One of the most brutal trading quarters in memory has sparked another round of soul-searching at Europe’s few remaining investment banks, with some concluding the only option is to wield the axe again.
The seven largest traders in the region reported sharp declines in markets revenues in the final period of 2018, falling an average 19 per cent, three times more than the aggregate 6 per cent drop at US rivals, according to data from Citigroup. The results were also marred by eye-watering one-off losses from deals and trades gone bad.
While Barclays again stood out from the crowd by reporting the least-bad results on Thursday — giving chief executive Jes Staley a vital boost in his battle with an activist investor — the German and French national champions were particularly badly hit, forcing new rounds of cost and job cuts.
Executives blamed a variety of reasons, particularly “extreme” decade-low levels of activity as clients pulled their money to the sidelines while markets were roiled by President Donald Trump’s trade wars and government shutdown, widespread economic growth concerns and Brexit. But the performance underlined their dwindling ability to compete with a resurgent Wall Street.
“The original sin for European banks is that their home market is small and fragmented compared to the US,” said Ronit Ghose, an analyst at Citi. They have “failed to consistently compete in US capital markets and most shareholders are no longer willing to support strategies that prioritise growth”.
Just a year ago, both were talking about becoming “top players” in global markets and taking market share back from the Americans.
The scale of the problems at BNP’s global markets division shocked the market. It posted a €225m loss in the quarter after revenue fell 40 per cent. The headline was a 70 per cent plunge in equity trading, a traditional strength of the bank, and it made an $80m loss on a single derivative trade linked to the S&P 500 index. It is also shutting its shortlived proprietary trading division.
“It’s not a question of waiting on the cycle in Europe, it’s more about the structural changes in the business model,” SocGen chief executive Frédéric Oudéa said after the results.
Germany’s Deutsche Bank also had another bleak quarter. Bond trading revenue slid 23 per cent, which combined with a 47 per cent decline in debt origination resulted in a €303m pre-tax loss for the investment bank. Several of its biggest shareholders subsequently called for deeper cuts to its perennially lossmaking US unit, the Financial Times reported last week.
A top Swiss bank executive commented that: “European banks long-ago lost their foothold in the US, which has always been the core investment banking market, and without that scale business they will always struggle to be profitable.”
Barclays, the last bank holding the line in investment banking, fared better. Revenues at its fixed-income trading operation fell 6 per cent compared with double-digit declines at European and US rivals. Its equities trading unit posted a 3.4 per cent increase, the only one in the region to record a positive result.
Jefferies banks analyst Joseph Dickerson said Barclays appeared to be managing risk more prudently than in the past, avoiding some of the “blow ups” that hurt its rivals.
However, Barclays’ equities performance paled when compared with double-digit increases at Citigroup, JPMorgan, Goldman Sachs and Bank of America. Investors were not impressed. The shares were flat on the day and it still trades at 60 per cent of the book value of its assets.
Still, the chief executive said the quarter was more evidence his turnround was working, helping him fend off activist Edward Bramson, who is trying to muscle his way on to the board and force the group to scale back its securities unit.
“If you’re a trader at BlackRock and you want to do a three-year interest rate swap, you’re going to write it with someone you’re pretty sure is going to be here three years from now,” Mr Staley said in an interview. “Our commitment to investment banking, perhaps the strongest of any European bank, is beginning to resonate.”
“The capital market is very thin in Europe . . . [but] in the US it’s grown,” he added. “We happen to have one of the largest US investment banks. And that is a competitive advantage we want to preserve.”
Switzerland’s UBS and Credit Suisse suffered the worst drops in investment banking revenue — 12 per cent and 21 per cent respectively — but both have drastically shrunk their trading divisions in favour of wealth management, insulating earnings.
Credit Suisse lost $60m after it hung on too long to shares it had underwritten for Canada Goose, which plunged after the down-jacket maker got caught up in a trade dispute with China. Separately, its Asian fixed-income revenues fell 91 per cent.
“We are not making excuses here, it was a tough quarter . . . not exactly a fun moment,” Credit Suisse chief executive Tidjane Thiam said. However, “the primary story about our trading business is to reduce the potential losses in bad markets.”
“Nobody any more debates that the sales and trading revenue pool, globally, is in structural decline,” he added. “If you try to grow in this shrinking industry, your total revenue will go down.”
After another humbling quarter, European banks appear to be in another period of retrenchment, said Nick Watts, an analyst at Redburn who used to work for Barclays.
“However, they have a tendency to dip their toes back in the water as soon as market conditions look better and therein lies the problem: their inconsistent strategy around investment banking.”