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July 29, 2014 8:53 pm
European investment banks are back. After a long period in which they lost market share to their US rivals in the crucial business of debt sales and trading, they are finally regaining some ground.
However, what looks like a robust showing compared with their US rivals is not actually a positive performance in absolute terms. Deutsche just managed to keep its revenues in fixed income and currencies steady at €1.8bn compared with a year ago, while Swiss rival UBS reported a drop of 2 per cent to SFr355m – excluding a one-off gain from an asset sale – in its foreign exchange, rates and credit unit.
These numbers compare with an average fall in fixed income, currencies and commodities of 9 per cent across the biggest US banks. This was still much better than expected after analysts had expected steep declines in FICC trading.
“There were some pretty negative forecasts as related to [the] kind of general client activity across fixed income and equities,” Harvey Schwartz, chief financial officer of Goldman Sachs said this month. “As the quarter went along and investors felt more comfortable, certainly post the actions of rate policy announcements out of Europe, there was a more significant pickup in activity.”
Adding to a pattern of a stronger European performance, Credit Suisse last week reported a 14 per cent rise in FICC revenues, while Japanese bank Nomura’s London-centric fixed income business also improved 7 per cent, according to its results on Tuesday.
One significant reason for Europe’s outperformance is that the continent’s banks had an easier time in beating last year’s results. In June 2013, they had been hit much harder than their US counterparts by the severe downturn in debt trading that was triggered by the Federal Reserve’s announcement that it would gradually reduce its bond purchasing programme. “They have simply regained some of the market share that they have lost last year,” said Kian Abouhossein, analyst at JPMorgan.
In addition, European credit markets have been making a forceful comeback, particularly helping Credit Suisse which has its main strength in credit, high yield and securitisation markets.
Swiss rival UBS, which has much lower FICC revenues and is thus difficult to compare with market leaders such as Deutsche, gained market share in its foreign exchange business which accounts for roughly half of its debt trading unit’s revenues, according to people familiar with its trading division. It was helped by the fact that a number of banks have cut back their old-fashioned voice spot trading desks in recent months in reaction to probes into alleged market manipulation.
UBS’s rates and credit business has also grown in the second quarter. After drastically cutting back it fixed income trading two years ago and reducing the balance sheet it consumes, the Swiss lender is now placing renewed emphasis on growth in the business, people familiar with it say.
Unlike UBS, rival Deutsche has not drastically cut back its fixed income business, traditionally its main profit engine that accounted for a fifth of revenues last year. The German lender has used parts of a €8.5bn capital increase this May to reinvest in the fixed income business, positioning itself as the only European universal bank to continue to take on Wall Street rivals.
Anshu Jain, Deutsche’s chief executive, said that the bank – which lost market share last year – regained its top three position in fixed income in the second quarter.
Its debt trading arm was not helped by macro products such as foreign exchange and rates, where revenues were lower and particularly affected by low volumes, historically low levels of volatility and reduced risk appetite from clients, the bank said.
That was offset by strong performance in a number of credit businesses, particularly in credit solutions. Mortgage-based products also turned in a good performance from a difficult second quarter in 2013, according to Stefan Krause, Deutsche’s chief financial officer, who said the results showed the breadth and diversity of the bank’s fixed income offering.
“There is an argument that their refocusing and selective investment in the US is working,” Mr Abouhossein of JPMorgan said.
But as Deutsche’s overall pre-tax return on equity of only 2 per cent in the second quarter demonstrates, the bank including its trading businesses are still some way off from a full recovery.
Moody’s, the rating agency that downgraded Deutsche’s long-term debt and deposit rating on Tuesday, bemoaned that the German bank remained more dependent upon its capital markets earnings than many of its peers, calling this “a structural weakness”.
“If you can’t keep the volatility of the capital markets business below the average it overwhelms the benefits of the diversification,” Peter Nerby, Moody’s lead analyst for Deutsche said.
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