China's banks are taking over the world, or at least pushing their U.S. counterparts out of the leadership role.
Bank earnings this week in the world's second largest economy paint a dour picture for American financial institutions, according to analyst Dick Bove at Rafferty Capital Markets.
"The Chinese government is now following a policy to allow its banks to expand faster. It has reduced their required reserve ratios," Rafferty's vice president of equity research said in a note to clients. "The United States continues to follow a policy to shrink the biggest banks in this country." (Tweet this)
The picture gets especially ugly when comparing the "Big Four" U.S. banks—JPMorgan Chase, Citigroup, Bank of America and Wells Fargo—to their Chinese counterparts, the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China.
In 2004, the U.S. side had assets doubling those of China and net income equal to 339 percent; now those respective numbers are 71.6 percent and 50.8 percent, according to Bove.
That precipitous slide comes as direct result of regulators trying to hamstring banks through excessive regulation, even though the four institutions in question have managed to gain a historically high share of the U.S. industry. In fact, the top five now control 45 percent of the entire industry's assets, according to SNL Financial (the list also includes U.S. Bancorp).
Even so, Bove said U.S. bank operations are being confined through tighter regulations, such as those from the Dodd-Frank provisions.
"The fact that U.S. banks are unable to lend as much as they did historically as a percent of capital is not good for the U.S. economy," he said. "Moreover, there are growing signs that the liquidity that characterized U.S. financial markets is being harmed by current policy."
Despite the strongest earnings of any sector in the —a 16.1 percent annualized gain in the first quarter for financials—banks stocks are struggling, collectively down about 1.8 percent. Bove said that's no coincidence. He also worries that the implementation of the Asian Infrastructure Investment Bank—essentially a development fund that will provide capital to developing Asian economies to which the U.S. does not belong—is another shot against U.S. international finance standing.
"U.S. government policy, aided by press support, is the biggest factor in weak bank stock valuations," he said. "It is also the biggest factor in shrinking the U.S. position in global financial markets relative to the Chinese."