Europe’s investment banks braced for more pain
Analysts forecast investment banking revenues will fall as much as a quarter
European banks are set to report a third consecutive quarter of grim investment banking revenues, which analysts predict will drop as much as a quarter, intensifying calls for another round of job cuts and retrenchment.
After US banks reported a tepid start to the year on Wall Street, analysts have downgraded their assumptions for their subscale European cousins, which for years have been steadily losing market share.
Overall quarterly revenues will drop 24 per cent at European investment banks versus an 11 per cent fall reported by their big Wall Street rivals, analysts at Morgan Stanley forecast. Citigroup and JPMorgan expect the decline to be 22 per cent and 20 per cent respectively due to European banks’ greater reliance than their US peers on equities trading, the hardest hit area in the first three months of the year.
“We are not talking about a couple of percentage points off earnings here, we are talking about business models under threat,” said Magdalena Stoklosa at Morgan Stanley. “Banks will be forced to forgo optionality they don’t need and really think about the flow trading businesses, which without scale are difficult to maintain and [are] lossmaking on their own.”
The travails of the industry across the EU are well-documented — collectively their stocks fell 25 per cent last year, wiping out $380bn in shareholder value, according to analysts at Autonomous Research. But recently their problems have intensified.
Sergio Ermotti, chief executive of UBS, warned last month that his investment bank had one of its worst starts to a year in recent history with revenues dropping about a third. He has put the Swiss bank, which reports quarterly results on Thursday, in “fuel saving mode”, delaying hiring and investment, in an attempt to save $300m in costs.
Deutsche Bank is on track for its eighth consecutive quarter of declining investment bank revenue. Analysts at Barclays estimate trading revenues will fall 30 per cent year on year at Deutsche, which is in merger talks with its domestic rival Commerzbank.
“Deutsche has to do a deeper restructuring, a downsizing of the investment bank as part of this, reduce its size by 20 to 30 per cent mostly from the US,” said a major bondholder of the German bank. “Regardless of what happens with Commerzbank, they need to do it, but it’s easier for them to sell it to the market as part of the merger.”
France’s BNP Paribas and Société Générale have already started retreating after heavy losses in the fourth quarter, with the latter announcing earlier this month 1,200 investment banking job cuts as part of a plan to eliminate €500m in costs.
BNP is in the middle of a root and branch review of its trading operations as it attempts to strip out €350m of expenses.
Barclays will also be under the microscope. Its chief executive, Jes Staley, recently parted ways with Tim Throsby, head of investment banking, after the two men clashed over whether the bank’s “sacrosanct” return targets were achievable.
Mr Staley has taken personal control of the unit, which is under attack from activist investor Edward Bramson, who wants to see it cut back to the bone. Another revamp could be required after analysts slashed their consensus estimate for 2019 pre-tax profit by a tenth for the unit housing Barclays’ investment bank.
“We do not see the current cost measures announced so far by European investment banks as adequate to generate sustainable returns of 10 per cent,” said Kian Abouhossein, an analyst at JPMorgan. “This could trigger new restructuring measures, especially in the case of Deutsche Bank unable to reach its 4 per cent return on tangible equity target.”
Unlike in the US, European banks have less able to rely on the “boring” retail parts of their businesses to prop up the flagging investment banking side due to negative eurozone interest rates and intense competition for customers on the overbanked continent.
“European banks’ investors have limited appetite for expansionary strategies in investment banking,” said Ronit Ghose, head of banks research at Citi. “Their future is retail and commercial banking run efficiently, with few people and smarter technology, plus investment banking in their home geographies.”