This report does not constitute a rating action.
European investment banks have consolidated their collective market position. The sector lost market share in the 2010s as some firms narrowed their business models to support stronger returns on capital. They have emerged as more focused players with steadier market shares in the past three years and are poised to take advantage of a potential sectorwide revenue pickup in 2025. Nevertheless, European investment banks will need to compete hard to keep pace with U.S. rivals that dominate the industry.
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What's Happening
Europe's investment banks have refocused their businesses on areas of competitive advantage. Confronted by tougher regulation and strong competition, firms have exited underperforming businesses and geographies and have concentrated on segments where they have critical mass. Some have materially restructured, including Deutsche Bank, which exited equities entirely, and UBS, which shuttered large parts of the former Credit Suisse business. Others have taken a more stable path. BNP Paribas, for instance, has supplemented organic growth with bolt-on acquisitions such as Deutsche Bank's prime services unit.
Restructuring has now largely ended. European firms have established more stable franchises, with very selective investments in people and technology to support growth in targeted capital-efficient segments. Recent hiring includes banks, such as Santander, that are aiming to bolster their capital markets presence. That said, HSBC's recent decision to exit certain advisory and equity underwriting activities illustrates that poorly performing segments remain at risk of further streamlining.
Why It Matters
Stronger investment bank profitability supports groupwide earnings. Higher interest rates are the main driver of European banks' improved performance, and increased returns from capital markets activities are a supporting factor. Banks generally have little appetite to allocate more capital to their investment bank divisions because these businesses are typically less profitable through the cycle than retail and commercial banking activities. Instead, they aim to improve the productivity of their existing capital allocations by prioritizing higher returning products and clients.
Capital markets revenues are inherently cyclical. European banks' downsizing has helped to underpin their capital positions and risk profiles. That said, certain segments--fixed income and equities financing, for example--are more stable than intermediation, advisory, and underwriting. In our rating analysis, we see capital markets activity as a potential diversifying factor for a bank's franchise provided it is managed in a risk-controlled manner and balanced by relatively predictable earnings streams from other businesses.
What Comes Next
Revenue prospects look brighter but are sensitive to event risk. Like peers in other regions, European investment banks' revenues for the fourth quarter of 2024 reflected favorable market conditions across origination, advisory, and trading. At the turn of the year, global investment banks anticipated growing activity and deal pipelines in 2025, though trade tensions and geopolitical uncertainties could weaken sentiment.
Future regulatory capital requirements are unclear. If the U.S. significantly rolls back its Basel III Endgame, European regulators are likely to dilute their equivalent rules to support a level playing field. The final Basel III package includes the fundamental review of the trading book, which raises capital charges on market risk positions.
The market landscape is evolving. Key trends include:
- The growing importance of private capital as a customer, partner, and competitor to investment banks.
- An increasing focus on capital efficient originate-to-distribute business models.
- The continuing electronification of trading markets, with implications for banks' margins, operating models, and technology investment needs.
- Slow progress on the EU's savings and investment union project that is intended to knit together the region's capital markets.
Related Research
- Capital Markets Revenue Could Improve In 2024 On Rebounding Investment Banking, Though High Rates May Still Hamper Results, April 24, 2024
- European Investment Banks Face A Continued Fight To Remain Competitive, Sept. 28, 2020
| Primary Credit Analyst: | Richard Barnes, London + 44 20 7176 7227; richard.barnes@spglobal.com |
| Secondary Contacts: | Nicolas Charnay, Paris +33623748591; nicolas.charnay@spglobal.com |
| Giles Edwards, London + 44 20 7176 7014; giles.edwards@spglobal.com |
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