The Challenges Facing European Banks

03 JUN 2019
TOPIC: Europe

The article below is from our BRIEFINGS newsletter of 03 June 2019

Ahead of this week's 23rd annual European Financials Conference in Paris -- one of Goldman Sachs' longest-running events in Europe -- we sat down with Jernej Omahen, head of European Financials Research, to discuss the challenges facing Europe's banks and insurers, from earnings pressures, to political and macro uncertainty, to competition from fintech startups.

Jernej, can you describe the current environment for financial services companies across Europe?

Jernej Omahen: The operating environment remains extremely challenging, especially for banks. Concerns continue over whether European banks, especially in some geographies, will be able to increase their profitability above cost of capital, remains. As a consequence, shares of European banks have generally underperformed for more than a year, driven in large part by factors outside management control -- political risks related to Brexit, Italy or EM, with macro slowdown expected in parallel. When you bring it all together, despite banks reporting broadly flat earnings, last year saw the sharpest sector-wide de-rating in the past decade, exceeding that of peak crisis periods of 2010 or 2011.

How are the recent results of the European elections playing into the sector's attractiveness to investors?

JO: Generally, results were ok, but the share price action wasn't. Solid bottom-up results were more than offset by top-down factors. Overall, the financial sector tends to reflect the political and macro reality at any given point in time. It would therefore be unusual to have a robust financial sector, with an optimistic outlook, in a period where political and macro risks are this high.

At last year's conference, the issue of "European Banking Union Completion" was central. How much progress has been made since then, especially on common deposit insurance?

JO: Not much. Indeed, as we see it, there has been very limited progress on completing the third pillar of European bank union, the common deposit insurance. The hope now is that as efforts to complete the banking union stall, efforts to complete the European capital markets union intensify. Completing these two projects -- the bank and capital market union -- is required, but obstacles abound. In turn this leads to banks preferring to operate nationally, with pan-European expansion viewed with reluctance, by most bank managers.

What other themes will investors be focused on at the European Financials Conference in Paris this week?

JO: Technology continues to be an important area, with companies working to improve customer experience, strengthen IT capability, increase spend on cybersecurity, whilst striving to reduce non-IT spend. The participation of fintech companies at this year's conference is the largest it's been since we started inviting fintech firms three years ago. It's not surprising that startups are targeting financial services given the importance of technology for the sector, coupled with some of the largest banks continuing cumbersome restructuring processes, which makes them vulnerable to disruption. The challenge for fintech startups in Europe is scale. Especially managing rapid growth to achieve critical scale, whilst navigating the industry's extensive -- and strict -- regulatory and supervisory framework.    

 

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