Written By: Darren Morris – Corporate Finance
According to the 13th Henderson Global Dividend Index report published in February 2017, the finance industry was by far the most generous in terms of distribution of dividends in 2016, with $155.2 billion distributed by banks out of the total $1.154 trillion distributed worldwide. The progression has been modest but constant, and is now largely above the oil and telecommunication industries. Among the biggest payers were HSBC Plc and JPMorgan Chase Co.
The US banking sector has been transformed since the 2008 financial crisis and has regained its leadership role.
US banking groups dominate and are certainly taking part in the improvement of the finance sector. Their leadership is coming from a mix of reasons. US banks led a real transformation of their business model. The entities that were in the most difficult situations during the crisis have been restructured rapidly. Bank of America rescued Merrill Lynch and JPMorgan Chase, and took over Bear Stearns.
The US authorities’ rescue of Fannie Mae and Freddie Mac with pragmatism has reaped rewards. As a phoenix is reborn from the ashes, Fannie and Freddie turned in nearly $10 billion in dividends to the government in March 2017, from their profits in fourth quarter 2016. Fannie posted a $5 billion profit in the quarter and said it will send $5.5 billion to the Treasury, while Freddie generated $4.8 billion in profit in the quarter and said it will funnel $4.5 billion in dividends to the government.
US banks have definitely strengthened their capital-adequacy ratios and profitability.
Banks in the US are ahead of their European competitors on the new total loss-absorbing capacity (TLAC) rule, which was imposed on the biggest banking groups to prove their ability to absorb financial losses in the event of a world financial crisis. Out of the eight American banks supposed to comply with TLAC regulation, the biggest ones had started to move forward before the end of 2016: JPMorgan Chase, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley issued specific senior debt with callable options. Meanwhile, discussions are still on the table of European regulators, although their new regulations should not apply until the beginning of 2019.
In terms of financial performances, US banks are continuously attempting to reduce needless expenses by reorganizing business. Actually this is how they have been able to deliver decent bottom-line numbers in the past few quarters. Banks in the US have also kept growing and expanding on new Asian markets. They have also coped with heavy fines from regulators and have seemed to be able to endure the increases in costs of operational risk, while some big European names such as Deutsche Bank and Crédit Suisse have been severely harmed by the heavy fines. Wall Street has paid to date more than $180 billion to absolve its responsibilities in the financial crisis.
The US Federal Reserve is increasing interest rates, which should contribute to the improvement of commercial margins for US banks, when their competitors are still struggling to sustain their net banking revenue.
European banks do not seem ready to challenge the hegemony of US banks.
Indeed, recent evolutions illustrate the weaknesses of the European banking landscape:
- The City of London leaving the European Union;
- The European Central Bank (ECB) facing the unsolved issue of some 1 trillion euros in bad debt in European banks;
- Interest rates remaining at low levels, eating into banks’ commercial margins;
- No common understanding or approval for each and every new regulation project.
In the major forums of dialogue (G20, Basel Committee), the United States speaks with one voice, being able to influence regulators and European leaders—whereas European banks still have to comply with both European and national systems of regulations and wait for agreements with numerous participants to avoid the erosion of European projects.
The US dollar is naturally the other big attribute of the US banks’ superpower: American banks have privileged access to US dollar markets, and every international group that wishes to work with the greenback has no choice but to comply with the rules issued by the US. Banks in the US are controlling US dollar flows in such a way that BNP Paribas, accused of having violated economic embargoes, had to pay an unforgettable fine that was close to $9 billion.
In their strategies, European banks’ restructuring programmes have led to major cuts in some of their activities. Instead of strengthening in size, most European banks have chosen to reduce their activities and trade areas.
During the period since the crisis, US banks have become international monsters, and their leadership is now expanding into Asia.