rates. And on the trading side, U.S. investment banks enjoy higher capital levels and dominant market share over their European rivals. However you look at it, the starting blocks in the race to capture the spoils from any improvement in financial markets just aren't level.
That Atlantic divide feeds through into the stock market, where investors apply a steeper discount to Deutsche Bank and Credit Suisse -- which trade at 0.33 and 0.59 times book value, respectively -- than to JPMorgan and Goldman Sachs (trading at price-to-book ratios of 1.04 and 0.86).
Yes, the earnings outlook may be getting worse across the board, with JPMorgan analysts cutting annual profit estimates for both U.S. and European investment banks, but it's broadly a worse picture in Europe. Moody's cited the threat of subdued volumes and revenue when cutting Deutsche Bank's credit rating on Monday. Litigation issues and a looming steeper bill for regulatory capital requirements aren't helping.
That's why the stock market is paying closer attention to how Barclays' Staley and Deutsche Bank's John Cryan execute strategy and pare balance sheets, rather than just the state of the global economy and markets. European banks were expected to deliver only about a 0.5 percent increase to return on equity in 2016, according to an Ernst & Young survey conducted in November and December -- and the outlook has only gotten worse since then. In the first quarter, Barclays reported a group return on average tangible equity of 3.8 percent; it has promised to improve this but without giving a specific number. Morgan Stanley reported an annualized return on common equity of 6.2 percent; Gorman has called that level unacceptable and is promising at least 9 percent by end-2017.
Overall, the banking sector is the cheapest sector in the world, according to UBS -- aside from autos. That's a global issue whether you're sitting in New York or Paris. But European banks, particularly the big investment-bank franchises, are still being seen as the mother of all value traps. It will take management execution and a changing regulatory wind to get these stocks out of their funk -- not just "staying tuned" for better days.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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