European banks’ battle for scale: Is HSBC the latest casualty?

The last quarter of 2024 saw reassuringly healthy capital markets volumes, bolstered by broadly supportive fiscal and monetary policy and a post-US elections bump. Primary revenues are recovering, while both fixed income and equities continue to thrive.

However, European investment banks are being challenged by their larger US counterparts. The top five US names are not only concentrating larger portions of revenue amongst them but also taking significant market share across fixed income and equities.

“Our concern is that US banks … are much better positioned to benefit from this favourable environment due to business and regional mix, plus potential de-regulation,” explains Andrew Coombs, an equity research analyst at Citi covering EU and UK banks.

“In equity and in fixed income, US banks have taken significant market share from the Europeans. But the other point to note is that what you’ve seen is a concentration of revenues amongst the top five names.”

According to Coombs, the key issue is one of scale – and while primary revenues might be recovering, the competition in secondary markets remains fierce. “As banks move to a lower-touch trading approach, profitability is increasingly a scale game,“ he says. “Most clients now will typically direct most of their commission wallet towards just a handful of players.”

This was already the case in macro and prime – and to a certain extent in equities – but the big change has been the notable move to scale in the fixed income space during the past year. “Historically, the spreads product market was very fragmented, but that is increasingly going down the algo route, so we’re seeing ever more concentration across asset classes,” says Coombs. “European banks, simply as a function of being comparatively smaller, have suffered as a result.”

A key metric for banking profitability is the return on tangible equity (ROTE). Most European banks now have an ROTE around or, in some cases, above the cost of capital – helped along by the big improvement in industry wallet seen in recent years. “For years they were running below the cost of capital, and the concern was that we were going to see more retrenchment in European peers,” explains Coombs. This is now recovering, in line with US, which gives EU banks some breathing space.

Another key metric to watch – and one that is often overlooked when it comes to performance viability – is the volatility of revenues quarter to quarter. For example, Barclays – although it now has a strong and diversified product mix – had the highest volatility of revenues in 4Q24 for fixed income and the second highest (notably after HSBC) for equities.

Typically, the banks with lower volatility are those that focus on financing, which tend to be a more stable revenue stream – whereas if you are more exposed to cash or derivatives, your revenues tend to be more volatile. Likewise in fixed income, large macro houses or banks with big FX and rates businesses tend to be less exposed than those with more of a credit focus.

Having said that, the difference in equities volatility between Barclays and Morgan Stanley in 4Q24 was just 2%, and during the past decade that spread has substantially narrowed, suggesting that banks across the board are, in equities at least, stabilising their income streams.

“Ultimately, it’s a function of industry wallet,” says Coombs. “The industry wallet has got bigger in the US and so the regional bias of US banks clearly makes a big difference.”

A strong financing game might contribute to lower volatility, but it also helps in other ways. Why? Because markets’ clients, such as hedge funds, typically allocate 70% of cash equity allocations to their three prime brokers – so if you have won the prime finance business, then you have won a lot of ancillary business as well.

This has been the strategy of many US banks, while their European counterparts were busy repairing their balance sheets after the financial crisis – and that gap has only widened since then. “That initial investment in financing has dramatically helped US banks to take a lot of market share,” says Coombs. “We’re now increasingly seeing this as a strategy across all the European banks as well.”

So, although the markets are on the up and performance is looking promising, 2025 could still be a tricky year for investment banks as this gap in financing capabilities highlights variation in the stability of revenue streams, while the current strength of US trading volumes and primary activity relative to Europe (as shown in charts one to three), could also lead to further market-share erosion. Who is best placed to benefit and who should be watched with caution?

One bank at risk from these could be Deutsche Bank, whose 2025 revenue targets are what one analyst on Wall Street calls “overly ambitious”.  At the other end of the scale, Barclays Investment Bank looks best placed to benefit, on the back of stronger revenues. 

The big news this year is, of course, HSBC’s plan to close its European and US ECM and M&A business, retaining only its Middle East and Asia presence. While it might seem on the surface like a surprise departure, in fact the business accounts for an estimated 0.3% of HSBC group revenues, making it a decision almost certainly driven by cost-based efficiencies.

In 2024, HSBC ranked as 18th in global ECM league tables, according to Dealogic, and lower still in M&A, making it a logical move for the bank, especially if the business was losing money. The group is forecast to make around US$1.1 billion of investment banking revenues in FY 2024, equivalent to just 6.3% of global banking and markets (GBM) revenues and 1.7% of total group revenues. DCM also accounts for the vast majority of this, with European and US ECM and M&A making up barely a fifth (19%) of the IB total – or 1.2% of GBM revenues.

“We expect the Asian business, where HSBC does have a slightly better position, is likely to have been retained to help encourage entrepreneurial flows into the Asian private banking business,” says Coombs.”

Neither should the news come as much of a surprise, given the December rumours of planned headcount cuts at the bank, with up to 40% of HSBC’s top 175 managers potentially being cut. This raises questions about the future of the bank’s broader European equities presence, after the shuttering of its primary business. New CEO Georges Elhedery, who took the reins in September 2024, has already embarked on a vast restructuring programme that includes combining the bank’s commercial and institutional banking operations, creating a new wealth division, selling off businesses in France, Malta and South Africa, and redistributing its regional focus to split between East (Apac and Middle East) and West (UK, EU and Americas).

The EU ECM announcement is therefore unlikely to be the last we hear from HSBC – but this is not necessarily detrimental to performance. “We believe this is the first in a series of announcements,” says Coombs. However, HSBC remains one of Citi’s preferred European ‘buy’ names, with upwards of US$3 billion in cost savings expected from the reorganisation. “On balance, we view [the restructure] as a positive, as it should help to further close the efficiency gap with domestic peers outside of the two home markets (HK & UK),” says Coombs.

The 2025 analyst consensus expects almost zero EPS growth from European banks, a sharp drop for a sector that had one of the strongest year-on-year EPS growth in 2024 (although 2026 should see a recovery). A stronger US dollar and a higher US 10-year Treasury yield, relative to Europe, is also likely to give US banks an advantage.

The key for European investment banks will be to leverage their regional strengths while also investing in the capabilities needed to compete with the scale of their larger US peers. Should the US dollar appreciate, European and UK banks with the highest proportion of US dollar (or dollar-linked) revenues are most likely to benefit on FX translation – particularly Swiss, UK, international and French banks, with UBS and Barclays currently standing out as banks with the highest US exposure.

Focus on profitability

Improving profitability should be a priority. During the 2010s, the wallet shrank considerably and a lot of banks had to move away from waterfront coverage. Post-pandemic, with more volatility and more central bank activity, that wallet has recovered. EU banks might be lagging in terms of profitability but at least they’re making up their cost of capital, which profits their IB divisions. However, cost efficiency also needs to be a focus (as seen with the latest HSBC news). Since 2012, headcount in the industry has shrunk to about 48,000 from 60,000 with IBD the only area that has seen any increase.

Consolidate investment banking revenues

Coombs highlights the trend of increasing revenue concentration among the top banks. European banks should look to consolidate their market share and client wallet. Those with big financing businesses will benefit, as well as those who are more exposed to the US, which has a deeper and faster-growing wallet.

Invest in product and technology

Banks should be investing in technology such as electronic trading platforms, algorithms, and pre- and post-trade analytical tools, to compete with the scale and capabilities of US banks, many of which have put substantial investment into these initiatives. Having a decent tech stack is crucial to develop a platform capable of taking on that volume. And while equities and FX were the first movers when it comes to electronification of asset classes, this is now being replicated across rates and credit, with business moving from OTC to exchange, so first movers here will get the advantage.

Deepen and extend client relationships

Expanding the corporate client base and cross-selling a broader range of products can help European banks build more durable revenue streams. Compared with financial institutions, corporates are often perceived to be a higher quality revenue stream, primarily because they need to hedge consistently, and they bring in ancillary financing business. Pushing into the corporate client base and going in the direction of financing rather than intermediation means there is less volatility in your revenue stream, often with a higher multiple attached.

Improve capital efficiency

Reducing risk-weighted assets (RWAs) through better collateral management, netting and leveraging clearing houses can improve revenue productivity. With European banks, there has been a lot of focus recently on reducing RWA utilisation.