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American banks look down on Europeans

The results of JP Morgan and Citi positively surprise analysts, reflecting a reality that contrasts with the worse situation of their Spanish and European counterparts

American banks shine against Europeans.

Two of the largest American banks, JP Morgan Chase and Citi Group, surprised the market on Tuesday by presenting better than analysts expected third-quarter results.

In the midst of a pandemic that has caused a global economic contraction, JP Morgan, the largest entity in the United States, announced an increase in profits of 4 percent to 9,444 million dollars, thanks to a 30 percent increase in revenues from its trading area.

Likewise, the entity also stood out with the cut in its provisions for non-performing loans by 569 million dollars, after adding 20,000 million in the first half.

Stock market operations boosts American entities

Something similar happened with Citi, which also came as a surprise by reporting better than expected results thanks to the good performance of the trading area and the reduction in provisions.

Specific, Citi announced an earnings per share of $ 1.40, which represents a drop of 32 percent compared to the same quarter of the previous year, but well above the 93 cents expected by the market.

Likewise, the entity’s provisions for non-performing loans fell to 2,300 million dollars, well below the 7,900 million allocated to this issue, the previous quarter.

A cyclical business

Even so, banking is a very cyclical business that suffers when there is an economic recession and, therefore, neither of these two American entities has been able to escape the red numbers this year.

JP Morgan falls 27 percent in the stock market so far this year and Citi, 44 percent.

However, its delicate situation contrasts with that of European banks, which are much more precarious, both in terms of stock and fundamentals.

European banking, much worse

In the stock market chapter, for example, Santander yields 56 percent and BBVA, 54 percent, which add to a continuous trickle that both entities have experienced since the 2008 crisis (unlike JP Morgan, which hit all-time highs in 2019).

But what justifies these differences in the performance of banks on both sides of the Atlantic?

Experts explain that the main reason is the different evolution of interest rates in the United States and in Europe.

Thus, while in Europe we have been totally depressed for more than a decade, in the United States they have remained at levels more than acceptable for the banking business until the pandemic made landfall (when the Fed reduced them to levels close to zero, as in Europe).

“In the United States, until the pandemic hit, they have been living with positive and quite positive interest rates. And the types are the heart of the banking business. A year or two ago, they were at 2 percent. See if there may be room for entities ”, explains Jesús de Blas, from Bankoa Credit Agricole.

The incidence of interest rates in the banking business

And it is that the rates directly affect the profitability of the entities, according to Nuria Álvarez, for Rent 4: “The problem is not one of liquidity or capital, it is one of profitability. In Spain, banks have an ROE of 3-4%, below the cost of capital. And for a business to make money, its profitability has to be above the cost of capital ”.

Likewise, another differential factor is that the large American banks have one of their main legs in investment banking, while the Spanish banks are mainly dedicated to retail banking.

(Let’s remember that it has been the stock trading business that has shone in the accounts of Citi and JP Morgan, this quarter).

Likewise, retail banking there is different: “They work more on credit than debit and there are many consumer loans,” explains Nuria Álvarez, from Rent 4.

But the problem is that this situation is going to last: “There are no expectations of a sustained recovery of the cycle that would allow a glimpse of an interest rate hike,” he says. Alvarez.

“We are in a very weak macro environment and, above all, very uncertain. Because, beyond having assumed the economic contraction of 2020, the problem is that you do not know the result of 2021. There is a downward revision of the economic growth forecasts for 2021. And that is what the market is picking up ”, Apostille is an expert.