Why are bank valuations in Europe still under par?
Dr. Dirk Holländer: The general explanations that have been reiterated time and again are certainly still holding true. Contrary to the US, Europe is - despite its size in GDP - a very heterogeneous landscape from which to provide Financial Services, making it extremely difficult to realise meaningful economies of scale. Legacy IT infrastructures and complex operating models result in OPEX setups that cannot be flexibly adjusted to changing needs – albeit without high upfront investments. Moreover, European banks seem to use their balance sheet less efficiently and effectively than other banks. Our latest research shows that optimised balance sheet management, i.e. the efficient deployment of financial resources, can make a difference in terms of valuation (read more on what drives banks’ price-to-book (P/B) ratios on bankinghub.eu). There is, however, also a silver lining on the horizon for Western European banks. The ESG and sustainability debate presents a megatrend that banks could (and should) leverage.
Is the Financial Services Industry not predominantly concerned about additional (regulatory) requirements with regards to ESG?
It is certainly true that additional ESG (and in particular climate-related) reporting requirements as well as the discussion about potential capital surcharges for banks with a negative CO2 footprint in their portfolio makes a lot of negative noise. And there is no denying the fact that additional costs will hit banks’ P&Ls in the short- and mid-term future. The collation and structuring of the relevant data and information – for instance for PCAF reporting – represents a Herculean task and will take time and investment. In the midst of these discussions, the business opportunities are frequently forgotten. Rightly or wrongly so, governments and regulators have put Western European banks in the midst of this great European change programme, i.e. the European Green Deal. Banks are now uniquely positioned to provide financing and advice to their clients to transform their respective organisations and industries. We believe that in particular, Corporate Business Divisions will benefit from this megatrend. There will be an impact on private and retail banking as well, albeit to a lesser extent in terms of P&L impact as far as our estimates and simulations show.
Can you provide us with an idea of the size of these opportunities and will this help to move the needle for Western European banks’ valuations?
Our recently published European Banking Study shows clearly that there is a sizeable revenue opportunity that can be seized by market participants. To reach the 55% targeted reduction of greenhouse gas emissions in Europe by 2030, the European Commission estimates additional investments needs of €1,100bn annually. If we assumed the typical financing mix of European industries and households with their strong reliance on bank credit, we arrive at a baseline revenue wallet of approximately €280bn over the next ten years. Will there be margin compression? Certainly. Will there be substitution effects, i.e. green investments replacing previously planned investments? Without a doubt. And this means that the real revenue potential will be somewhat smaller. But, in our view, still large enough to try to capture a larger than average share of it and ideally carve-out a market leading position.