(Bloomberg Opinion) -- Scale begets scale. In the world of investment banking, the top U.S. firms have powered ahead this year as unprecedented market swings and central-bank spending has fueled a surge in activity across trading and capital markets.
Traders at some of Europe’s biggest securities firms — including Barclays Plc, Deutsche Bank AG and Credit Suisse Group AG — have done pretty well too. But not quite as well as their Wall Street peers, which is a reminder of why being big matters. It will be harder for the European banks to protect their profit once the unnaturally favorable trading conditions ease and their loan losses mount because of pandemic-induced recessions.
The big American investment banks have been able to make the most of the deeper U.S. capital markets and the fact they have become the dominant players in trading, given them better insights and deeper pockets. Meanwhile, regulation has forced firms to limit their own funds that they put at risk, helping turn the blockbuster client activity into healthy profit.
The second-quarter investment banking results are telling. U.S. firms saw fixed-income, currencies and commodities trading revenue more than double in the second quarter, with the market leader JPMorgan Chase & Co. enjoying a 120% gain. Among the larger European securities firms that have so far reported, only Barclays came close to that, with a 95% jump. Deutsche’s equivalent revenue rose 39% and Credit Suisse’s 53%.
In equity trading, Barclays — starting from a lower base — was in line with its U.S. peers, whose average revenue increased by 27%. Deutsche has pulled out of this market and Credit Suisse’s income was unchanged. In investment banking and advisory, which makes up a smaller portion of the big lenders’ revenue, sales at the New York giants rose 44%. Over in Europe, Deutsche stood out with a 73% jump in this business, but at Barclays the figure was closer to 5% and at Credit Suisse the increase was 32%.
The trillions of dollars that nations have injected into their economies to soften the Covid blow have benefited American firms more. U.S. bond and stock sales rebounded more strongly than in Europe and there was an upswing in commodities, credit and rates trading.
And when the pandemic trading boom finally ends, Wall Street’s banks will be able to rely on stronger balance sheets and domestic commercial lending businesses that are more profitable than their European peers. Deutsche and Barclays both echoed warnings from the U.S. that the securities business is indeed normalizing in the second half.
That signals more difficult times for the Europeans. Deutsche is counting on expanding market share in its remaining trading businesses to meet financial targets set for 2022. Germany’s biggest bank needs 2% annual growth in revenue to meet that goal, but it isn’t getting much help from its commercial and consumer lending arms. Revenue in its corporate and private banking units was flat over the past 12 months and the squeeze on interest rates will keep hurting profit margins.
Barclays’s decision to maintain a large investment bank has provided useful diversification as pandemic-related loan losses in the U.K. rise. The British bank is confident that bad-loan provisions will decline in the second half of 2020, but it may not be able to count on trading to alleviate any future pain.
While Europe may have had a “good pandemic” compared with the U.S, that doesn’t extend to its banks.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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