U.S.-based investment banks should see higher profits than their European peers during 2017 as president-elect Donald Trump enacts his proposed tax cuts, JP Morgan said in a report on Monday.
"Global investment banks and wealth managers are well placed with a 21 percent increase in earnings per share (EPS) potential upside in our 'blue sky' scenario with US banks remaining much more attractive with higher valuation justified due to better capital positioning and limited litigation risk," JP Morgan said in its latest European Banks Outlook 2017.
Trump has indicated that corporate tax rates could be cut from 35 percent to 15 percent and his Treasury Secretary nominee, Steven Mnuchin, has suggested tax reforms remain a top priority, the bank said. Although some European banks with operations in the U.S. should also benefit.
"A 20 percent lower tax rate would offer undiscounted 19 percent EPS upside to U.S. and 10 percent to Euro investment banks and asset managers," JP Morgan added.
Apart from fragile capital positions and weak economic growth, European banks will have to deal with crucial elections in core member states: Germany, France, the Netherlands, and potentially in Italy.
"While the Italian referendum is out of the way, political event risk will remain a theme in 2017," JP Morgan said.
"The process of negotiating the UK's terms of leaving the EU, following the planned triggering of Article 50 before the end of March, poses a further risk," the bank added.
An associated risk is the uncertainty regarding the EU passporting rules, which allow U.K.-based financial services firm to sell their products to investors in the European Economic Area without approval from each EU country.