Last week, US banks reported strong Q1 earnings. They received some help from the tax man. Broadly, the new tax regime hit banks with a one time write down of deferred tax losses, but gifted them a permanent reduction in tax rates and provided a boost to growth from lower corporate taxes across the economy. Revenues, margins and loan growth were up across the largest US banks and ROEs recovered well past the 10% mark with a few exceptions. Regulation has also been relaxed which will allow the banks to return more money to shareholders.
This week, European banks begin reporting and we expect to see solid results in line with their US counterparts. A significant drive or US banks’ revenue growth came from trading on the back of renewed market volatility. European banks will probably see the same effect. Where Europe differs is that there has been no tax boost, or rising interest rates. However, cheaper financing and rolling over of liabilities should see interest margins improve while the strong rebound in growth across the European Union should see a boost to lending as well.
China reported 6.8% GDP growth in Q1, a robust number. This despite a surprising slowing in exports two weeks ago. Chinese exports fell 2.7% YOY in March confounding forecasts of an average 10% growth. This is before, of course, any trade sanctions have had time to bite. It is somewhat indicative of how China has made itself less reliant on exports. Also this week, the PBOC cut its RRR by 1%, ostensibly a dovish signal. More likely it is fine tuning monetary policy where it has been more interventionist in specific parts of the credit market and now seeks to direct lending away from the hard to regulate Shadow banking system towards the regulated banks.
On April 26 the ECB meets. Expect another no-signal meeting with potential for dovish surprise. Europe has experienced remarkable growth in 2017 but measures of sentiment and confidence have moderated significantly since then. Growth of 2.5% in 2017 was probably an overshoot driven by the rebound in international trade. Europe is particularly dependent on trade. The resumption of trade contraction and trade war, coupled with a strong EUR will complicate policy at the ECB. Europe is far from lurching into recession but the pace of growth in 2017 will be hard to repeat and the current slowdown is evidence of this. The EUR has been strong on expectations that the ECB would normalize policy. Already it has halved asset purchases from 60 billion EUR to 30 billion EUR and will likely not extend QE past September 2018. However, the ECB may find itself having to replace QE with a less direct accommodation policy. This could have impact on the EUR. Watch this space.