European banks face tougher options as revenue slows, BCG says

European banks face tougher options as revenue slows, BCG says

Is it all over? Not exactly, but it’s not as good as it used to be.

This seems to be the message at Barclays’ 19th annual Financial Services Conference this week. In the predominantly US banks presented so far, the message seems to be the same: 2021 is slowly boiling over – at least in fixed income sales and trade.

“And as we sit here in the third quarter, we’re seeing revenue declines year-over-year to mid-teens, driven primarily by fixed incomes and rates, and especially by currencies,” said City’s chief executive. Mark Mason, speaking at the conference yesterday. He was echoed by Marian Lake, co-CEO of consumer and community banking at JPMorgan, who said Morgan Stanley CFO Jonathan Pruzan said business revenue was down 10% quarter-on-quarter and year-over-year. Deutsche Bank’s Mark Fedorsic said “July is calm,” although things “increased” in August and early September.

After the record 2020, some slowdown is inevitable, but it could be a difficult option, especially for European banks.

In a white paper released this month, Tim Jensen, a partner at Boston Consulting Group (BGC) and leader of BGC’s global market and investment banking division, suggested with colleagues that the recent mild revenue environment has made it harder for European banks to push harder.

“Non-escaping portfolio options are being pushed forward perfectly,” the paper says, referring to the European banks ’business mix. “Wallets are moving more and more to American banks, and the performance gap has widened physically over the past year.”

BGC says the gap has widened, particularly in equity trading, where French banks had to bear losses in their equity derivative trading business in 2020. Prime broking losses related to Archigos have exacerbated the problem in 2021.

The danger now is that the cost issues of European banks will return as the epidemic-induced instability slows. “And when financial markets become less bullish, the pressure on costs and ROE will resume immediately,” says BCG. Key players [primarily large U.S. banks] will be protected, advisors suggest; Smaller players can be killed unequally.

It stands to create challenges. “Reducing alternatives is culturally problematic,” says the consultant happily. On the one hand, there is short-term pressure to make strategic choices that will improve revenue; On the other hand, long-term difficult decisions must be made. The BGC suggests that these decisions are often made under pressure from the board or stakeholders, rather than a rational “peace time” hat.

All of this suggests that European banks could benefit from a long-term look at the business of their markets, especially before 2022. The main culprits are frequently highlighted by banking information provider Tricumen. Some, like Credit Suisse, are already in the process of a major review. Deutsche, which has already undergone a major restructuring, plans to continue spending cuts, according to Federico.

While European banks are scrutinizing their priorities, American banks appear to be doing just fine. After investing in the business, Mason said yesterday that Citi’s equity sales and trading operations are thriving, “especially in derivatives and prime.”

Meanwhile, M&A bankers work more everywhere, but mostly in US banks. “The M&A market is very, very active, at all historical highs in terms of voice and announcement speeds,” said Prusen, adding that the activity focuses on deals in the $ 1bn to $ 10bn range. “We’ll expect it to continue. As you’ve heard from others, I’m sure the pipelines are healthy.”

Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Top Markets News journalist was involved in the writing and production of this article.

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