Are U.S. Banks Decoupling From Foreign Rivals?

An article in The Wall Street Journal today outlines an interesting perspective: retail banks in Europe may be in better shape than investment banks. That perspective, which is being touted right now by various analysts in the region, differs from the prominent one in the U.S., where investment banks are currently gaining all the glory.

Analysts at Bank of America and JP Morgan cite increasingly burdensome capital requirements for investment banks, coupled with earnings upgrades for traditional retail banks, as the prime driver behind the reasons for the expected alpha.

In particular, Banco Bilbao Vizcaya Argentaria and HSBC Holdings (which recently moved its chief executive to Hong Kong from London) are among the favorites to benefit from an increasingly stable consumer lending environment.

The phenomenon is the latest of a series of speculations of pending re-pricing among financial services companies. Only last week, analysts in Asia said that Japanese banks had become oversold. Since then, Nomura, which is busy raising billions in a new share sale (see story here), has shot up 20 percent, while rival Mitsubishi UFJ is up about 10 percent.

The dramatic volatility among financials stocks is an indication of just how uncertain everyone is about the health of the global banking system right now. It's also an indication that U.S. financial services firms may be decoupling from many of those in the rest of the world.

Take, for example, firms such as Zions, a regional U.S. bank which is using the recent market momentum to raise much-needed operating capital. As the share price has more than doubled since March this year, Zions finds itself in a similar position to many global investment banks, with investors chasing its lead. The story is a similar one for many regional banks: the SPDR KBW Regional Banking ETF, a regional bank tracker fund, is up 17 percent in the past 3 months.

And yet underlying lending conditions stateside don't seem to be getting that much stronger. Indeed, many of the small banks are raising capital now just to keep the Federal Deposit Insurance Corporation (FDIC) from the door over the coming 12 to 18 months.

In other words, that scenario is somewhat in contrast to the story going around about the Japanese and European banks, which many consider to be fundamentally healthy but undervalued.

Traditionally, the U.S. has been the leader in all things financial. A decoupling between the performance of the banking systems in the U.S. and the rest of the world would therefore serve as a significant disadvantage to many Wall Street firms. It may also help to empower savvy foreign banks that are well-capitalized enough to snap up increasingly cross-border market-share.