Europe's banks brace for tougher competition under Trump's second term

European banks face an even tougher task to close an earnings gap on US rivals, as Wall Street awaits a new era of financial deregulation under a second Donald Trump presidency. 

Lenders in the euro zone and Britain have been hobbled by poor profitability and weak economies since the 2008-09 global financial crisis, while US banks have soared in value and stolen market share, especially in investment banking as European rivals retreated. 

Some banks had begun to claw back lost ground this year. 

Until this week, European shares were outperforming US peers and hopes had grown that the US would adopt some elements of the Basel III regulations requiring American banks to hold more capital, helping level the playing field. 

Trump's presidential election win this week has turned the tables. JPMorgan, Goldman Sachs and Morgan Stanley shares all soared while the STOXX Europe 600 Banks index is down more than 1 per cent for the week. 

"The expectation is simple: deregulation and tax cuts in the US contrast with Europe's strict oversight and low-interest-rate grind," said David Materazzi, CEO of Italy-based automated trading platform Galileo FX. 

"If US banks get the expected policy support, they could ramp up loan volumes and optimize capital in ways that Europe's banks just can't match right now," Materazzi said. 

Since early 2010, European banking shares have fallen 10 per cent, while US lenders have more than tripled. 

The European Central Bank has estimated that euro zone banks' return on equity fluctuates around 5 per cent, against 10 per cent in the US, linking it to higher US fee income and legacy non-performing loans with which European banks still grapple. 

LEVERAGE TO LOBBY? 

There are already signs European politicians are bracing for a new landscape under Trump. 

Swiss Finance Minister Karin Keller-Sutter said on Thursday she and her British counterpart Rachel Reeves had discussed the outlook for US banking regulation. 

"It was said beforehand that a wave of deregulation was coming in the USA," she told Reuters, adding that both agreed it was important to strike a balance between competitiveness and stability. 

A wave of deregulation should give European banks some leverage to lobby for easing the rules in Europe, which are already more onerous, one banking executive told Reuters. 

The US banking industry is expecting Trump to usher in Republican regulators who ease capital rules and merger approvals and further dilute the contentious Basel III endgame proposal aimed at requiring big lenders to hold more capital. 

But the pace of any deregulation will be determined by new regulators and key policymakers that Trump has yet to nominate, leaving the outlook highly uncertain. 

Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, thinks Trump may also roll back parts of the 2010 Dodd-Frank financial reform law, which increased regulation on banks to avoid another 2008-style implosion. 

"Additionally, an uptick in expected corporate M&A because of a less restrictive FTC (Federal Trade Commission) should lead to increased investment banking fees," he told Reuters. 

"We can also expect an uptick in regional bank mergers. 

Comparatively, European banks with their more restrictive regulatory oversight will be competing with one hand tied behind their backs." 

Long-awaited European banking M&A has restarted this year with a potential takeover by UniCredit of Commerzbank and BBVA's bid for Sabadell, but 

neither deal is guaranteed as they navigate political opposition. 

Filippo Maria Alloatti, Head of Financials Credit at Federated Hermes, said US banks would be the primary beneficiaries under Trump. But international banks with substantial US operations such as Barclays, Deutsche Bank, and UBS, should, he said, see "positive impacts" too.