While US banks raced to clean up their mess after the financial crisis kicked in, European banks – and their regulators – have taken their sweet time. The result? The Americans are now poised to steal a march – and plenty of market share – from their rivals across the Atlantic.
US bankers can hardly wait for 2014, believing now is the time they can steal a big chunk of market share away from European rivals who have been slow to get their houses in order after the financial crisis. Nearly six years on from the meltdown, American banks are in pretty solid shape, while those in Europe are severely under pressure – forced to hive off businesses and make other preparations for tough new regulatory capital requirements.
Indeed, for the moment everything seems to be going the Americans’ way. Resurgent US primary and secondary markets this year have left them flush with cash and capital – and armed with substantial war chests to weather bumps in the market. A seemingly endless series of woes across eurozone economies has done the region’s banks no favours.
While the US houses were pushed into cleaning out their stables very quickly after Lehman Brothers collapsed in 2008, their European brethren have moved (or been allowed to move) too slowly. They are now being forced to cope with a surge of onerous new regulations. That is tempting many of them to retreat to core competencies – specialising in verticals they have been strong in, while stepping out of weaker areas (and cutting headcount accordingly).
That leaves those abandoned businesses and regions wide open for a US invasion.
“We’ve seen it on a global scale, in terms of European banks pulling back to core markets,” said Stephen Scherr, global head of the financing group at Goldman Sachs.
“They are very relevant, very strong, very powerful in those core markets – but equally they have pulled back.”
He said the trend was most visible in Asian lending, where many European firms are now less engaged, less involved and less committed, but stressed: “It’s not limited to Asia.”
The most high-profile European banks to beat a retreat, of course, have been UBS and Credit Suisse. With the US$60bn bailout of UBS in 2008 still fresh in their minds, Swiss regulators and lawmakers pushed well beyond new internationally agreed banking standards, forcing the nation’s financial institutions to hold more capital and use less leverage to ensure there is no repeat of the debacle.
That has left the two banks with much smaller balance sheets – and a drastically smaller footprint in the markets. UBS has exited much of its fixed-income operations. And Credit Suisse, while somewhat slower to accept the changed investment bank environment, has trimmed across the board.
“The landscape is changing and the two Swiss banks are suffering the most in terms of the regulatory pressure,” said one US banker, who is expecting the landscape to tilt decisively in his firm’s favour in 2014.
That retrenchment is already showing up in the league tables. In terms of total investment banking fees, for example, UBS and Credit Suisse lost 36bp and 42bp of market share in the first 10 months of 2013 compared with the previous year.
“Between them they’ve given up 20% market share, and it’s not because they are not good at the stuff they spend time at,” said the banker. “They have clearly pulled in their horns.”
Similar decisions are being taken in the executive offices of banks across Europe. Deutsche Bank and Barclays, two of the biggest banks in the region, have announced plans to cut about €400bn of assets between them.
Naturally this has created something of a vicious circle. Diminished balance sheets and lending capacities are making it harder for banks to do deals – especially in the mergers and acquisitions space. Deutsche Bank, which is cutting €250bn of assets in the coming years, lost 430bp of market share for global announced M&A through the first nine months of 2013, dropping three spots to number seven.
And there is plenty more to come. RBS estimates that European banks will need to cut about €2.6trn of assets over the next four years – on top of the €3.5trn they have already shed since 2011.
Stuck at home
Meanwhile, as UBS analysts said recently, the age of the bulge bracket bank looks to be winding down – and while there may have been 10 or so of them in recent years, there are likely to be fewer than half that number in the near future. And most, with the possible exception of Barclays and Deutsche Bank, will be US institutions.
“Given the heightened capital requirements – with leverage increasingly becoming the limiting factor – we envision a competitive environment whereby banks need to either go big, with large capital bases and market leading positions, or go local,” the analysts wrote.
Already, competitors say, much of the retreat in Europe seems to be just such a return to local markets.
“Deutsche Bank has decided to be all things to all people in Germany,” said another US banker. “They have decided that they can be strong in Germany and still be the dominant EU bank.”
US v them
But where Europe’s banks are faltering, their US rivals are swiftly moving forward. Bank of America Merrill Lynch has been perhaps the biggest beneficiary of the European pullback, increasing its share of total investment banking fees in the first nine months of 2013 by 117bp to 7.4%. Goldman Sachs added 82bp, JP Morgan 69bp, Morgan Stanley 58bp and Citigroup 30bp. No European bank made such large gains.
Bankers say a related reason is that, while the Europeans are cutting staff, some American banks are still expanding.
“BofA Merrill has been one of the few players in the market willing to bid on talent,” said a banker competing with the US giant.
And US banks are also benefiting from the growing tendency among European corporates to shift their funding mix in favour of capital markets over bank loans, as it creates a point of entry for outside institutions.
Indeed, for European banks one of the quickest ways of reining in risk-weighted assets is to cut corporate lending. For European companies, capital markets present an opportunity to lessen reliance on a single banking relationship.
“There is a much greater interest in accessing capital markets rather than using bank lending,” said another US banker. “That plays to the strength of the US capital market banks.”
Of course the move towards capital markets won’t be total and it won’t come overnight. UBS analyst Derek de Vries said the movement in that direction was “glacial” compared to expectations, believing it may take 10 years for European companies to draw equal parts of their funding from capital markets and bank loans. Even then, the national champions will have home-field advantage.
But there’s no denying that the Americans have come out of the gate quickest after the crisis – and that will be a significant advantage in the short term, as their European rivals gear up for the unprecedented regulatory challenges ahead.
“We’ve been through all the regulatory issues and rebuilt balance sheets and are building revenue now,” said the first American banker. “The US banks are just so much further along the recovery curve.”
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