European investment banks have abandoned the goal of global dominance, given their chronic lack of scale compared with major Wall Street institutions, but leadership in specific segments is still possible, UniCredit SpA CEO Andrea Orcel said Sept. 7.
Big U.S. investment banks overtook their European peers after the 2008 global financial crisis and have dominated the global market for nearly a decade now, gaining more ground in Europe too.
A global leadership in "financial supermarket investment banking," aiming for the top in all segments, is no longer possible for European players, who gave up on the idea years ago, Orcel said at the Handelsblatt Banking Summit 2022.
"We were behind [after] the financial crisis. We took a view that that was not a business we wanted to lead globally," said Orcel, who headed the investment bank business of Switzerland's UBS Group AG between 2014 and 2018.
US dominance
JPMorgan Chase & Co., The Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley and Bank of America Corp. held the top five spots in global investment banking revenues in the first half of 2022, according to Refinitiv data.
Business in Europe, the Middle East and Africa was also dominated by U.S. banks, with JP Morgan, Goldman Sachs and Citigroup the top three by revenues in the region, the data shows. France's BNP Paribas SA was the only European bank in the EMEA top five, taking fourth spot from Morgan Stanley, which dropped to fifth place in the first half.
Nevertheless, leadership in specific business segments and in Europe is not out of reach, Orcel said. Europe's market and regulatory fragmentation makes it a difficult and unattractive place in which to compete. Wall Street banks are "naturally focused" on the U.S. and Asian markets, while Europe has become "a difficult ground and unprofitable brand," Orcel said.
European banks also have an advantage in their home market because of close ties to small and medium-sized enterprises, he noted. SMEs in Europe are very difficult, if not impossible, to service for "anybody who is not local," Orcel said.
"One of the drivers of our bounce-back in revenues is fundamentally providing SMEs with hedges on rates, [foreign exchange] and commodities," he said.
SMEs account for 99% of all businesses in the EU and half of Europe's gross domestic product growth, according to European Commission data. In the U.K., 99.9% of the private sector was made up of SMEs in 2021, according to government data.
European banks have achieved strong revenue growth, especially in fixed-income, currencies and commodities, or FICC, trading in the first and second quarter of 2022.
Size matters
European banks have a good chance to lead in Europe if they focus on quality and target areas that are important for clients, but size also matters, according to Orcel. European banks are in "a completely different galaxy" in terms of scale compared with U.S. banks — a situation that can only be fixed by further cross-border consolidation in Europe.
Speaking earlier at the same conference, Deutsche Bank AG CEO Christian Sewing called for greater market integration to facilitate the creation of larger European banks that can take on foreign competitors, warning against allowing foreign banks to dominate European financial services.
Cross-border consolidation is not likely in the short- to midterm, as it requires not only a consistent regulatory and legal environment but also stable markets and a robust macro environment, according to Orcel. "At the moment everybody is preparing for shocks, not to do deals," he said.
