Europe’s booming markets no magic bullet for trading desks

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Published: July 24, 2015 10:38:45 AM

While Europe's financial markets are buzzing with billions of dollars of stimulus from the European Central Bank, U.S. financial houses look set to be the biggest beneficiaries of the surge in business as European banks continue to retrench.

While Europe’s financial markets are buzzing with billions of dollars of stimulus from the European Central Bank, U.S. financial houses look set to be the biggest beneficiaries of the surge in business as European banks continue to retrench.

The past six months in Europe have featured the rising inflows, trading volumes and volatility that are often a boon for brokerages. But analyst forecasts suggest U.S. banks will win global market share again this year, while European rivals continue to cut back in investment banking.

“European players are stepping back … The U.S. banks all clearly think there is more market share to come,” said Atlantic Equities analyst Chris Wheeler, adding that U.S. banks had cleaned up their balance sheets quicker after the 2008 crisis and had the firepower to back more capital-intensive trades.

U.S. banks’ share of total global revenues among nine leading banks in equities and fixed income trading rose to 63.2 percent and 69.2 percent respectively in 2014, from 60.1 percent and 62.3 percent in 2010, according to Wheeler. European banks made up the balance.

The European investment banking market — worth around $50 billion annually — tells a similar story, according to data for Top 10 banks from research firm Coalition. European banks’ share of equities and fixed income fell to 51 percent and 47 percent respectively in 2014, down from 52 and 49 percent in 2013.

“Capital-intensive products are the purest area where we have seen American banks taking market share,” said George Kuznetsov, head of research at Coalition.

“One of the best-performing products in the first quarter was European macro (including rates and foreign exchange) but it ended up mostly benefiting the American banks, because they have a much bigger commitment of risk and balance sheet.”

CURRENCY IMPACT

One obvious caveat is that much of the impact is down to currency: comparable trading revenues are denominated in dollars and the euro’s weakness on the back of the European Central Bank’s stimulus push has exacerbated the divide.

While European banks have yet to all report results, Credit Suisse delivered a better-than-expected set of figures on Thursday that saw a 5 percent drop in fixed income revenue and an 18 percent rise in equities in local currency — broadly in line with trends seen at the U.S. banks.

But research from Morgan Stanley suggests the bigger issue is European banks’ lower profitability and lower leverage ratios — total loss-absorbing capital relative to total assets. U.S. banks were forced to move quicker to toughen up after the crisis by stress tests and clearer rules, analysts and investors say.

That may not be such a bad thing for shareholders, with new management at Credit Suisse, Deutsche Bank and Barclays offering hope for more radical restructuring.

But if the first quarter is anything to go by, that means 2015 will see more short-term sacrifice. The winners in terms of investment-banking “wallet share” — or portion of a customer’s spending — among the Top 10 in the first quarter were U.S. banks Morgan Stanley and Citigroup, according to Thomson Reuters data, while Credit Suisse saw a 23 percent decrease in quarterly fees.

“We expect the European firms will lose share to the U.S. ones — even after adjusting for the huge shift in euro-dollar,” Morgan Stanley analysts wrote in a note to clients.

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