Lawrence White and Iain Withers

LONDON (Reuters). – Europe’s banks have a great opportunity this year, experts in the industry say. They can reverse their recent weakness and regain market share against rivals from the United States with increased interest rates.

European lenders fell behind Wall Street competitors during the pandemic. Volatility in the markets increased the earnings power of U.S. banking’s large trading arms, which decreased the profitability of European lenders. European competitors earn more through lending, and enjoy a better interest rate environment.

The continent’s largest lenders are set to announce full-year earnings in 2021. We kick off with Deutsche Bank (DE:) https://www.reuters.com/business/finance/deutsche-bank-nearly-triples-q4-profit-defying-expected-loss-2022-01-27 on Thursday, European banks must seize the opportunity that now presents itself, analysts consultants and investors say.

Eriola Shehu, partner and managing director at Boston Consulting Group said that “European banks need to demonstrate what they stand for” and show how they will differentiate themselves in the long-term,” Eriola Beetz stated.

U.S. banks are beating European counterparts in the field of investment banking by nearly every metric over recent years and this gap is growing.

JPMorgan (NYSE) & Goldman Sachs, (NYSE). Morgan Stanley (NYSE:), Citigroup According to Refinitiv data in 2020, Bank of America (NYSE) claimed 31% of the merger fees for Europe, Middle East, and Africa in 2021. This is up from 26% in 2019. Their six biggest European competitors took only 12%.

“What the US banks have done really well – and scale helps quite a bit – is that they’ve consistently invested in technology in their capital markets businesses. Shehu Betetz explained that it makes banks more resilient.

This is evident in the valuations.

According to Refinitiv data no of the 10 largest European banks has a price-to-book ratio greater than one. Only Citigroup, among its U.S. counterparts, dips below 1. This shows the gap in investors’ valuations of European lenders.

REBOUND POSITIONIAL

European banks lending heavily to homebuyers, such as Dutch ING in Europe, believe that the low interest rates that helped lift the region from the financial crisis a decade ago may finally come to an end.

Steven van Rijswijk, CEO at ING, said late last year that the gradual increase in interest rates would slow down in order to make the lending business more profitable in the medium term.

After years of nearing zero interest rates, the central bank rate is rising in Britain. This has helped banks like NatWest and Lloyds Banking Group (LON) to make more money from their lending. The European Central Bank will likely follow this trend by 2023, if not earlier.

European lenders avoided large sums of unpaid loans, as corporate borrowers have weathered the COVID-19 epidemic.

The combination of lower than expected sored loans from the pandemic as well as curbs on shareholders payouts and bonuses to central bankers has meant that lenders generally have healthy capital buffers.

“The (loan) moratoria are almost gone and banks still have quite a lot of (bad loan) provisions that they can take back,” said Jerome Legras of Axiom Alternative Investments.

Investors believe that higher capital levels will lead to bumper dividends as well as share buybacks. Banks could use their refueled firepower to make long-term investments in areas like digital services or wealth management.

“The banking system has proven to be able to cope … Enough is enough now, and the focus has to be on what you do with that excess capital,” said Oliver Judd, senior credit research analyst at investor Aviva (LON:).

“I am looking for strategies. It’s the missing piece for over two years.

These ambitions will be constrained by spiralling wage requirements, as seen in U.S. bank branches over recent weeks.

Swiss bank Credit Suisse (SIX) Tuesday’s warning about a fourth quarter loss in European earnings was a harsh tone. Analysts however said that the bank scandal should not have an impact on the rest of Europe.

UBS will report positive earnings for Monday. It is expected to continue its recent winning streak, which saw UBS post its largest quarterly profit since 2015.

Deutsche Bank, Germany, nearly tripled its fourth quarter profit on Thursday. This was despite expectations of a loss. However, revenues at the bank soared. This was the longest consecutive quarter of the bank in black since 2012.

Others European heavyweights that will be reporting include UniCredit in Italy, Spain’s Santander on Wednesday and BNP Paribas France (OTC) on Friday.

The big British banks will also report strong earnings. Standard Chartered (OTC) reports first on February 17, followed by NatWest on the following day and HSBC on February 22. Barclays (LON) February 23rd, and Lloyds Feb. 24, respectively.