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David Hendler is founder and principal at Viola Risk Advisors.

What are your expectations for the banking sector this year?

The major challenge for global systemic banks is to generate economic earnings that help them build and keep strong balance sheets in a natural organic way. Economic earnings can be reinvested into the company’s technology platform and infrastructure to compete against banking industry competitors and emerging non-bank FinTech competitors. A combination of a strong management team and company culture can sustain the bank’s ability to build a strong balance sheet, improve its infrastructure and platforms, while at the same time rewarding shareholders with positive actions whether higher dividends and/or stock buybacks. Together these key factors lead to changes in the level of capital markets liquidity and to challenging trading conditions for a host of securities and derivatives.

Unfortunately banking regions around the world are not equally prepared to generate attractive and sustainable economic earnings and this leads to a bifurcation of competitive standings and capabilities. Generally, the leading US and Canadian banks are much better positioned in the global systemic bank landscape than the largest European banks mostly because they have strong economic earnings, strong balance sheets and better management teams and company cultures.

Still each region and bank is challenged by the constantly shifting competitive landscape posed by regulatory/political factors, economic/interest rate cycles, and non-bank competition from the FinTech sector.

Major challenges for all global banks include: 1) the impact from the Brexit discussion affecting the UK and global systemic banks operating in the London capital markets; 2) US Federal Reserve’s rising interest rate policy impacts, 3) impacts from the incoming Trump presidency and administration, 4) continued European bank weakness across economic earnings, franchises and balance sheets.

Regarding the Brexit impacts, our Viola Risk Advisors view is that a Brexit will not change the rankings in the global underwriting and M&A league tables where the US banks and brokers dominate by products and regions. US banks/brokers have deeper and more profitable relationships with the biggest issuing/advisory global sectors and especially with large and fast growing industries in global technology, telecommunications and health care.

All banks will be challenged by rising US interest rates as the Federal Reserve tightens monetary policy. Still the ability to generate higher yielding assets and especially loans is not equally distributed across all banks by region. On the loan generation side, the big US banks including JPMorgan Chase, Wells Fargo, Bank of America and Citigroup have better abilities to generate higher yielding assets mostly across the consumer credit front. They are at an advantage versus the US regional banks and the global European banks which either are less well positioned or do not have major consumer borrowing cultures that vary across Europe.

Regarding the soon to be Trump presidency & administration we believe that it will focus on 5 key points to loosen up regulatory restrictions. These points include: 1) strong capital levels; 2) Volcker Rule roll-back allowing more proprietary trading, but not to same extent of the mid-2000s; 3) reduction of securitization retained interests back to 3%, but with a 2% outside interest away from originating banks; 4) re-launch of the residential mortgage GSEs, Fannie Mae & Freddie Mac, with a new format, but helping to bolster the US resi-mortgage sector once again; 5) enforcing consequences toward bank management/equity & regulatory debt regarding their failed risk-taking actions.

The general inability of global European banks to generate material and attractive economic earnings, puts them at a disadvantage in the global capital markets. Global capital markets transactors want to trade with strong counterparties across the securities and derivative spectrum. Still European banks have weakened franchises, weak management teams, and weak balance sheets that are reliant on external capital raising to backfill capital shortfalls. Until the European banks can bolster their economic earnings, which Viola Risk generally believes is difficult for Deutsche Bank, Credit Suisse, and Barclays to some extent, the overall capital markets’ counterparty and systemic risk will be too high and result in big swings in trading liquidity for 2017.