European banks are still alive. The obituaries for the likes of Deutsche Bank may have already been written, but in the past few days and weeks there has been a resurrection as lenders’ share prices stage a recovery and European bank earnings for the third quarter have come in surprisingly robust.
Deutsche Bank defied expectations on Thursday by posting a small profit versus an anticipated net loss for the third quarter – thanks to its global markets division clocking up a 10 per cent increase in revenues. Barclays meanwhile had a 40 per cent increase in revenues from bond trading. Royal Bank of Scotland’s corporate and institutional banking division had “a blowout performance” according to an analyst at Investco, with the bank’s rates department profit rising 117 per cent from last year.
This echoes similarly strong showing from the US banking sector this quarter as lenders around the world benefited from the frantic weeks of trading following the Brexit vote.
Granted, investment banking revenues, especially those in the fixed income, currencies and commodities (Ficc) units, are often volatile and depend strongly on macroeconomic events. And, unfortunately for the banks although luckily for everyone else, an event on the scale of Brexit only happens once every decade.
Nonetheless, it’s a lesson for bank investors and regulators alike: investment banks are alive and kicking.
With banks under regulatory and market pressure to slash risk-weighted assets in their investment operations and some lenders like UBS pulling back almost entire from Ficc activities to free up regulatory capital, you wouldn’t have been mistaken in thinking that European banks were all morphing into wealth managers with only ancillary investment banking operations.
While prop, derivatives and commodities trading may have been wound down in many places, other investment banking business like bond and currency trading, equity and debt capital markets and the advisory divisions are still in high demand.
The only slight problem is this: the European banks are not exactly at the top of the global investment banking game.
The five biggest European investment banks currently generate only half of what their US peers are raking in, according to research by the Financial Times.
It is no secret that the US banking behemoths have weathered the financial crisis better than their European counterparts – thanks in part to the prompt rescue response from the US government in the form of the Troubled Asset Relief Program.
The euro-zone debt crisis never allowed the European economies and thus the banking businesses to recover, depressing earnings and clients’ risk appetite. Add to the mix hurried and often messy restructuring, capital raising and litigation settling exercises by most European banks, led by UBS, Credit Suisse, RBS and Deutsche Bank, just to name a few.
Deutsche Bank still finds itself in the painfully slow and tedious process of settling with US authorities for the misselling of mortgage-backed securities before the financial crisis.
All these internal clean up operations and legal battles are distracting it from its day-to-day business.
Investor confidence in European banks has plummeted and has driven bank shares to historic lows. That was the perfect window of opportunity for US banks like Goldman Sachs, JP Morgan and Morgan Stanley to swoop in and take market share.
Without wanting to sound too EU-centric and protectionist, the case is clear that European banks cannot afford to lose more ground. The European financial sector deserves a much-needed boost of confidence to regain a sense of pride. Not the hubris we saw in the years leading up to the financial crisis but a healthy let’s-get-down-to-business attitude. A strong European banking sector fosters job creation, credit growth which in turn spurs economic growth, and investment banking plays an important part in servicing the needs of corporate Europe.
Carolin Roth is anchor for Street Signs and covers the Swiss market for CNBC. You can follow her on Twitter @CarolinCNBC.
* The National and CNBC are global content-sharing partners.
business@thenational.ae
Follow The National's Business section on Twitter
