After a dismal fourth quarter, it seems that Europe’s investment banks have got some of their swagger back.
Switzerland’s UBS grew investment bank profits by more than 50 per cent in the first quarter, even though it is hard to imagine a recovery less well-suited to the Swiss bank which is short on the US exposure and the markets businesses that have driven the strong results of peers.
Credit Suisse reported a 133 per cent rise in credit revenues in the first quarter, on a US dollar basis, and said it had led 19 IPOs “more, we believe, than any of our peers”. Even, Deutsche Bank, which had a tough quarter, won praise from Atlantic Equities analyst Christopher Wheeler for remaining “firmly entrenched behind the big three US players” in fixed income.
Bright spots were harder to find at Barclays, as the UK banking group’s shares fell sharply because of weakness in its investment bank and the big US banks beat their European peers on aggregate, despite a big earnings miss at Goldman Sachs. Still, the story was a lot more nuanced than the ‘US banks win, European banks lose’ narrative which has prevailed for much of the last five years.
“Rather than US v European, it’s starting to diverge,” said the head of one investment bank. “I think we’re at an interesting point where the Europeans dug in,” said Mr Wheeler. “They recovered from a dreadful fourth quarter, particularly in FICC [fixed income, currencies and commodities] and equities.
“One has to believe given the data that is coming out of Europe that there could well be a pick-up in activity, so the question is do the Europeans now take share because they are more successful in their home markets?”
In US dollar terms, the 33 per cent first-quarter growth in investment banking revenues at Deutsche, Credit Suisse, Barclays and UBS exactly matched the 33 per cent increase across Wall Street groups JPMorgan, Morgan Stanley, Bank of America, Citigroup and Goldman, according to Mr Wheeler’s figures.
Investment banking revenues – which cover everything from advising clients on M&A to helping them raise cash in debt and equity markets – can be heavily swayed by a few big deals, so analysts cautioned against reading too much into the strength of European banks based on a single quarter.
The Europeans fared less well in trading overall. Relative to a year ago, their first quarter 2017 revenues for fixed income were up just 7 per cent in US dollar terms, while the US lenders were up 23 per cent. In equities, the European banks’ revenues fell 12 per cent year on year, while the Americans were flat.
“It’s hard to compete in FICC when you are still solving for capital and balance sheet – read Barclays, Deutsche Bank and Credit Suisse,” said Chirantan Barua, banks analyst at Bernstein, adding that he was surprised by how much the US outperformed in equities. Still, there were some European bright spots, such as the 133 per cent jump in Credit Suisse’s credit and securitised products revenues.
Sergio Ermotti, UBS chief executive, stressed that his bank was deliberately cautious in some areas. “We want to be part of the fixed income party, but we do not want the hangover the next morning,” he told CNBC. UBS dramatically scaled back its fixed income business as part of a 2012 restructuring and is sticking to its guns even as fixed income markets recover.
Jes Staley, Barclays’ chief executive, defended the performance of Barclays’ investment bank, where FICC revenues were down 1 per cent and equities revenues fell 10 per cent year on year, saying it had suffered from “a tough comparison given the strength of the first quarter last year”. Barclays enjoyed a 46 per cent rise in credit revenues in the first quarter of 2016, far outpacing European rivals.
“To make a judgment on the investment bank based on one quarter is just not right,” added Mr Staley, a lifetime investment banker who had a 20-year career at JPMorgan before joining Barclays a year and a half ago.
Mr Staley said weak revenues from US rates trading had been offset by the “best debt capital market share” in its history. Revenues from banking fees, which includes debt capital markets, were up 51 per cent year on year.
However, most analysts expressed concern that Barclays was falling behind rivals in fixed income trading, despite Mr Staley’s strategy of doubling down on its investment banking operations in the UK and US.
Andrew Coombs, analyst at Citigroup, raised concerns about “weak US rates and US equity derivative revenues respectively, despite resilient volumes, which would seem to suggest the bank was positioned poorly during the quarter”.
Mr Coombs said: “The hope is that growth in Barclays International business will offset the pressure in the UK.” But he added “there was limited evidence of this” in the first quarter, as Barclays’ underperformed “despite a very favourable foreign exchange tailwind”.
The European banks are bullish about their prospects, but there is no understating the size of the mountain they have to climb if they are ever to really challenge the US banks for global relevance. The four European banks had collective investment bank revenue of $10.674bn, just over a third of the $29.662bn revenues of their five US rivals across fixed income, equities and investment banking.