If Donald Trump the president looks anything like Donald Trump the candidate, Europe's financial industry should have cause for concern.
Top European banks have had a hard enough time competing with their better-capitalized and more profitable U.S. peers without the guiding hand of a protectionist U.S. president.
Trump has said he wants to cut red tape and roll back the Dodd-Frank rule-book that curbs proprietary trading, imposes more oversight of consumer banking and ramps up regulation of derivatives trading. That would in theory help U.S. banks in their domestic market, still the biggest source of investment-banking revenue globally, and allow them to extend their lead over European rivals in market share and profitability.
The threat of regulatory retreat in the U.S. might prompt Europe to relax some of its own rules on bank capital, something that could provide some breathing room to banks like Deutsche Bank or Barclays Plc. But this kind of retreat is unlikely, and would come at political and economic cost: Strong financial reform was a key pillar of the G-20 post-crisis pledge to get the global economy back on track without hurting the free flow of global capital. Not every nation will be able to successfully win a race to the bottom on regulation.
Trump's anti-globalization rhetoric is going to be a problem for global firms like HSBC if it creates obstacles to free trade. The bank, which operates in 26 markets, gets about two-thirds of its revenue from outside Europe, according to Bloomberg data. By contrast, Citigroup, whose domestic business is proportionately larger, gets only half its revenue from outside the U.S.
Putting the brakes on global trade could also jeopardize HSBC's chances of returning more capital to shareholders -- a prospect that has been a key support for the bank's valuation. It trades at a 13 percent discount to book value, better than most of its peers.
It's hard to see Trump benefiting lenders in the euro zone, either. A rising euro could choke growth in the euro area, complicating Mario Draghi's job and hurt bank lending. A tit-for-tat trade war -- something 370 economists warned about in case of a Trump victory -- could contribute to a 0.3 percentage-point decline in euro area GDP. Trump's win raises the prospect of victories by populist parties in France or Germany that could threaten investment.
It's hard to know whether the direst predictions for a Trump presidency will come to pass. The U.K. economy defied expectations by holding up well after the vote to leave the EU. Julius Bear's chief strategist reckons Trump's policies could turn out to be reflationary, with tax cuts and infrastructure spending, and create jobs.
So far, Europe's market reaction looks pretty muted considering the uncertainty ahead. European blue-chip equities are down 0.8 percent and European banks are down 1.6 percent -- that's much better than the 5 to 10 percent drop expected by some investment-bank strategists.
This may be a function of how much equities and particularly banking stocks have sold off this year. But buying into this dip means putting faith in President Trump above the experience of Candidate Trump.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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