Europe’s Investment Banks Suffer American Envy

Across the board, most European banks’ revenues are falling further behind

By Paul J. Davies

Credit Suisse stood out as having a particularly rough second quarter, mainly due to a much worse performance in both equity and bond trading in Asia. Photo: Michele Limina/Bloomberg News



Life isn’t getting any easier for Europe’s investment banks.

A string of results on Friday showed they are falling further behind U.S. rivals in the key business of trading bonds and currencies, although some are doing better in equities. Low volatility at home and a lack of scale in the more active and profitable U.S. market are taking their toll.

In investment banking, advising on deals and capital raising, Europeans are performing worse, too, with only UBS getting close to the revenue gains reported by the U.S. banks.

The trouble for the Europeans is that the more money U.S. banks make in their domestic market, the more firepower they will have to deploy on winning business elsewhere. As banks like Morgan Stanley and Citigroup return to strength, the White House’s deregulatory agenda for banks might give this extra impetus.

Credit Suisse stood out as having a particularly rough second quarter, mainly due to a much worse performance in both equity and bond trading in Asia, a market on which it is pinning its turnaround story.

Low volatility in currencies and weak activity among clients in interest-rate related trading hurt all banks. Only Deutsche Bank , which reported Thursday, did marginally better than the U.S. average, although the German bank fell down on its equities business, which saw the biggest revenue fall among its peers.

One bright spot for several banks was the business of funding equities trades for hedge funds, which makes Deutsche’s major loss of ground there look doubly painful. BNP Paribas appeared to benefit most from Deutsche’s woes with its equities revenue up 24% from the second quarter of 2016 in dollar terms, although it said strong equity derivatives results were also a big part of that.

BNP’s revenue gains were far ahead of the pack. Barclays and UBS both managed to do a little better than the U.S. average of a 1% increase. Barclays’ equity revenue was up 4% in dollar terms and UBS’s up 3%.

There is a further threat to European banks in the form of planned changes to global capital rules that could increase equity requirements. This has become somewhat less of a concern since rule makers announced banks are likely to have up to 10 years to meet updated rules.

Meanwhile, European banks’ best hope is that U.S. regulators don’t loosen the leash on American banks too much. Otherwise, the Europeans will have little chance of recovering their lost ground.

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