zeb.market flash (Issue 24 – January 2018)

Key Topics

I. State of the banking industry

The market capitalization of the global banking industry reached its highest value in three years—all banks EUR 7.7 tr and global top 100 banks EUR 5.6 tr.
Especially U.S. banks showed a strong capital market performance in Q4, with a total shareholder return of +10.6% (global top 100: +5.7%) and a significant increase of the P/B ratio (+0.16x) driven by increasing U.S. yields and upcoming tax reliefs in line with Trump’s U.S. tax reform.

II. Economic environment and key banking drivers

The economic sentiment in the euro area reached a new peak value in Q4 and expected growth remains robust in Western Europe (2.3%), also strengthening the value of the euro currency.
In a final act as Federal Reserve chair, J. Yellen increased U.S. interest rates by 25bp for the third time in 2017.
The profitability among the global top 100 banks remained almost unchanged—accordingly, the RoE gap between U.S. (10.4%) and European banks (8.5%) is still about 1.9pp.

III. Special topic: Trump’s tax reform—how will it affect the banking industry

The new U.S. tax reform bill is the most significant change of the federal tax code in over 30 years and includes a massive reduction of the corporate “headline” tax rate from its current 35% to just 21%.
Despite short-term losses, U.S. banks will be one of the big winners of this reform, expanding the gap to their European counterparts regarding profitability and capital market performance