Market Rally Trump Gives Cause for Celebration - and Concern

As U.S. banks surge ahead of their European rivals, boosted the Trump administration's loosening of regulations, concerns are mounting across the Atlantic that giving Wall Street a longer leash could result in the next big financial crash.
Quelle: dpa
Celebrations on the New York Stock Exchange last month as the Dow reached 20,000 for the first time.
(Source: dpa)

Depending on which side of the Atlantic you're on, the fact that the six largest banks in the United States are worth $280 billion more than they were before Donald Trump was elected president could be cause for celebration - or concern.

The mere prospect of rising profits and a rollback of regulations on the financial sector has sent shares in some of Wall Street's most prominent institutions soaring. At the front of the pack is Goldman Sachs, whose share price has jumped by a whopping 37 percent to levels not seen since before the financial crisis a decade ago.

The KBW Bank Index, on which Goldman Sachs and other major banks are listed, has grown nearly three times as fast as the broader stock market in the United States, and even that is jumping from record to record these days.

American banks, galvanized by Mr. Trump's promises to unravel the most stringent regulations imposed by his predecessor to prevent a repeat of 2008, are threatening to leave their European competitors in their dust. That’s because while institutions like Citigroup and Bank of America rejoice at 20 and 40 percent rises in their share prices, many European banks are still plagued by anemic growth.

But while many of Europe's banks view their troubles as residual effects of the 2008 financial crisis, American bankers see things a little differently.

 "The main problem I see in Europe is that its capital markets are still underdeveloped," Brian Moynihan, chief executive of Bank of America, told Handelsblatt. "The restructuring in Europe has been slowed down because banks were not able lay risks off to the investor community."

The weakest link of the European banking sector is still Italy. Brian Moynihan, CEO, Bank of America

Analysts at Berenberg Bank put it this way: "European banks are lacking capital and they still have to deal with bad debts." Banks in the United States, on the other hand, have overcome these problems, yet the Berenberg analysts still consider their stocks to be overvalued due to the ambient euphoria among investors.

To be sure, there are banks in Europe that are flush with cash. France's largest lender, BNP Paribas, and the Netherlands' ING both logged billions of euros in profits last year. Most financial institutions on the eastern side of the Atlantic, however, could only dream of making that much money.

The weakest link of the European banking sector is still Italy, where a number of banks are still grappling with a record number of bad loans. After the sectoral index that measures the state of Italy's banks plummeted by 39 percent on the Milan stock exchange in 2016, state-funded bailouts are no longer a taboo subject. The government in Rome has created a rescue fund worth €20 billion, the first beneficiary of which is the crisis-stricken bank Monte dei Paschi, which will receive €6.6 billion. The state is now the bank's largest shareholder.

Now, two other Italian banks are also reportedly interested in receiving assistance from the government. They include the regional banks Veneto Banca and Banca Popolare di Vicenza. They require €5 billion in fresh capital since they have been blocked from acquiring it on the market.

"We made these instruments available to the banks, now I would encourage them to use them more wisely," Italy's economy and finance minister, Pier Carlo Padoan, said on Wednesday.

He added that the banks must now work to profit from the overall more positive market environment and make more of an effort to reduce their stockpile of bad loans. The general secretary of the Organisation for Economic Co-operation and Development, Angel Gurría, for his part, is also pressuring those banks to hurry up.

The problems facing Germany's banking system aren't nearly as dramatic as Italy's, but lenders in Europe's largest economy still aren't nearly as strong as they once were. Nowhere is this truth more apparent than at Germany's largest lender, Deutsche Bank.

In the first year and a half of his tenure there, Deutsche's CEO John Cryan was mainly preoccupied with resolving a long list of legal disputes. That distraction cost the bank a lot of money. Last year, Deutsche had a €1.4 billion loss on its books.

The resilience and strength of large banks has increased a lot since the financial crisis. Brian Moynihan, CEO, Bank of America

Commerzbank, Germany's second-largest lender, and one that received a state bailout in the immediate aftermath of the financial crisis, is doing considerably better than Deutsche. Its profits of €279 million in 2016, however, don't have investors popping any champagne over its performance.

Martin Zielke, a board member at Commerzbank, has ordered a massive restructuring program aimed at getting the bank back on track by 2020. For the shareholders, progress can't come soon enough - until at least 2018, they're more than likely going to have to forego any dividends.

Of Germany's roughly 1,700 banks, most of them would rank pretty miserably if pitted against their American counterparts. Case in point: returns on equity. From 2012 to 2015, German banks on average logged returns of 2 percent - compared to 9 percent in the United States.

It's numbers like that which make Mr. Moynihan from Bank of America feel validated when he denies that Donald Trump's plans to deregulate the financial sector could pave the way for another crisis.

"The resilience and strength of large banks has increased a lot since the financial crisis. For example, the amount of capital that banks have is now two or three times higher than it was back then," Mr. Moynihan told Handelsblatt.

But while bankers can revel in Donald Trump's promises of a future in which they are no longer bogged down by regulators and politicians, they are by no means the only ones who stand to profit from the new administration.

US Banks and the Stock Markets - Indices / Market Capiralisation

One of the first laws Mr. Trump signed nullified a clause from the Dodd-Frank law that had required energy companies to report payments made to foreign governments. That part of the law was designed to combat corruption, but companies like Exxon Mobil simply saw it as an obstacle to business. In places like Nigeria or Venezuela, paying bribes to political leaders is sometimes the only way to get permission to drill there.

"It's a good measure that will secure America's competitiveness and jobs," said Jack Gerard, the chairman of the American Petroleum Institute.

All across the economy, executives from industries ranging from energy to aviation are finding a sympathetic ear with the Trump White House.

Car companies are hoping for a reprieve from the Obama administration's "Corporate Average Fuel Economy" rules, according to which manufacturers' fleets had to have average fuel economies of 4.3 liters per 100 kilometers (54.7 miles per gallon) or better. Their reasoning? Gas guzzlers like SUVs may be bad for the environment, but they sell like hot cakes.

A few days ago, Mr. Trump also sat down with representatives from the airline industry. They, too, had a long list of requests. American Airlines, Delta and United all want to do everything they can to keep cheap, European carriers like Ryanair out of the U.S. Those airlines, they say, are robbing them of customers along the lucrative trans-Atlantic route. In addition, they don't want to see Gulf airlines such as Emirates or Etihad competing with them on their home turf.

The new administration's plans to lower taxes, raise infrastructure spending and usher in a new era of deregulation have given investors in the U.S. something to celebrate.

That euphoria is also starting to trickle over to Europe - if not among the banks, then at least among investors. As strong as opposition to Mr. Trump is in Europe among ordinary citizens and entrepreneurs - and it's widespread, to say the least - people with a stake in the stock market see the possibility for companies in Europe to log higher profits with Mr. Trump in charge.

Shares in companies like Hochtief, a German construction company, and Bilfinger, a civil engineering firm, both of which generate more than 80 percent of their sales outside Germany, have begun to take off. The same thing has happened with the company Heidelberg Cement, a building material supplier that could win the bid to build Mr. Trump's wall between the United States and Mexico.

 Daniel Schäfer is head of Handelsblatt's finance pages and based in Frankfurt.Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. To contact the authors: [email protected] and [email protected]