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In This List

European i-banks: Struggles set to continue in 2020

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European i-banks: Struggles set to continue in 2020

European investment banks' uphill struggle for profitability is set to continue in 2020 with most major sector players still bogged down by restructuring, primarily in their securities trading arms.

Over the past two years, European investment banks have been retreating from global trading as unstable markets and increased investor cautiousness weighed on revenues and hurt their bottom lines. For many, there has been gradual disinvestment from corporate and investment banking businesses, as they aim at higher profits and lower risk-weighted assets, Pierre Gautier, senior director at S&P Global Ratings' EMEA financial institutions group, said at the rating agency's London conference in November.

While some have seen a boost in trading revenues in recent quarters amid continuing monetary policy easing and some encouraging signs on global trade and Brexit later in December, the market outlook for 2020 is rather gloomy.

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'State of repair'

Low interest rates, economic slowdown, continued regulatory challenges, and continued uncertainty ahead of the U.S. presidential election are likely to keep a lid on investor activity at least until late 2020. Furthermore, unlike their U.S. peers, European investment banks are still "in a state of repair" 11 years after the crisis, analysts at investment bank Berenberg said in a note Nov. 29.

Many effects that plagued European players in 2019 will carry on in 2020, most notably low rates and structural challenges, the analysts said. The banks may also face material cost inflation from investments in compliance and risk controls.

Almost all major European banks, amid calls from shareholders to boost profits, have restructured, are still revamping or planning to revamp their investment bank units.

Deutsche Bank AG, once Europe's leading investment bank, has been under particular pressure. At the latest annual general meeting a shareholder noted that the bank's shares are now cheaper than a pack of cigarettes.

To appease investors and regulators, the group announced the closure of its equities trading arm in July and vowed to focus only on businesses and markets where it is one of the top five players. It also is shifting its business mix toward global transaction banking, asset management and serving wealthy private clients. To achieve that, it plans to cut 18,000 jobs and some €4 billion in costs by 2022.

Since 2014 when it was the third global investment bank by total trading revenues, Deutsche Bank has dropped to sixth in the 2018 global league table compiled by research firm Coalition.

Other revamp plans

French banks BNP Paribas SA and Société Générale SA are also reshuffling their CIB units.

Aiming at €500 million cost cuts by the end of 2020, SocGen has announced 1,600 job cuts. BNP Paribas wants to achieve €600 million in cost savings by the end of next year. The latter is also acquiring Deutsche Bank's prime finance and electronic equities portfolio.

U.K.-based HSBC Holdings PLC also plans a restructuring at its global banking and markets division from early 2020 as the business was not producing acceptable returns, interim CEO Noel Quinn said Dec. 2.

Switzerland-based UBS Group AG, which downsized its investment bank years ago and focused it on serving the group's main wealth management division, has been boasting about the success of this business model. Nevertheless, bowing to slumping market revenues in recent months, it has decided to revamp the CIB unit again.

Responding to the latest sector trends, UBS will take "a number of actions to evolve our business model," which will position it better to serve clients, leverage investments UBS has done and capture growth opportunities "in areas where we are strongest and returns are the most attractive," CEO Sergio Ermotti said in a third-quarter earnings presentation Oct. 22.

Credit Suisse, Barclays

With most major peers in restructuring, Credit Suisse Group AG and Barclays PLC look in a better position to take advantage of growth opportunities in 2020.

Having completed a three-year franchise revamp in 2018, Credit Suisse saw a 34.09% year-over-year jump in trading revenues in the third quarter of 2019. CEO Tidjane Thiam expressed confidence in the strength of the franchise at the group's investor day Dec. 11 but announced a reduced return on equity target for the next year.

Having resisted a shareholder push to downsize its investment bank earlier this year, U.K.-based Barclays enjoyed a strong third quarter as well, booking a 13.03% year-over-year surge in trading revenues for the period. After Deutsche's withdrawal from equities, Barclays is set to become the most influential player in European investment banking. The bank's "decent presence in the U.S." is important for the strength of its trading arm, according to David Covey, head of financial credit research at investment firm M&G.

Despite the better prospects for the 2020 business of some European investment banks, the gap between them and U.S. competitors such as JPMorgan Chase & Co. will likely widen.

"The dominance of U.S. investment banks has only become more entrenched [in 2019]," Covey said in a panel discussion at the S&P Global Ratings conference in November.

European banks "have ended up retreating into niches where they feel they can compete as opposed to providing the whole big picture as JPMorgan does," Covey said. This does not bode well for European players in the near future, he said.

S&P Global Ratings and S&P Global Market Intelligence are both divisions of S&P Global.