One slightly bright spot in Europe has been the use made of the pandemic crisis by some European banks. European banks are still laden with bad debts from the bloc’s sovereign debt crisis, and unlike U.S. banks, still not adequately recapitalized, and still struggling under depressed rates. All these woes help explain why Europe’s banks trade at a discount to the U.S. peers, even when their balance sheets are seemingly comparable. (That divide also illustrates the complexity of assessing the value of “assets” on banks’ balance sheets.)
However, another aspect of European banks’ challenged profitability is their recalcitrance in adopting modern consumer-facing banking practices. Many of them are dramatically over-stored — pre-pandemic, for example, Spain had nearly 50 branches for every 100,000 citizens, compared to 30 for the U.S. Payrolls and office space are similarly bloated.
However, many European banks are taking advantage of the crisis to merge, cut jobs, and consolidate branches. For example, Spanish bank Caixabank [CAIXY] is buying a smaller rival and closing half its combined branches. So is Germany’s second-largest bank, Commerzbank [CRZBY], which is also downsizing its staff by a third. Both banks cite pandemic trends of declining in-person banking, which are likely to persist after the crisis is over.
Investment implications: These measures are commendable, and may indicate increased willingness of European banks to downsize and adapt rationally in a way that will improve their bottom line. However, they are unlikely to be a rapid needle-mover on investor sentiment, and they do not trump our deeper long-term concerns about European banks’ stability, and indeed, the ultimate stability of the Euro project. Post-Brexit, Europe may be able to come together to create a fiscal union to complement its monetary union, but that still seems a distant possibility.
