European banks are struggling, fiercely.

Unlike strengthening US banks, European banks are struggling. There are a few reasons.

1. Yields of regional bonds are too low.

In the US, yields of fixed income market are going up from late last year, and are leading to the recovery of profitability for commercial bank part. On the other hand, in Europe, the yield is still too low. It will be continued for a while. 

2. Regulators are not nimble enough.

Since the 2008 crisis, the US banks had shed distressed debts. The regulators stopped them from taking risky businesses, but they have survived by raising their size. Before the crisis, they earned $10 by investing $50, but they are earning $10 by investing $100. The market is in favor of this model.

On the other hand, European rivals could not shed their debts. In fact, the distressed debts had increased with serial crisis in Greece, Portugal and Italy. Regulations targeting for the crisis were much stronger than those of the US and not effective as much as the US ones were. Profitability of the players has plunged.

The European Banks have not raised their size as much as the US counterparts have done, because of the regulations and convoluted legal system of the zone. The big banks are distributed in various countries of the zone, and the laws are different among the countries. Besides, conservative politicians do not want that a bank of other countries eats banks of their own country. In the meantime, Market Caps of the regional banks is decreasing continuously. Deutsche Bank, the biggest lender in Germany, was out of EUROSTOXX50 index, and Commerz Bank, the second biggest lender in Germany, was out of DAX30 index.

3. The problem of European Banks themselves.

Because of lowering profitability, the American banks have been entering to new businesses, which they never thought before. Pure investment banks like Goldman Sachs or Morgan Stanley have entered to and expanded Private Banking, Wealth Management and Retail Loans. Of course, they are operating old businesses very well too. In fact, the big Universal Banks like JPM or BAML are making more stable profits based on their economies of scale, with the favorable environment from the regulation.

On the other hand, European banks are struggling even in the old businesses. The investors are pressuring Barclays, Deutsche Bank and Societe Generale to acquire other banks in the zone. Some investors are demanding Barclays, Deutsche Bank and UBS to sell their investment bank parts, which are making net-losses.

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In fact, I saw many reports which were insisting to buy European Banks which are underestimated considering their fundamental value. The researchers' analysis about the fundamental value could be right, but the market could go to underground five-floor, not first floor.