Don’t write off European investment banks just yet

For the dozen big global investment banks, the first-quarter earnings season is nearly done. At the time of writing, only the French have still to report. So, what have we learned?

Trading was flat, deals were down – but within that summary lies a host of detail. Yes, the five Europeans to have reported still sit at about 25% of the revenue pools for all 10 banks, in both investment banking and markets. And it will come as no surprise that the Europeans contained the worst performers.

But it is perhaps more unexpected that they also contained, on some measures, the best. In the first quarter, only three banks saw year-on-year gains in their aggregate revenues for capital markets, advisory, and sales and trading. All three were European.

The tempting conclusion is that times like these favour firms that have picked their spots – think UBS and Deutsche Bank – so long as the spots match the times. But it’s more complicated than that. Barclays, completing the trio of risers, is still trying to do everything that its US cousins are doing. And its investment banking and markets revenues rose 12%, far better than the 10% to 15% drop on Wall Street.

Deal-making suffered everywhere, most notably in equity capital markets (ECM), where US and European firms saw revenues plummet by as much as 83%. Debt capital markets (DCM) was more resilient, but still typically down 20% to 30%, with leveraged finance hurting more than investment grade. Advisory was one encouraging area, with revenues up almost everywhere, and pipelines that are reportedly strong.

Sales and trading is where the individual stories differed most. Taken in aggregate, revenues were flat at both the US and European houses, but there were notable moves within that broader picture – Goldman Sachs’s 21% gain in fixed income, for example, was partly reflective of the bank’s efforts in financing, while Bank of America’s 16% fall was off the back of a particularly strong prior-year result.

And so, to the Europeans. Credit Suisse was awful everywhere. Advisory revenues that fell only 13% were a highlight of sorts. All told, its capital markets and advisory business dropped nearly 60%, while it also failed to garner any of the pockets of relief seen at other firms in either equities or fixed income sales and trading, with each falling by about 50%.

Clearing out much of its senior management and increasing provisions for legacy litigation are evidence that Credit Suisse has much on its mind. Reshaping its investment bank against that backdrop will not be easy. Deutsche Bank has been able to use its corporate bank as the foundation for a rebuild of its investment bank. UBS made wealth management the anchor. Credit Suisse is still too distracted by constant missteps, hence its desire to move more quickly on putting legacy issues behind it.

HSBC looked unspectacular, although aggregate capital markets and advisory revenues that were flat year-on-year actually made it the best on that measure, with a 25% fall at Barclays the next best. But in absolute terms, HSBC’s business these days is tiny in comparison with peers. Even UBS’s revenues were nearly double the $290 million seen at HSBC for the quarter. JPMorgan’s business, the biggest in the quarter, was nearly 10 times bigger.

And UBS looked bright overall, particularly with an 85% revenue gain in its equities business. But as always, it’s worth delving into the exceptionals. The year-on-year comparison there was flattered by a first-quarter 2021 number that included a $774 million loss related to Archegos. Strip that out and the equities business rose by a somewhat less eye-catching 1%, and its aggregate investment bank revenues fell by 4% – not bad considering US peers, but a different picture to the reported 28% gain.

Barclays was notably resilient in DCM, where revenues fell just 8%, making it the best of the bunch, including the US houses. And it outshone all comers – European and US – in fixed income sales and trading. The bank acknowledged that its business mix favoured it, but a particularly strong ability to capture opportunities from emerging-market volatility was one of the keys to success.

But while unable to boast anything wildly flashy, the standout was arguably Deutsche, showing a performance that ought to be recognised for what it is, a welcome dose of steady-as-she-goes. The bank expects 2022 to be the year when it sees the fruits of the restructuring of its investment bank that it began back in 2019, and it augurs well so far.

Fixed income sales and trading – the markets business that it kept when it jettisoned equities – was up 15% and had its best quarter since 2015, despite not having commodities. Macro did impressively to overcome the obvious headwinds in credit, a business that is a hefty part of Deutsche’s franchise. Advisory rebounded well.

One quarter does not make a trend, and European banks will not threaten the continued scale dominance of their US competitors. But so far this year the Europeans have beaten expectations. Trading volatile markets has been a big factor in that. If they normalize – and if deal-making normalizes with them – it will be harder to stand out against the heft of the US banks.