North American banks outperform European rivals in revenue generation
North American banks are outpacing their European peers in revenue generation, with net interest margins (NIM) of 1.8% compared to just 1.2% for European banks, according to a new report by global professional services firm Alvarez & Marsal (A&M). Net fees and commissions are also 60bps higher in North America. As a result, North American banks can extract 50% more income from banking services than their European counterparts.
The report finds that North American banks significantly outperform their European counterparts in revenue and business productivity, while European banks lead in cost-to-income efficiency due to stronger cost reduction efforts post credit crisis. European average cost-to-income ratio of 55%, outperforming U.S. banks’ 62%.
Overall profitability is similar with North American banks generating an average ROE of 11.9%, compared to 11.3% for European banks. However, the valuation gap remains large. North American banks are trading at 1.4 times book value, while European banks lag at 0.9 times. This is due to higher investor confidence on earnings sustainability for North American banks combined with European regulatory and economic headwinds.
The report also found that European banks retain stronger capital positions, with an average CET1 ratio of 14.5% compared to North America’s 13%, reflecting stricter regulatory requirements and lower capacity to distribute earnings for European Banks. MREL levels for North American banks at 30% are 6% lower than that of European banks.
The findings highlight fundamental differences in the structure and priorities of banks on either side of the Atlantic:
- Regulatory environment: North American banks operate under capital-light models with greater flexibility in generating returns, while European banks face stricter capital requirements and regulatory costs.
- Market structure: Wider credit spreads and fees in North America contribute to higher revenue, whereas European banks contend with compressed margins due to lower interest rates and less commission power.
- Efficiency initiatives: European banks have made significant strides in streamlining operations, leveraging digital transformation to offset legacy inefficiencies and reducing workforce.
Fernando de la Mora, managing director at Alvarez & Marsal, commented: North American Banks account for 64% of total market capitalisation while European banks represent just 36% in our report. This significant valuation disparity is explained by structural market power, scale and regulatory differences. We expect increased M&A activity in large European banks aiming at increased scale.”
