The European banking sector has seen enough worries in the last few years owing to low interest rates, massive fines and weak earnings results. But with the Federal Reserve increasing its benchmark interest rate by 25 basis points on Wednesday, markets seem to be celebrating the return of the yield.
Rising rates are particularly beneficial for banks, which have seen their profitability squeezed by low interest rates. But while the banking sector is cheering the move a number of analysts say the road still remains challenging for European banks since the European Central Bank is still lagging behind when it comes to tightening monetary policy.
“The issue with banks has been an issue of balance sheets. They haven’t had balance sheet strength, in fact they haven’t managed to have loan loss provisions that U.S. banks did early on in the cycle,” Jonathan Bell, Chief Investment Officer at Stanhope Capital, told CNBC Wednesday.
Bell further added that as a result banks haven’t been able to lend or grow and have needed more capital.
“We are seeing capital increases slowly so it is slowly getting back to normal but we are not there yet. So even if you have margin increases you still haven’t got to the problem of solving the balance sheet issue.”
