European Banks Snap Losing Streak on U.S. Election Relief, but Risks Remain

European banks have turned a corner in the week since the U.S. presidential election, with some of the continent's titans seeing their stock prices rise by around 15% on expectations of higher inflation and a less onerous regulatory environment.

The sector also received an added boost from a third-quarter earnings season that saw a robust performance from the region's biggest lenders.

Mike Harrison, an analyst at Barclays (BCS) , said last week; "Eighty six percent of the banks we look at have reported better-than-expected attributable profits -- mostly driven by revenues."

But recent speculation that the European Commission could soon impose fines on JPMorgan Chase (JPM) , HSBC (HSBC) and Credit Agricole (CRARY) over their role in rigging the London Interbank  Offered Rate, or LIBOR, and other benchmarks shows that litigation risk will remain alive and well regardless of what happens on Capitol Hill from January.

Switzerland's UBS (OUBSF) saw its stock jump 15.1% during the last week while Deutsche Bank (DB) is up 13.7% and Credit Suisse  (CS) is 11.9% higher.

U.K. banks Barclays  (BCS) and RBS (RBS) are up by nearly 10% each, while Lloyds (LYG) has lagged with a 6.8% gain. The Stoxx Europe 600 Banks ETF rose by 7.2% during the week also.

Reuters reported Tuesday that the Commission has decided to impose fines against the three banks but that it has been holding off on the announcement. The report also stated that an announcement could be delayed for a number of weeks further still, without specifying why.

The European Commission declined to comment when contacted by TheStreet. JPMorgan and Credit Agricole did not immediately respond to a request for comment. HSBC could not immediately be reached for a request for comment.

Credit Agricole stock was down 0.9% during the morning session over in Europe, at €10.79 ($11.65), while HSBC shares fell 1.1% to 630.1 pence.

The recent rally in stock prices marks a departure from the summer months when Europe's banks were dogged by concerns over regulatory capital, bad loans and political stability.

In the third quarter, nearly two-thirds of reporting companies beat expectations for regulatory capital accumulation, with common-equity-tier-1 ratios coming in ahead of forecasts. This is while 27% of companies announced capital buffers that were in-line with estimates and only 13% missed. 

But looking ahead, some of the biggest gainers of the 'Trump rally' could be among the most vulnerable to renewed weakness, with Credit Suisse and Deutsche Bank both having seen earnings forecasts trimmed for the full-year.

Deutsche Bank is also facing substantial regulatory action in the U.S. and saw its credit rating assigned a negative outlook by Fitch Ratings last week. 

Conversely, Harrison at Barclays said in his recent report that RBS and Lloyds have seen the greatest number of earnings upgrades for the full year - although these companies have lagged continental peers in the recent rally.

However, RBS sits in the same boat as Deutsche in that it too faces a plethora of litigation in the U.S. while Lloyds, as a domestic bank, is almost entirely at the mercy of U.K. economic performance in the post- Brexit world. 

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