All banks are feeling the pain, but European banks are feeling it more than most. My latest column for Financial News.
When the European and US Ryder Cup golf teams tee off against each other in a few months’ time at the Medinah Country Club in Illinois, the Americans will be hoping to overturn a strong run of form that has seen their rivals win four out of the past five contests. Would that the competition between investment banks were as tight.
With the investment banking industry skewered by the eurozone financial crisis, a global economic slowdown and a barrage of unhelpful regulatory reform, all banks are feeling the pain. But some are feeling it more than others – and most of those are on this side of the Atlantic.
My analysis of the underlying results of 16 investment banks – six from the US, nine Europeans and one from Japan* – shows that most European banks have significantly underperformed their US rivals over the past two years and, with a few exceptions, show little sign of improving anytime soon.
Let’s start with the first quarter of this year, a mixed bag in which revenues from capital markets (that is, investment banking and sales and trading) fell across the industry by 5% with pre-tax profits down a shade more at 8%. Banks and their shareholders may have drawn some comfort from the fact that revenues from fixed income, currencies and commodities – the traditional engine room for investment banks, actually rose by 1% on the same quarter in 2011.
Look a little closer, however, and European banks fared significantly worse: overall capital markets revenues fell by 10% compared with last year (they slipped just 1% at US investment banks), while pre-tax profits tumbled by 18% (compared with a small 3% rise across the pond). While US banks mustered a 5% increase in FICC revenues between them, the Europeans posted a collective fall of 4%.
In the rough
One quarter – particularly the seasonally strong first quarter – is hardly a long enough period from which to declare the death of the European investment banking industry. But if you run the same numbers comparing the performance of investment banks over the 12 months to the end of March this year with the same period a year earlier, the same gap between US and European banks emerges. And it’s getting worse.
In the 12 months running up to March 2011 (that is, the second quarter of 2010 through to the first quarter of 2011), US and European banks were level pegging. In fact, the collective capital markets revenues of the European banks in dollar terms of $108bn were slightly ahead of the US banks on $107bn. Let’s say that they halved that hole.
Fast-forward to the 12 months running up to the end of the first quarter this year, and a gap had opened up. While revenues at US investment banks were heading for a bogey by falling 11% to $95bn, the European team was doing twice as badly with a collective drop in revenues of 22% to $84bn, handing the Americans a big lead.
In fact, on every measure – investment banking, equities, FICC, costs, pre-tax profits and profitability – European banks have fared worse over the past year than their US counterparts. Take profits, which tumbled 60% at European banks, compared with 39% at their US challengers. In all, the US team posted a pre-tax margin of 23% compared with the European team’s 15%. A year ago, both of them carded 32%.