USA! USA! American investment banks have had a great first half of 2013. Not only is fee income up but they are trouncing the Europeans. Fees for the top four US investment banks rose 24 per cent on last year, according to data from Thomson Reuters. The top four European banks only managed to increase fee income by 11 per cent. What is more the Americans are taking market share in the Europeans’ back yard. JPMorgan, Goldman Sachs, Citi and Morgan Stanley all moved up the European rankings. Deutsche Bank, BNP Paribas, Credit Suisse and Barclays all slipped down the list.
So, time to buy shares in US investment banks and get out of the Europeans? Not so fast. There is plenty of noise in quarterly and semi-annual fee income and rankings. A big deal or two can move the dial in a big way. And in any case, investment banking fee income is not the whole picture for the big European names, none of which is a pure play investment bank. Take Barclays, for example. In 2012, advisory fee income (from activities such as M&A, initial public offerings and debt issues) made up 18 per cent of investment banking income. Trading was a much bigger contributor. And the investment bank itself was less than half of Barclays’ total income.
But that does not mean investors should ignore fee income entirely. Share prices over the first half of the year have reflected the diverging performances of the two groups. The Dow Jones US banks index rose 16 per cent in the first half of the year. The FTSE Eurofirst banks index fell 1 per cent. And of the big, global investment banks, the strongest share price performances came from Morgan Stanley, JPMorgan, Citigroup and Goldman Sachs.
That is reflected in valuations. Three years ago, almost all of the big global investment banking names traded on about 8 times forecast earnings, according to data from Capital IQ. Since then, the European names have made it all the way up to 9 times, while the Americans have pushed on to a range of 10 to 11 times. The dire economy in Europe is a big part of that, although all these banks are global. For other explanations, it might be worth looking towards the politicians. While US banks are largely being left to get on with the job, their European counterparts are still seen as fair game whenever a short term popularity boost is required. No wonder investors are making their preferences clear.
Email the Lex team in confidence at firstname.lastname@example.org