No hiding place for Europe’s elite investment banks
European investment banks are running out of excuses. The legacy issues that have dogged them since 2008 are finally coming to an end, meaning they can now devote all their energies to fighting back against their US rivals, which have gained a bigger slice of the European investment banking pie in each of the past five years. Failure to do so will trigger far-reaching questions about whether the decline can be arrested. By David Rothnie.
Each passing year feels momentous for the financial services in the post-crisis world. But 2017 should go down as the one in which Europe’s investment banks can finally be judged equally on the strategic bets they have laid, without the distortion of write-downs and fines, or the obfuscation of executive churn.
In the end, 2016 proved to be another lacklustre year in European corporate finance. With political uncertainty continuing into 2017, the outlook may be little better. European investment banking fees slumped to a 13 year low of $16bn last year, while US banks grabbed the highest proportion of corporate finance fees in Europe, the US and globally on record. European banks’ share of the region’s underwriting and advisory revenues slumped to an all-time low of 57% in 2016, according to full-year data from Dealogic.
In today’s climate, banks cannot be judged solely on league table rankings. But Europe’s elite also fare poorly when it comes to return on equity and their ability to cover their cost of capital. In fact, those firms that have prioritised RoE have done do through shrinking, suggesting that growth and profitability are mutually exclusive.
But there are grounds for optimism for European banks as they struggle against the charge of waning relevance. While Europe’s leading players still remain in different stages of recovery, there is sufficient evidence to suggest that strategy — and management issues — have largely been clarified. Banks tend to talk of a “year of execution”, but of Europe’s notable players only Credit Suisse and Deutsche Bank can perhaps be allowed that luxury. For the rest, this is year of judgement. For the first time since the crisis, it’s reasonable to look at where banks stand today and extrapolate how they might end the year.
DB: proving it has the right model
Deutsche Bank declared that 2016 represented the peak year of its restructuring. Rivals admit that CEO John Cryan has the toughest task in the industry, and when it emerged in November that the US Department of Justice was looking to fine the bank $14bn, that task started to look like it might be impossible. The bank’s shares plummeted to record lows amid predictions that it was facing one or all of the following — a third capital increase in as many years, a state bailout, or a defensive merger with Commerzbank.
In fact, none of these doomsday scenarios materialised and the $7.5bn settlement with the DoJ announced on December 23 means that Deutsche has entered 2017 on a more stable footing.
Its corporate finance business has suffered from its internal struggles and finished the year in third position — the same as in 2015, albeit with lower market share. On one hand that is disappointing when set against its aim to restore itself as Europe’s leading firm; but on the other it is a suggestion of the resilience of its franchise.
It also has a strong management team across its investment bank, led in CIB by Jeff Urwin globally and in EMEA by Alasdair Warren, along with Garth Ritchie, who is head of global markets. The bank continues to scale back unprofitable clients and is cutting loans where it does not have a broader relationship. Success for Deutsche will be a business model that coalesces around its chosen client segments, delivering the corporate bank to investment banking clients.
But in 2017, it is promising more immediate improvements in its corporate finance business. Warren believes he can revive Deutsche’s equity capital markets franchise over the next 12 months, while there is sufficient evidence to suggest that its advisory business remains relevant, after it landed mandates on two of Europe’s biggest deals — advising British American Tobacco on its $57bn acquisition of the remainder of Reynolds and 21st Century Fox on its £23bn bid for Sky PLC.
Its corporate finance business will benefit from the overhaul of its coverage effort, and there is greater optimism inside the bank than many think, illustrated by the relative stability of its team. But the bank still faces more challenges than its immediate rivals in proving it has the right model, and those that know Cryan say he and his team will not hesitate to cut harder if headwinds persist.
Barclays is about 18 months ahead of Deutsche in the execution of its strategy, and it should be judged this year on the progress of its investment bank. The bank has made its bets after the arrival of Jes Staley as CEO led to a doubling down of its commitment to investment banking at the expense of its African business.
The uncertainty of the Antony Jenkins era, during which the sword of Damocles seemed to hover over the investment bank, with a tangled web of often conflicting financial targets, has given way to clarity and creation of a transatlantic corporate and investment bank in the mould of JP Morgan, Staley’s alma mater. Barclays is no longer held back by its non-core unit, which will be closed some time during 2017, and with strategic clarity comes the need to prove clear progress.
Its aim is to be the leading investment bank in the UK and it sees considerable upside in the fusion of its corporate and investment bank. Staley has freed the investment bank from doubt and from the shackles of targets. This is a positive development but it also means there is a hiding place for Barclays this year – it has the infrastructure, people and momentum to prove in 2017 that it is beyond execution and on the cusp of a sustainable, successful CIB. Barclays retained seventh spot in the fee rankings in 2016, but boosted its share of the fee wallet, bucking the industry’s downward trend.
BNP’s ECM challenge
Eighth-placed BNP Paribas should also be judged on its ability to deliver growth in 2017, now that its corporate and institutional offering has bedded down. The bank has a mix of businesses that should be the envy of its European rivals, especially in payments and transaction banking. It has a more attractive offering in the US, where its international holding company can use deposits from its BancWest retail branch.
The bank sees itself as the natural global bank for European corporates, but in order to usurp Deutsche or Barclays outside corporate banking it must bring its ECM and advisory businesses closer to the standard set by its DCM offering, and become more involved in the strategic dialogue of its clients.
UBS and Credit Suisse distinguished themselves in 2016 with strong improvements in their advisory business, both of which have been rebuilt. But the spotlight will fall on other aspects of their businesses. UBS’s capital-light investment banking strategy of serving its wealth management clients has been acclaimed and the bank has been depicted as the poster-child of the post-crisis world, in which banks play to their strengths.
What matters now is how the pro-cyclical weighting of its business towards equities at the expense of fixed income will fare. It will look to grow its Asian business further and the plan to boost the stake in its Chinese joint venture is intended to take advantage of an improving capital markets backdrop. While the bank is picking its spots, it ended the year in 11th spot in EMEA fees, having been leapfrogged by its arch-rival.
Credit Suisse may have stolen a march in the rankings but it is behind UBS in both execution and proof of concept and it has been compared unfavourably for not imitating its rival more closely by cutting more deeply into its fixed income business.
Of the European banks, Credit Suisse’s future remains the most unclear. Its investment bank is split between its corporate finance business, which is profitable, run by a tight-knit seasoned team, and seen by CEO Tidjane Thiam as part of the future, and its trading operations, which remain in the midst of strategic and staff upheaval.
Last September, Tim O’Hara stepped down as head of global markets after just 10 months in the job, while this week Stephen Dainton, co-head of global markets equities for the UK and EMEA, left the firm. Such departures happen at any firm — just witness the recent executive-level churn at the top of Goldman Sachs — but at a company still in the throes of repositioning itself, it smacks of instability. That is not being helped by a second hiring raid by Jefferies, which poached members of its leveraged finance team.
How Credit Suisse emerges at the end of 2017 will depend on the successful execution of the cornerstone of Thiam’s capital raising strategy — the partial IPO of its Swiss Universal bank. In November 2016, Credit Suisse created a legally independent company, paving the way for its plan to raise $2bn through the sale of a 20%-30% stake towards the end of the year. Some suggest that Credit Suisse might sell the entire business — and if it does, break-up talk will resurface.