European banks and asset managers underperform US peers

Profitability for European banks and asset managers will remain below that of US peers as the European Union’s fragmented markets hamper cost-efficiency and restrict revenue sources, Moody’s Investors Service said in the attached report.

“There is a long-standing profitability gap between banks in the EU and the US. Profits at European banks have been eroded by cyclical factors such as lower interest rates, slower economic growth and large amounts of non-performing loans, but the EU’s fragmented markets also play a role, hampering cost-efficiency and technology investment and narrowing revenue sources, ” says Olivier Panis, VP-Senior Credit Officer at Moody’s Investors Service.

Higher interest rates and stronger economic growth in the US than in the European Union have widened the profitability gap between US and EU banks in recent quarters. The prospect of sustained low interest rates and slowing economic growth in Europe indicate further pressures on EU banks’ profitability over the coming months, providing limited prospect of closing the performance gap with US banks, even if US rates decline further. This is reflected in an average profitability score, under the Moody’s banking methodology scorecard, of baa3 for the largest 20 EU banks compared with a3 score for the largest 20 US banks.