The Strategist

Top losers of the investment services market

03/07/2017 - 13:22

Global market for investment banking services is shrinking. What’s worse, proportion of European banks there is getting smaller. Proceeds of the banks from provision of investment and trading services in 2016 has been falling for the fourth year in a row, independent research company Coalition said. On average, revenues have been falling by more than 3% per year since 2012.

Many of Europe's largest investment banks are doing even worse. They won a part of revenue back in the IV quarter, but the last three months of 2015 were simply monstrous. More importantly, European banks are still lagging behind their American competitors. This means they are likely to continue to lose market share. Partly this is caused by the fact that they are still trying to reduce their balance or increase capital. Sometimes they even use both at once, while their competitors in the US have done away with these changes a long time ago.

European investment banks, which once used to dominate the world scene, still cannot secure a profit. According to Goldman Sachs’ analysts, second-tier investment banks, such as BNP Paribas, HSBC and Société Générale, are demonstrating higher yields.

There are several reasons for this. And here's one of them: they have to pay less penalties for past sins. In terms of revenue, the picture looks even more complicated, but one thing is clear: almost all European investment banks find it difficult to attract customers, and at the same time they either save on capital expenditures or try to reduce risks.

One way to assess the situation is to look at amount of quarterly revenue that falls on every dollar, euro or Swiss franc invested in the risk-weighted assets of their investment and trading units. Larger investment banks - Barclays, Credit Suisse, Deutsche Bank and UBS - received less revenue per unit of risk by the end of 2016 than at the beginning of 2015.

Deutsche Bank is still the "top-performer" in negative dynamics. In the last quarter of last year, its revenue was almost 40% lower than in the first quarter of 2015. The bank is carrying out a large-scale restructuring and is simultaneously losing customers who are afraid of its instability. Credit Suisse and UBS have lost 24% and 31% of revenue, respectively. In early 2015, they experienced a period of rapid growth due to activity caused by unexpected decision of the Swiss National Bank to untie its currency from the dollar.

But even if we take the second quarter of 2015 as a starting point, it still turns out that the proceeds of both banks per risk unit decreased by more than 20%.

In fact, of all the seven banks, only HSBC achieved more success in the last quarter of 2016 than in early 2015. This suggests that the credit institution is winning market shares of its competitors. US banks are helped by the fact that the US capital markets are bigger, deeper and are recovering more rapidly, while growth in Europe remains slow, and the Asian economy is too dependent on a narrow and unstable stratum of rich people. It is very likely that Donald Trump will weaken regulation in this area, opening even more opportunities for growth to the US banks. If their European competitors keep watching every penny, they will surely continue to lose ground.