In the next two years, a whole series of corporate insolvencies are expected to lead to bank defaults.
How well are the banks in Europe and the US prepared for this?
The auditing firm EY is investigating this in a comparison of the ten largest US banks and the largest European banks after the first half of 2022.
One conclusion is that the profit situation of European banks has improved in recent years, but it is still not satisfactory - not even in Germany, says Robert Melnyk, partner at EY.
Hanno Mussler
Editor in Business.
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Deutsche Bank, the only German financial institution among the ten largest in Europe, recently achieved its best result since 2015 with a net profit of EUR 2.4 billion in the first half of 2022.
In a European comparison, however, the German industry leader ended up behind HSBC (8.5 billion euros), BNP Paribas (5.3), Santander (4.9), UBS (4.1), Barclays (3.6), Lloyds ( 3.2) and Crédit Agricole (2.5) only in eighth place.
The top 10 US banks all had higher after-tax profits in the first half of 2022 than Deutsche Bank.
The profits of the banks are important because they serve to strengthen the equity of the banks in addition to the distributions to the shareholders.
The more equity a bank has, the more losses it can absorb, for example from loan defaults.
Equity thus serves as a loss buffer and is therefore also called "liability assets".
In good years, many US banks make more money in the capital market business than from lending.
In the first half of 2022, these banks suffered greatly from the lack of company purchases and takeovers (M&A), where they earn excellent money as M&A consultants.
In addition, banks as holders of bonds were hit by the major turnaround in interest rates in the USA, since interest rate hikes in turn lead to bond price losses.
The profit of the ten largest US banks in the first half of 2022 fell by 20 percent compared to the previous year to a total of 76.7 billion euros.
The profit of the ten largest European banks fell by only 4 percent to 36 billion euros.
So, despite this drop in profits, American banks were still making more than twice as much as their European peers.
While eight banks in the USA earned more than 5 billion euros, there were only two in Europe.
The US banks JP Morgan with the equivalent of 16.2 billion euros and Bank of America (12.7) even made double-digit billion net profits in the first half of 2022.
Despite the increasingly difficult capital markets and lending business, banks have expanded on both sides of the Atlantic.
The ten European banks expanded their total assets by 8 percent in the first half of 2022, and the US banks by a whopping 18 percent.
The retained equity could not keep pace with this growth.
Interestingly, auditor EY mentions the entire equity ratio here, i.e. not the higher core capital ratio usually reported by banks, which only relates equity to risk-weighted assets as part of the balance sheet total.
Calculated in this way, the equity ratio of European banks fell by 0.3 percentage points to 5.0 and was thus a full percentage point lower than that of US banks.
Cumulated in absolute amounts, the equity of the ten European banks reached 877 billion euros in mid-2022, the highest value in ten years, as EY notes.
But although the equity ratio of US banks has also fallen by 0.2 percentage points compared to mid-2021, the equity of the ten US banks is almost 1.3 trillion euros, 46.5 percent higher than that of the European ones.
Thomas Griess, partner of EY, only paints a cautiously optimistic picture.
The turnaround in interest rates in Europe is also leading to rising interest income, and the banks have also successfully pushed through higher fees in recent years.
But the stock exchange shows that it distrusts European banks more than its American competitors.
The market capitalization of the ten US banks has fallen by 18 percent to 1.2 trillion euros since the beginning of 2022, while the stock market value of the European banks has even fallen by 20 percent to 400 billion euros.
This means that the ten US banks are worth three times as much as the ten European ones.
On the one hand, the EY partners Griess and Melnyk see the resilience of European banks to credit defaults as increased.
"All in all, the financial institutions are well prepared for the imminent economic downturn." On the other hand, they expect new cost-cutting and efficiency measures, because the looming recession increases the pressure to act.
There is also a lot for the banks to do.
More technology and digitization, but also compliance with the rules by employees, require investments that will be more difficult to manage, especially in times of increasing loan defaults and then falling profits.
After all, the turnaround in interest rates leads to “highly welcome additional interest income, so that burdens elsewhere can be partially cushioned,” is a conclusion from EY under the mixed comparison picture.