Major US banks post highest profits since the financial crisis

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  • Major US banks report rise in total profit of 19% for the first half of the year, Europe’s top banks report rise of 9%v
  • US banks twice as profitable as European competitors
  • Capital base at US banks remains significantly better
  • US banks with better profit outlook

Frankfurt, 12 September 2018. The major US banks benefited greatly in the year to date from the domestic economic development and the US tax reform and posted record half-year profits. Thanks to lower levies to the US treasury, net-income climbed by 19% to EUR 69b. US institutions were also able to increase their operating profits, with pre-tax profits rising by 7% to EUR 87.5b – the highest level since the financial crisis. By contrast, operating profits of European banks stagnated at EUR 40.6b. The earnings of US banks were therefore twice as high as those of their European competitors. This includes positive tax effects for US banks.

While eight institutions were able to increase post-tax profits of more than EUR 4b in the US, only one European institution, the British bank HSBC, was able to achieve this feat. The institution with the highest earnings among the twenty banks analyzed was the US bank JPMorgan Chase, which reported post-tax earnings of EUR 14.6b.

The market value of Europe’s top 10 banks has even declined since the beginning of the year. Overall, their market capitalization fell by 12% to EUR 561b between January and August. By contrast, US institutions posted a minor increase of 1.5% and were worth a total of EUR 1.3t in August – more than twice as much as Europe’s top banks.

These are the results of an EY analysis of the balance sheets of the 10 largest European and US banks measured in terms of total assets.

“This year, US banks were once again significantly more profitable and generated higher earnings than their European competitors – and the gap appears to be widening,” observed Hubert Barth, Country Managing Partner EY Germany.

“The European institutions were able to increase their post-tax profits slightly in the first half of the year – but only thanks to the relatively good performance of British banks. Overall, the profit situation of European banks is still far off the pre-crisis level and remains unsatisfactory,” says Barth. “Impairment losses as well as restructuring and litigation costs continue to weigh on their balance sheets. Although the banks are benefiting from the positive economic situation in Europe, the more profitable major US banks are currently in better shape with their higher capital base and stronger domestic economy.”

The capital base declined slightly on both sides of the Atlantic in the first half of the year. For example, the equity ratio of the US banks fell from 7.5% to 7.2%, while a decline from 5.7% to 5.6% was recorded in Europe.

Outlook remains positive for US banks
“The US economy is good – corporate profits, consumer spending and business investment are rising, the effects of the impetus from the tax reform and additional government spending are being felt. There is still no discernible impact from the Trump administration’s foreign economic policy. There is much to suggest that US banks will make record profits at least this year thanks to their strong domestic market,” anticipates EY’s Global Banking Leader Bill Schlich. In addition, a rise in interest rates in the US would offer the banks the opportunity to generate higher interest income. “On top of that, US banks are in a fortunate position in that they are suffering less from the legacies of the financial crisis than their European competitors.”

The situation in Europe is more challenging than in the US, adds Barth: “The economic situation in Europe is fragile. The European sovereign debt crisis is still by no means over. On top of that, the US-Turkish dispute has now created another source of conflict, which is leading to additional uncertainty.”

The European market is generally more challenging, observes Barth: “A much more fragmented market with a larger number of competitors and traditionally higher pressure from competitors offering lower fees are affecting Europe’s earnings opportunities. Moreover, Europe’s banks are suffering from historically low interest rates which means that many banks are generating little to no interest income.”