Europe's Banks: Dinosaurs On Their Last Legs?

| About: iShares MSCI (EUFN)

Europe's banks have been back in the crosshairs of the markets in recent weeks, with new attention to their multiple problems catalysed by the Brexit vote.

I spoke on the matter in a brief interview with UTV here.

Now, Bloomberg has put together a (very concise) summary of some of the key problems the banks face: "Europe's banks have been a focal point of investor skittishness since Britons voted to leave the European Union, but reasons to be worried about financial firms pre-date the referendum. Whether it be the mountain of non-performing loans, the challenge from fintech firms and alternative lenders encroaching on what was once their turf, or rock bottom interest rates eroding margins, the problems facing Europe's lenders are mammoth."

To summarise the whole rotten lot: European banks (as a sector)

  • Cannot properly lend and price risk (hence, a gargantuan mountain of nonperforming loans sitting on their books that they can't deleverage out, as exemplified by Italian, Slovenian, Spanish, Portuguese, Cypriot, Greek, Irish, and even, albeit to a lesser extent, German, Dutch, Belgian and Austrian banks);
  • Cannot make a profit even in this extremely low funding cost environment (because they cannot lend properly, while controlling their operating costs, and instead resort to "lending" money to governments at negative yields);
  • Cannot structure their capital (CoCos madness, anyone?);
  • Cannot compete with more agile fintech challengers (because the dinosaur mentality and hierarchical structures of traditional banking prevents real innovation permeating banks' strategies and operations);
  • Cannot reform their business models to reflect the changing nature of their customers' demands (because they simply no longer can think of their customers' needs); and
  • Cannot succeed in their traditional markets and services (despite being heavily shielded from competition by regulators and subsidised by the governments).

Instead of whingeing about the banks' plight, we should focus on the banks' resound failures and stop giving custom to the patrician incumbents. Let competition restructure Europe's banking sector. The only thing that sustains Europe's banks today is national- and ECB-level regulatory protectionism that contains competition within the core set of banking services. It is only a matter of time before M&As and the organic build-up of fintech players will blow this cozy cartel up from the inside. So, regulators today have two options: keep pretending that this won't happen and keep granting banks a license to milk their customers and monetary systems, or open the hatches and let the fresh air in.