latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/outgunned-euro-i-banks-should-concede-global-dominance-to-us-peers-analysts-say-52328356 content esgSubNav
Log in to other products


Looking for more?

Contact Us
In This List

Outgunned euro i-banks should concede global dominance to US peers, analysts say


Banking Essentials Newsletter - April Edition


Tracking Credit Risk of a Major U.S. Retailer


Banking Essentials Newsletter: March Edition - Part 2


A Bank Takes Its Project Finance Assessments to a New Level

Outgunned euro i-banks should concede global dominance to US peers, analysts say

After nearly a decade of fruitless attempts to catch up to U.S. peers, European investment banks should give up the race for global dominance and focus on lucrative niches instead, analysts say.

Maintaining a global universally servicing franchise is more challenging today than it was before the global financial crisis because higher regulatory costs and the rapid rise of new technologies put greater pressure on investment banks to be flexible and innovate.

But unlike their counterparts across the Atlantic, European banks are still bogged down by low profitability which limits their ability to invest in future growth. The lack of available funding, especially for investments in technology — key to reducing costs in trading — has been a barrier.

Growing performance gap

Since the financial crisis, the balance of power has shifted toward U.S.-based i-banks, which have gained market share. In 2017, U.S. investment banks accounted for 66% of operating revenues in the sector compared to 50% in 2007, according to Eurogroup Consulting.

U.S. groups have consistently generated more revenues from trading in equities and fixed income, currencies, and commodities than European peers and have been firmly in the lead in global investment banking league tables in recent years. And figures compiled by S&P Global Market Intelligence indicate that the gap continued to widen between 2017 and 2018.

SNL Image

Furthermore, a second-quarter ranking of the 10 largest global banks by fee income in Europe released by research firm Refinitiv on July 2 also shows that American heavyweights outpace their competitors across the Atlantic even on their own turf.

With a total of $574.1 million, Goldman Sachs Group Inc. earned the most investment banking fees in Europe so far during 2019, for a 5.4% share of the total fee pool, with JPMorgan Chase & Co. in second place and Citigroup Inc. third, Refinitiv said. Citi replaced U.K.-based Barclays PLC, while Bank of America Corp. pushed out HSBC Holdings PLC, which fell from fifth to ninth place year over year.

Conceding global dominance

European banks can survive and bridge the profitability gap by embracing digitization and capturing available "axis" opportunities, Eurogroup Consulting said in a report.

"This means that they need to make deliberate choices on where to play and how to win, in areas that they can build a distinct competitive advantage," it said.

SNL Image

It is more widely acknowledged now that the winners of the postcrisis race for global dominance have been large U.S. investment banks, David Myers, partner and head of the U.K. capital markets group at auditing firm Deloitte, said in an interview.

It is they who can truly act as international multi-asset and multi-client servicing organizations; European banks should instead focus on niches, which could be dictated by a region, an asset class, or a client segment where they have real strength and real leverage, he said.

"I would argue that few would succeed at being able to build a franchise up to compete with the U.S. firms in the near term," Myers said.

Tech investments

U.S. banks, which have been profitable for longer, invested in new technologies earlier than European peers and are already seeing the fruits, consultancy Accenture noted in an investment banking report.

Many market observers see technology transformation as essential to improving efficiency and reducing costs in trading. Having a unified platform makes a big difference as it allows a firm to price any trade, regardless of the asset class, in one place rather than running two or three different systems, Markus Boehme, a managing director at Accenture said in an interview.

But switching to a comprehensive cross-asset trading platform typically comes with a price tag of $2 billion to $3 billion, he said.

This is nearly as much as Switzerland's Credit Suisse Group AG and Germany's Deutsche Bank AG have been able to spare for their entire IT budget.

In 2018, Deutsche's total IT costs amounted to €3.82 billion and Credit Suisse spent €2.8 billion on technology, of which €1.4 billion went to "change-the-bank" tech aimed at improving functionality, capability and/or quality.

Meanwhile, U.S.-based JPMorgan's total technology budget was $10.8 billion in 2018, almost half of which was spent on big data, new technology, and platform modernization, according to research by UBS' equity analyst team.

JPMorgan, which is the biggest IT spender in the U.S., plans to hike its technology budget to $11.4 billion in 2019, according to the UBS data. Bank of America and Wells Fargo, which rank second and third respectively in UBS' sample, had total technology budgets of $10 billion and $9 billion in 2018. Wells Fargo, which invested $800 million just in cybersecurity, plans to hike its technology budget by 10% in 2019.

Stuck in restructuring

Running low on profit, many top European banks cannot afford to boost their IT expenditure to replace legacy platforms or invest in new technologies.

They need to balance that spending with capital accrual and dividend payments, and their priority remains on restructuring, so the performance and development gap between them and U.S. banks is likely to grow.

Some European banks have already moved away from the pure investment banking play.

Credit Suisse and fellow Swiss bank UBS Group AG have focused their franchises on servicing private and high-net-worth clients, leaving their investment banking divisions to play a supportive role for their global wealth management businesses.

The market turmoil in 2018 pushed others to also rethink their investment bank strategy, as a further depletion of trading revenues weighed on their bottom lines.

Most notably, Deutsche Bank, which was one of the most serious European competitors of U.S. banks before the crisis, announced cuts in its trading operations with a refocus on European business, moving away from the global investment banking strategy it had pursued for nearly three decades before.

Credit Suisse, BNP Paribas and Société Générale SA also revamped their investment banking units in a move to reduce their dependence on market-sensitive businesses and turn to more stable sources of revenue such as transaction banking.

SNL Image

SNL Image

Click here to view the above data table in excel sheet.

Enjoyed this analysis? Click here to set up real-time alerts for data-driven articles on any region of interest.