By Justin Baer And Max Colchester
In the trans-Atlantic rivalry for investment-banking supremacy,
the Americans are running up the score.
European bank executives over the past week have delivered a
series of dour proclamations about their need to shrink and further
dial back their global ambitions. Meanwhile U.S. banks are
preparing to pounce, with executives touting the gloom emanating
from their European counterparts as a big opportunity to press
their newfound advantage.
On Thursday, Deutsche Bank AG's new co-Chief Executive John
Cryan wrapped up the first half's earnings period for major
European banks by warning of more pain to come. "We must shrink our
balance sheet," he said, indicating plans for the German bank to
pull back from a number of countries and businesses.
Those remarks followed Barclays PLC Chairman John McFarlane, who
on Wednesday conceded that the big Wall Street firms are "an
enormous threat" to European investment banks. "They have the scale
that we no longer have to be global," he said.
The diverging paths are now clear, at least to investors. Over
the past five years, the shares of J.P. Morgan Chase & Co.,
Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and
Morgan Stanley have climbed, on average, by 45%. In the same
period, European banks Barclays, Credit Suisse Group AG, Deutsche
Bank, UBS Group AG and Royal Bank of Scotland PLC are down 17%.
By market capitalization, those U.S. banks have added a total of
$254.6 billion in that period, while the Europeans have gained $9.5
billion.
As recently as a few years ago, the big U.S. and European banks
were going toe to toe on Wall Street and in markets across the
globe. The Europeans poached star bankers and expanded operations
in Asia and the U.S., including building massive trading floors in
Stamford, Conn., that UBS and RBS conceived as a satellite to Wall
Street.
Those Stamford offices are now largely empty, part of a broad
global retreat by the Europeans, who have been pushed by regulators
and shareholders to change strategies and, in some cases, chief
executives. Meanwhile, their big U.S. counterparts have generally
found their footing after years of searching for answers to many of
the postcrisis existential questions the European banks are still
addressing.
The U.S. firms have spent the past several years shedding
unprofitable businesses and assets, while stockpiling enough
capital to return some to shareholders through stock buybacks and
dividend increases. When the Federal Reserve unveiled last week an
additional layer of capital requirements for the biggest lenders,
all but one of the U.S. firms were already above their new buffer.
They have also benefited from the relative strength of the U.S.
economy, the world's largest.
Europe's economy is at an earlier stage in its recovery. So are
the Continent's banks. Deep cutbacks loom at Deutsche Bank and
Credit Suisse, where new CEOs consider ways to streamline their
balance sheets to conform to new capital rules and investor
expectations. For others, like Barclays and UBS, restructurings are
under way. Some, like RBS, have thrown in the towel and are
shutting down large parts of their investment banks.
Some of Asia's largest banks have maintained a presence on Wall
Street, too, but their forays into investment banking and trading
to date generally haven't been as global or as aggressive as their
Western peers'.
Executives at Goldman, Morgan Stanley, Citigroup and Bank of
America have recently acknowledged the struggles facing their
competitors across the Atlantic--and the opportunities they
present.
James Gorman, Morgan Stanley's chairman and chief executive,
said last week that his firm is poised to gain a bigger slice of
the debt-trading pie. "There's clearly more turmoil in other parts
of the world than there is in the U.S.," Mr. Gorman said in a call
with analysts earlier this month. "And we think that there's a
potential for, over a period of time, share gain for our
business."
On a call with analysts earlier this month, Goldman finance
chief Harvey Schwartz said, "we're seeing potential big
restructuring [by banks] on the European side."
During the first half of 2015, Deutsche Bank, Credit Suisse,
Barclays and UBS each had a smaller slice of the investment-banking
revenue pie than they held during the same period three years ago,
according to Dealogic. By comparison, J.P. Morgan, Goldman, Bank of
America, Morgan Stanley and Citigroup each have a bigger share of
the market this year than in 2012.
Big European investment banks' revenue across Europe, the Middle
East and Africa fell 18% to $23.7 billion between 2012 and 2014,
compared with a drop of 2% to $26.2 billion, for the largest U.S.
banks, according to research firm Coalition.
Most European investment banks now make half the returns on
assets of their U.S. peers, according to Morgan Stanley. This has
squeezed return on equity, an important measure of profitability,
and prompted shareholders to pile pressure on chief executives to
improve performance. In the past few months, Barclays, Credit
Suisse and Deutsche Bank announced their CEOs' departures.
European lenders are also battling to keep their best-performing
bankers after the European Union imposed rules that cap bonuses for
top managers, giving U.S. banks, which don't face the same
restrictions, a potential advantage.
The high-risk, high-reward debt-trading floors may prove an even
tougher battleground for European banks. That is where all big
lenders have had to make difficult choices on their ambitions in
markets where the barriers of entry are higher and the
balance-sheet demands are greater.
"Part of the strategy shift is going to be a de-emphasis of the
trading businesses at some of the larger European players," said
Steven Chubak, an analyst with Nomura Holdings.
Thus far, though, 2015 has been a mixed bag in that area for
U.S. firms. In the first quarter--typically Wall Street's busiest
period--the five banks reported a median increase of 7% in
fixed-income, currencies and commodities revenue. For the second
quarter, the firms' FICC businesses posted a median decline of 9%,
according to a recent research report by Deutsche Bank
analysts.
The European investment banks broadly performed in line with
analyst expectations in the quarter ended June 30, aping U.S.
trends with a strong showing in equities helping to offset a
slowdown in fixed-income revenue. Still, executives at Barclays,
Deutsche and Credit Suisse signaled more restructuring in the near
future as they continue to bolster their capital reserves.
Asked this week whether U.S. investment banks were eating
European lenders' lunch, Barclays's Mr. McFarlane replied: "they
are doing a good job of it."
The U.S. banks, he said, "are the only ones that really claim to
be global and successful."
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