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For the second time in 12 months, the US Banking sector is in the news for the wrong reasons. This time it is New York Community Bank having to make extra unexpected provisions. The news is not as extreme as we had last March, when there were bank insolvencies and the market reaction was very different. The chart below shows the absolute performance of the US banking sector and its performance relative to euro area banks. As you can see, it took a large tumble after the insolvencies last year.
Last week’s news did hit the sector but only modestly and, in fact, since last December the sector has started a major recovery in absolute terms and in particular against its euro area counterpart. The end of interest rate increases in the US should ease the pace of rising funding costs and risk of recession. Euro area banks have been slower to pass on higher rates to depositors, so have less room to manoeuvre should the ECB cut rates.
The other major advantage the US sector has above the euro area is a faster growing economy which should lead to stronger loan growth and better credit quality. These trends are set to continue and should lead to the US banks continuing to outperform their euro area peers.
