Europe’s investment banks dramatically underperformed their US rivals in the second quarter, continuing a post-crisis trend in which the Americans have strengthened their dominance across the globe. The large European banks say they can mount a fightback – at least in some areas – and that market conditions will not always favour the US as they did in the three months to June.
However, analysts, investors and academics are sceptical. They say the Europeans will concede even more ground over the coming quarters, a view that is shared by the US banks.
The latest figures make for grim reading for Europe. The region’s big four – Barclays, Credit Suisse, Deutsche Bank and UBS – recorded 17.5 per cent lower revenues from investment banking and trading than in the period a year earlier.
In contrast the big five in the US – Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and Citigroup – increased revenues by 3.4 per cent despite high volatility, geopolitical unrest, slow economic growth and a litany of other headwinds to which bank bosses referred on earnings calls.
“I don’t think the market share shifts are done yet, and the reason is really the capital situation,” says Andreas Nigg, head of equity and commodity strategy at Vontobel Asset Management in Zurich.
“It’s two different worlds. [US banks] are just much better capitalised. European banks are going to have to make some tough decisions.”
Capital decisions that European banks have made – slashing tens of billions from their investment banks’ balance sheets to boost capital ratios – are undoubtedly to blame for some of the contraction.
Bank bosses often play down the profit impacts of the resource cuts, however, by saying they are “optimising” their businesses.
One of the Europeans’ worst relative areas was in advisory, the capital-light business of helping clients do merger and acquisition deals and other corporate projects. Advisory revenues across Credit Suisse, Deutsche and UBS fell 22 per cent in the quarter. Across the five US banks these rose almost 7 per cent. (Barclays does not disclose its advisory fees).
Any “sustained” fall in advisory would be “worrying” for the European sector, says Guy Moszkowski, a New York-based banks analyst at Autonomous. “The intent is to try and keep those businesses.”
The most dramatic fall – almost 48 per cent – was at Deutsche. Alasdair Warren, head of the group’s Emea corporate and investment bank, says the second-quarter position is “absolutely not” its permanent state.
It was “inevitable” that the bank had been “impacted” by both the market environment and internal changes, he adds. “With focus and intensity we’ll get our corporate finance franchise back to the place where it was.”
Deutsche dropped out of the top 10 of M&A fee earners in 2016. The German bank was the sixth-biggest M&A fee earner in 2013, Thomson Reuters data show.
Changes include the departure of the bank’s co-chief executive, Anshu Jain – one of the industry’s top rainmakers – a new strategic plan and the appointment of a new crop of managers including Mr Warren, who left Goldman to join the German lender in November.
Rival bankers and analysts have doubts about Deutsche’s capacity to rebound. Christian Meissner, who heads BofA’s corporate and investment bank, says institutions can grow quickly in activities such as underwriting bridge loans or block trades.
“On the advisory side, it’s completely different,” he says. “It takes years to wind down a business and it ultimately takes years to restock one. It’s all about relationships.”
European banks also took body blows in the capital-intensive sales and trading divisions, where revenues across the nine banks are 10 times those of advisory.
In fixed income, currency and commodities (FICC) trading, European lenders recorded a 14 per cent fall in revenues, against a 21 per cent jump for their US counterparts. In equities trading, the Europeans were down 28 per cent while the Americans were down 5 per cent.
Brad Hintz of the Stern business school at New York university says the UK’s June 23 referendum on EU membership had a “significant” impact on FICC results. US banks may have profited from taking strategic positions on the vote’s outcome, he says, because the Volcker rule, which prohibits them from trading on their own behalf, does not apply to government bond trading.
“For a UK or a European bank, profiting from open positions in German Bunds or UK gilts would have political implications given the sensitivity of the vote to their home countries – and their regulators,” he says.
The US groups’ relative strength in equities is partly because US equity markets were stronger than European ones over the quarter, adds Prof Hintz.
Robert Karofsky, global head of equities at UBS, expects the US market to be the more attractive in the medium term. And while European banks continue to invest in the US, he says, it takes time.
“You don’t all of a sudden make your US business a much larger contributor to your overall return,” he says. “An overall environment where everyone is cutting costs ... will make that significantly more difficult to achieve.”
European banks’ higher exposure to Asia has affected their equities performance in recent quarters, says Mr Karofsky, but it does not make sense to pull back resources. “People believe that China is going to come back ... in a big way,” he says.
The one area where European banks outperformed was in capital markets. In equity capital markets (ECM), US revenues fell 45 per cent against a 41 per cent decline for the Europeans. In debt capital markets the US was down 1.5 per cent and Europe was up 11 per cent.
“ECM was definitely Europe-heavy from a volume perspective given that the US IPO market in particular has been incredibly slow,” says Mr Meissner.
Some of the European operations were “pretty aggressive” on leveraged finance, boosting the region’s figures, he adds.
“The bigger theme – how the US market is just more attractive at the moment given volumes, fees, market structure – hasn’t changed and, if anything, Brexit will accelerate that given uncertainty in Europe.”