AMERICAN BANKERS make for bold bosses. From his roomy office in Manhattan, in early February, the boss of one of the country’s biggest suggested he has few serious rivals—and all are just a few blocks away. “US banks continue to gain share from European banks.” Asia barely gets a mention. “Chinese institutions have generally proven incapable of expanding globally. When they buy sports cars and flashy hotels, it just doesn’t feel solid.” Days later Morgan Stanley, America’s sixth-largest bank, announced its $13bn acquisition of E-Trade, a broker—the biggest by a Wall Street bank since 2008.
Within weeks China had exported a different threat. As coronavirus-induced investor fever took hold, the Dow Jones index of top American lenders, which had soared by a third over 2019, crashed by 50%. The market rout did not wipe them out. But it is the sort of event that could lead incumbents to self-isolate—accelerating the discreet spread of Chinese banks in emerging markets. And the country is opening up its own market, hoping to learn tips from new entrants along the way.
Chinese banks are already huge. Their total assets now surpass those of American and European banks. They are also providing more cross-border credit, the bread and butter of international banks. The sum they lend overseas has grown by 11% a year since 2016. More surprising to outsiders, they are gaining clout in the sophisticated universe of capital markets, too. Last year Chinese banks earned three times more investment-banking fees than all Asian rivals combined (excluding Japan). Their share of the total has jumped from 1% in 2000 to 14%.
Balance-sheet of power
On the eve of the collapse of Lehman Brothers in 2008, European banks were the kings of cross-border lending. They accounted for 71% of total flows, which had grown from $10trn in 2000 to $35trn in 2008. But the subprime meltdown, followed by the eurozone crisis, forced them to retreat. As regulators required global banks to hold more rainy-day equity, other lenders chose to issue capital or to retain earnings. But conditions in Europe meant its banks had little choice but to trim their balance-sheets. Banks shed assets overseas. Far-flung subsidiaries were sold or shut. Today Europe (including Britain and Switzerland) provides 47% of the world’s $31trn in cross-border flows.
Cyclical events are likely to stymie them further. It is hard for banks to grow faster than their home economy. Europe has had anaemic growth throughout the 2010s. The virus crisis is turning 2020 into an even sicklier year. Interest rates, negative across the region for many quarters, are plumbing new depths. European banks’ return on tangible equity (ROTE) sank to 6.6% last year (investors reckon 10% is par). America’s top banks, buoyed by positive rates and a sprightly economy, posted double-digit ROTEs in 2019.