The Wide Gap Remains: A Look at Valuation Disparities between Leading North American and European Banks
European Industry Leans Toward Specialized Operational Strategies
It appears that a substantial difference in market valuation persists among top North American and European banking institutions, as revealed by a study [1] conducted by Alvarez & Marsal. Although the exact title of the study is unspecified, it focuses on comparing the 35 strongest banks based on total assets, market capitalization, and net income [2]. The result: 24 European and 11 North American banks made the list.
By Carolin Kassella, Frankfurt
Potential Explainations for Valuation Gaps
Alvarez & Marsal, with its focus on operational restructuring, risk compliance, and profitability improvement [3], sheds light on potential factors contributing to the disparities in market valuations:
- Operational and Regulatory Divergence North American banks may benefit from more standardized regulatory frameworks, like the Dodd-Frank Act and Federal Reserve oversight, compared to Europe's fragmented regulatory environment, resulting in differences in risk management and capital efficiency.
- Profitability and Cost Structures European banks often struggle with lower profitability due to stricter capital requirements (e.g., Basel IV), higher cost-to-income ratios, and prolonged low/negative interest rate environments compared to North American banks.
- Market-Specific Challenges
- North America: Strength in equity markets, technology adoption (e.g., fintech integration), and diversified revenue streams (e.g., investment banking dominance) drive higher valuations.
- Europe: Overbanking, slower digital transformation, and macroeconomic headwinds (e.g., energy crises, geopolitical tensions) may suppress valuations.
- Crisis Management and Restructuring Efficacy North American banks, with quicker access to liquidity and recapitalization tools, seem to resolve crises more efficiently than European institutions facing cross-border legal complexities or state-aid restrictions.
While these insights offer possible explanations, further analysis with direct access to Alvarez & Marsal's proprietary research on bank valuations is required for definitive conclusions.
American banks, such as those with the M35 designation, may exhibit higher valuations due to their strength in equity markets, technology adoption, and diversified revenue streams, as compared to European banks that struggle with overbanking, slower digital transformation, and macroeconomic headwinds. Alvarez & Marsal's findings suggest that North American banking institutions may benefit from more standardized regulatory frameworks, like the Dodd-Frank Act and Federal Reserve oversight, leading to differences in risk management and capital efficiency. Additionally, the efficacy in crisis management and restructuring seems to be more pronounced among North American banks compared to European institutions, potentially contributing to the observed valuation gaps.
