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