Barclays and Deutsche Bank to Lag U.S. Trading Peers in Rift
(Bloomberg) -- The biggest U.S. banks reported record first-quarter profits on the back of their stock-trading units. Investors expecting the same from the Europeans may be disappointed.
Equities revenue at the biggest U.S. banks surged by almost one-third as volatile markets triggered a feast of trading activity for lenders including JPMorgan Chase & Co. and Citigroup Inc. By contrast, Deutsche Bank AG, Credit Suisse Group AG, and Barclays Plc may report declines or low single-digit increases as they struggle to take on their rivals and deal with a declining U.S. dollar, analysts said.
The leaders of the biggest European banks pinned some hopes on their stock-trading divisions when they began costly overhauls several years ago. Instead, they have lost market share to U.S. rivals amid internal dysfunction and sweeping new rules. Another weak quarter may add to pressure on embattled executives including Barclays’s Jes Staley and raise the stakes for newly-installed Deutsche Bank chief Christian Sewing as he weighs the future course for Europe’s largest investment bank.
U.S. investment banks will continue “to outperform Europeans, leading to a further revenue market share gap,” JPMorgan analyst Kian Abouhossein wrote in an April 19 note to clients. “We expect this trend to continue through 2018,” particularly in equities trading, he wrote.
Six of the biggest European banks may increase equities trading revenue by 5 percent in local currencies, Abouhossein wrote, compared with a 32 percent increase for the five biggest U.S. banks. The Americans, including Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, reported total profits for the period that exceeded $30 billion for the first time ever.
Analysts don’t expect European banks to perform much better elsewhere either. Revenue from fixed-income trading may fall 6 percent in local currencies, worse than the 1 percent dip reported by U.S. lenders, while fees from advising clients on deal-making could slide 13 percent, more than three times the decline reported by their rivals across the Atlantic, JPMorgan’s Abouhossein wrote.
Banks spent 2017 bemoaning the lack of volatility -- or movements in asset prices -- as a reason for their poor trading performance. Uncertainty then returned in the first quarter amid a bout of stock-market upheaval -- soaring, by one metric, to the highest in almost three years and causing clients to make more bets. Top executives at each of the five U.S. banks cited higher volatility as a reason for the increase in equities revenue.
Still, the uncertainty was too much for some clients, who pulled back from trading and led Credit Suisse Chief Executive Officer Tidjane Thiam to describe the period as “very confused.” The Zurich-based lender had signaled a buoyant first quarter in January, yet revised this two months later after early gains fizzled out.
“The optimism on trading revenues following a strong January has failed to sustain itself for European banks,” Eoin Mullany, an analyst in London with Berenberg, wrote in a note to clients Friday morning. “Volatility is not always good for trading revenues.”
European banks that do business in the U.S. will also be hit by the performance of the dollar, which has fallen against major currencies since the first quarter of 2017, analysts wrote. The greenback slumped nearly 14 percent against the euro for the period, 10 percent against the British pound and about 5 percent against the Swiss franc amid speculation that other central banks may follow the Federal Reserve in reducing stimulus programs.
Yet clients are also becoming more selective as a result of the revised Markets in Financial Instruments Directive, or MiFID II, and may be doing more business with the banks that already dominate equities, Morgan Stanley analysts led by Magdalena Stoklosa wrote in an April 17 note. UBS Group AG, the Zurich-based bank that gets most of its trading revenue from stocks, is one of the few European banks that is not losing market share to U.S. banks, she wrote.
“European players (UBS an exception) appear to be losing share and we will be watching this closely for less scaled players,” including Deutsche Bank and Barclays, Stoklosa wrote.
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