European Bank Trading Slump Worsens; U.S. Rivals Gain Share

(Bloomberg) -- The gap between the biggest European banks and their U.S. rivals is widening even faster than expected.

Total dollar revenue from trading stocks and bonds at Barclays Plc, Deutsche Bank AG, UBS Group AG and Credit Suisse Group AG fell 6 percent in the first quarter, compared with a 15 percent increase for their five biggest U.S. rivals. The Europeans’ total share of the market, which was 35 percent three years ago, dropped below 26 percent for a second straight quarter, according to Bloomberg Intelligence data.

While some of the dip is by design -- as the European banks try to cut risk and free up capital dedicated to illiquid trading positions -- all four firms fell short of analysts’ trading estimates in the quarter. An enduring decline could threaten the viability of their turnaround efforts and scare away investors.

“European banks are on the back foot trying to defend market shares,” said Gildas Surry, an analyst at Axiom Alternative Investments in London that manages 800 million euros ($871 million) of financial-sector debt. “The loss of market share reduces profitability, weakens the diversification benefits, and keeps European banks in a defensive mode.”

Barclays reported Friday that fixed-income revenue fell to 889 million pounds, a 14 percent decline in dollar terms. The result was “well below peers,” Citigroup Inc. analyst Andrew Coombs wrote to clients. Shares of the London-based lender fell 5.2 percent, the most in ten months.

“We’re not going to shy away from the fact that we hoped to do better on the trading side in some of our markets businesses,” Barclays Chief Executive Officer Jes Staley said on a conference call with analysts this morning. “We’re disappointed with how we did.”

European Bank Trading Slump Worsens; U.S. Rivals Gain Share

Earlier in the morning, UBS reported that fixed-income trading revenue fell more than 6 percent to 452 million Swiss francs ($455 million). Deutsche Bank, once among the world’s top bond traders, and Credit Suisse both posted debt-trading sales that fell below analysts’ estimates earlier this week.

Still, the loss of ground wasn’t as dire as in the fourth quarter, when the European firms’ share of trading revenue plunged to a post-crisis low.

Reasons for the first-quarter underperformance vary. Barclays executives cited a poor effort in trading products tied to interest rates in the U.S., a business where Citigroup and JPMorgan Chase & Co. said they gained in the quarter.

Deutsche Bank blamed its performance in part on its exit from trading securitized products, another business that provided gains for U.S. banks. Credit Suisse attributed its result to lack of client interest in equity derivatives, complex products tied to shares. BNP Paribas SA and Societe Generale SA are set to report results next week.

“By trimming back into what they consider more profitable FICC businesses, the revenues will be hurt,” Christopher Wheeler, an analyst at Atlantic Equities in London, said of Deutsche Bank.

Whatever the reason, rivals across the Atlantic are feasting on weakness. Citigroup, which has been selling assets and exiting businesses since the financial crisis, boosted bond-trading revenue 19 percent in the first quarter and CEO Mike Corbat declared the New York-based bank’s restructuring complete on April 25.

Wall Street banks may gain even more as U.S. President Donald Trump pledges to roll back regulations and bolster the economy, just as European banks struggle to meet tougher capital rules on the continent. And while European Central Bank President Mario Draghi has ushered in negative interest rates across the euro zone, Federal Reserve Chairman Janet Yellen intends to raise them in the U.S.

“The trading results show the different regulatory climate under which the banks operate,” said Surry, the Axiom analyst. “This is threatening the European champions.”

Staley, Barclays CEO since late 2015, last year warned that a combination of new rules, low interest rates and the legal costs arising from past misdeeds has placed many European investment banks “at the brink.”

The continent’s capital markets may soon be “almost entirely dependent on firms domiciled elsewhere,” he said at a May 24 speech in Brussels. “To my mind, that’s a problem.”