24th April 2024

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Business Industry and Financial

How UK and European investment banks are catching the US

  • Wall Street still dominates global investment bank revenues, but European banks have regained their positions from 2010
  • European and UK investment banks are showing particular growth in debt capital markets and M&A in the Emea region
  • European wholesale banks are in their best shape for 15 years, having benefited from lower deposit betas and more favourable regulatory treatment than US banks

Which investment banks usually make the top five list of any ranking? JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citi and Bank of America Securities — all US banks. The last time UK and continental European investment banks had that sort of clout was in the run up to 2008. 

But a lot has happened since the financial crisis, with banks across Europe, including the UK, having undergone profound restructuring. Some analysts believe that this has put them in a fundamentally stronger position to compete with their US peers compared to a decade ago. 

Maria Rivas, senior vice-president, global financial institutions at DBRS Morningstar, says: “The European and UK banking sector has been subject to a significant restructuring since the financial crisis, which resulted in some European banks either exiting some businesses or simply not operating to their full investment bank franchise potential. 

“This allowed US banks to gain investment banking market share and reinforce their position in Emea, particularly when interest rates were negative. European banks’ profitability was under pressure and they faced increased regulatory capital requirements.”  

Yet data from Dealogic suggests that the wheel of fortune may be starting to turn their way. 

Dealogic’s aggregate global investment bank revenue by region reveals some important trends. From 2010 to date, the US accounted for between 41 per cent and 53 per cent of investment bank revenue globally.

European investment banks commanded a quarter of global revenue in 2010, a share that dipped to around 21 per cent in 2019–2020. But from 2021, their share has been on a steady upward path, returning to just more than 24 per cent in 2023.

UK figures tell a similar story. In 2010, UK banks held nearly 6 per cent of total revenue, dipping closer to 5 per cent in the intervening years, but returning to just above 6 per cent in 2024 so far. 

Dealogic’s global investment banking revenue rankings for 2018–2023 reveal that UBS is the only European investment bank that made it into the top 10 for every year, bar 2023. 

For UK banks during the same period, Barclays consistently ranks within the top 10, around seventh place, while HSBC reliably maintains a position in the top 20.

“It still remains challenging to compete with the top five US banks that have a much larger scale globally,” says Rivas. “However, we consider EU and UK banks to have started to regain some of the market share they lost in some [investment banking] businesses over the years.”

Potential for growth 

Globally, European banks are showing the most progress in debt capital markets. According to Dealogic data, all five of the top US banks have lost market share since 2019. For DCM, BNP Paribas showed the largest improvement, jumping from outside the top 10 in 2018 to seventh place in 2023. Meanwhile, for 2022–2023, Barclays held sixth position, and Deutsche Bank ninth place. 

The most interesting development, Rivas says, is the repositioning of continental European and UK banks in the Emea region. BNP Paribas, UBS and HSBC have all seen gains, significantly improving their rankings and market shares in 2023 compared to 2019, and outperforming the top five US banks in Emea global revenue.

The US banks appear to have lost a significant part of their Emea market share since 2019, adds Rivas.

In M&A, UBS is the clear winner in the 2023 Emea revenue list, climbing to fifth position from 10th in 2018.

However, in global equity capital markets, the top US banks remain dominant.

“Here, the top US banks remained leaders and none of the [continental] European banks or UK banks have been able to compete among the top 10, probably because they lack scale globally,” says Rivas. 

“We expect that European banks will continue to reposition their IB businesses particularly in Emea in 2024, with a strong focus on DCM,” she adds.

Europe’s turn

A new report from Oliver Wyman and Morgan Stanley supports Rivas’s argument of a bright future for European wholesale banks for the first time in 15 years. It argues they are leaner, more focused and higher returning than a decade ago. 

Banking revenue pools have grown by 20 per cent since 2019, reaching $195bn in 2023. The authors of the report add they expect these gains, with a structurally larger and more profitable pool, to be sustained.

A couple of fortunate circumstances are helping eurozone banks. First, deposit betas — or how much of the change in market interest rates banks have to pass onto their customers — have been lower in the eurozone than in the US. This has allowed transaction banking and securities services businesses to add $16bn in revenue.

Regulations might also be tipping Europe’s way. The proposed Basel III rules in the US are more punitive and could result in a 35 per cent increase in risk-weighted assets for US banks globally and international subsidiaries if implemented. 

Overall, the US rules are tougher in how market, credit, and operational risk capital are calculated, compounded by potential double-counting across capital requirements. 

By comparison, RWAs for European banks under the continent’s proposals would increase by just 15 per cent. Even though some changes to the final US rules are expected, the proposals could still lead to a 2–3 percentage point drag on returns for US wholesale banks, compared with 0–1 percentage points for European banks. 

“These changes could largely close the return gap between US and European banks, re-levelling the playing field for Europeans,” the report says. 

Four solutions 

The study also flags four actions that European banks can take to bolster returns in the future. First, focus on areas of comparative advantage, especially fixed income. Second, banks should look at making strategic alliances with non-banks to expand in sectors such as private credit. Third, links should be deepened between wholesale banking and private banking. And, finally, banks should look at controlling costs.

Ronan O’Kelly, head of corporate and institutional banking for Europe at Oliver Wyman, says: “Our thesis here is that the industry has actually been through a continuous amount of cost cutting for many years.

“But that’s been a relatively cyclical play. And there is a case here for structural cost action to deliver a more efficient platform. And that’s ultimately about taking larger blocks of cost out in workforce infrastructure and processes. 

“So apply automation, technology standardisation and start to experiment with generative AI.”

These suggested solutions are partially an answer for banks that have high staff costs that are no longer supported by a bullish deal market.

“If you look at the cost build-up in many of these businesses, there was a huge wave of inflation in the immediate post-pandemic era as there was a war of talent for people, especially in investment banking and trading. Now those sectors are bearish,” says O’Kelly. 

He adds there is still a balance to be struck at European banks between core activities contrasted with maintaining scale and diversification. 

Over the past decade, many of them have exited regions and product lines to make their business models more focused. Others have maintained a broad footprint in many areas that do not generate sustainable returns after the cost of capital.

O’Kelly argues there is a question of whether that multi-footprint model is affordable through the economic cycle. And that is why he thinks that forward-looking capital allocation discipline is needed. 

“So, as we point out in the report, there could be opportunities to gain market share, particularly if the US banks cede some ground. The quandary is: where is it attractive to do so?

“Can European banks add market share at low marginal cost? If they can do that, the marginal returns will be higher and that will be attractive. If they simply gain share across the board, then there may be a risk of dilution,” says O’Kelly.